due diligence in mining transaction

purposes and processes

Business Contract Drafting

FHUI – March 20th, 2011

purposes

• Understanding the mining operations and business of the target

• Understanding the potentials of the mining targets: mineral resources that are potentially valuable, and for which reasonable prospects exist for eventual economic extraction.

Mineral reserves or Ore reserves that are valuable and legally and economically and technically feasible to extract

Mineral reserves are resources known to be economically feasible for extraction. Reserves are either Probable Reserves or Proven Reserves.A Probable Ore Reserve is the economically minerable part of Indicated, and in some circumstances,a Measured Mineral Resource. It includes diluting material and allowances for losses which may occur when the material is mined. A Probable Ore Reserve has a lower level of confidence than a Proved Ore Reserve but is of sufficient quality to serve as the basis for decision on the development of deposit.A Proven Ore Reserve is economically minerable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which occur when the material is mined

purposes

A Proven Ore Reserve represents the highest confidence category of reserve estimate. The style of mineralization or other factors could mean that proved Ore Reserves are not achievable in some deposits

• Understanding the future and going concern of the target

• Understanding the regulatory, business, political and social environment of the mining business

• Assessing risks (hidden or exposed) and opportunities in mining business

• Understanding the history, culture and values of the target

• Understanding the management style of the target

purposes

• Understanding the strength and weakness of the branding of the target

• Reviewing and assessing the assets and goodwill of the target

• Reviewing and assessing the liabilities of the target, exposed and hidden

• Understanding the stakeholders of the target

• Obtaining the real value of the target

• Mapping issues that may be used as tools for negotiation

• As part of the decision making process

• Compliance and application of good governance

processes

Sealing the meeting of business mind

Prepare and sign indicative agreement to include due diligence process; determine the scope of due diligence

Negotiate and sign non disclosure agreement

Determining access to data room

Setting up a solid team work: management, lawyers, accountants, financial advisers, technical experts, tax advisers, human resources experts, communication experts

Setting up programs, schedule, distribution of responsibilities, logistics, resources, support systems, reporting systems, decision making systems, etc

the coverage

Corporate history, establishment, capital structure, sources of capital, payment of capital, types of shares, legal and beneficial ownership of shares, claims or potential dispute on company’s ownership, pledge, encumbrance and attachment on the shares, shareholders, commissioners and management material decisions for the past 5-10 years

Investment, business and operational licenses; duration and ability to extend licenses, dependency on certain licenses, risks of not being able to extend licenses, regulatory trend on material licenses, breach to requirements of the licenses, potential of revocation of licenses, assignment of licenses, value of licenses, etc

The future of the target in the organization of the acquiring party; how it would fit in

the coverage

Review on the assets, quality of the assets, sustainability the assets, risks that may affect quality of the assets, claims and liabilities arising from the assets, mobility of the assets, valuation of the assets, technology of the assets, ability to replace the assets to support operations, ability to use assets for financing purposes, etc

Funding ability, access to financial markets, acceptability in the financial industry, ability to refinance, alternative of financing

Review on the liabilities of the company, exposed or hidden; forms of liabilities; ability to contain or limit liabilities;

the coverage

Review the systems, programs, SOP, governance adopted and applied in the target company, and how it would fit in with the ones adopted and applied by the acquiring party

Review the organizational structure of the target company and how it would effectively carry out the mission and programs of the target company

Review the management style of the target company and how it would effectively bring it to the goals and targets of the company

Review conflict of interests and affiliated transactions

Review the decisions made by the management, commissioners and shareholders that may affect the going concern, profitability and value of the target company

the coverage

Review all contracts, agreements, commitments, and statements to public, customers, government and other stakeholders, and analyze how it would affect the target company, its going concern, assets, profitability and value

Review insurance and other protection coverage on the target company, its assets, management, and employees

Review claims, potential claims, litigation, arbitration proceeding and other dispute settlement that may involve or affect the target company, management, shareholders, assets and value of the target company

Review the intellectual proprietary rights owned or used by the target company, and how it would affect the operations of the target company in the long run

the coverage

Review the human resources condition, form of employment, employment terms, collective labor agreement, relations with the labor union, compliance of labor regulations, work safety and health, etc

Review marketing and sales, marketing network, terms of engagement with distributors, dealers, sellers; level of collections, bad debts, etc

Review supplies and its engagement with suppliers, financing of supplies, payment terms, procurement systems, etc

Financial performance, production and sales, profitability, risks factors and assessment, cost of production, sales and operations, dividend policy and history of dividend payments, investors’ satisfaction, etc

the coverage

Review operations of the target company, manufacturing processes, risk factors and how to deal with it

Review transportation issues, safety, liabilities, and outsourcing

Review sub-contracting, quality control, liabilities, insurance, compliance

Others as maybe relevant or triggered from the on-going due diligence

Due diligence exerciseABC Corp., a holding company in the US plans to expand due to limitation of resources in its home country. It targets mining companies in Indonesia for the purpose of supplying its customers in Japan (tin) and India (coal). The contracts to supply its Japanese customers are for a long term supply, and for the coals are one time contracts. For the tin resources, ABC Corp., targets Perusahaan Daerah DEF, a company operating in an offshore area of Belitung Island, and for the coal resources, it targets CV GHI, a local company owned and run by the family of local Bupati. The long-term contracts with Perusda DEF are based on a price agreed 15 years ago, and the mining licenses of Perusda DEF will expiry early 2014. Perusda indicates that it wishes to extend the contracts only if the price is adjusted with fair market price plus premium of 10%. It comes to the knowledge of ABC Corp., that the premium will not booked as income of Perusda DEF, but will be distributed to the directors and commissioners of Perusda DEF as performance bonus. They are also public officials of Kabupaten where the mines are located.Please brief your client, ABC Corp., the focus of your due diligence!