From the scorched goldfields of Tanzania to the arid, iron-laden plains of Sierra Leone, mining can be a glamorous industry. The mining engineer inhabits an enviable world of hi-tech kit, magnificent scenery and the promise of untold riches. Even the traditionally more sedate dealmakers who work in mining move in exotic circles. Walk through Mayfair’s Shepherd Market and you will see them emerging from chic cafés, cigars in hand, towards chauffeur-driven Rolls Royces having just brokered funding for their next ambitious African adventure.
The blue chip end of this spectrum is more rarefied and is reflected in the self-assured grandeur of the exclusive St James’s clubs, just minutes from the offices of global mining power-house, Anglo American. These deals wouldn’t progress, however, without one simple ingredient, almost universally overlooked in the transaction lifecycle. There is one very good reason however why this often maligned professional service is overlooked: due diligence is not glamorous.
This may sound like an odd pronouncement for someone who regularly undertakes due diligence assignments for law firms, equity houses and indeed mining firms, but before leaping to its defence, let us examine exactly what we are talking about. Due diligence mitigates risk. It reduces the likelihood of the project failing because of unseen financial, regulatory or reputational problems and gives you all the intelligence you need to make an informed decision before buying, merging or entering into a joint venture. Due diligence should be carried out right at the beginning of the investment process, and in the mining sector should encompass not only prospective investors but also contractors, local suppliers and the middle men allocating concessions who so often are tainted by corruption.
Peter Leon, Head of Africa Mining and Energy Projects at Webber Wentzel in South Africa, observes that, ‘While Africa is full of opportunities, it also contains surprises for the unwary or the unready which is a timely reminder of how important it is to be prepared to undertake proper due diligence before embarking on projects in this exciting, but potentially risky, continent.’
The following true story illustrates the absolute necessity of conducting pre-transaction due diligence, whether it be in Africa or any other new market, and even now will probably make sobering reading for the veteran mining man who very nearly found himself sucked into a murky tale of blood diamonds, kidnap threats and, ultimately, his own financial ruin. The mining man in question had been operating successfully in West Africa for over 20 years. He was, and still is, a major player with immense technical ability, solid financial experience and the tough exterior required to survive such a harsh environment. One would assume that our mining man – having been around the block enough times to know all that glitters is not necessarily gold – would not fall victim to blood diamonds peddled by an international conman. However, the lure of easy money proved too much, and having been approached by a seemingly unknown character in a West African bar, he plunged in headfirst.
Essentially, he was very nearly duped into funding an entirely fictitious mining venture. The character who approached him was a presentable, believable and seasoned conman who made his living by operating such stings all over the world. Behind his smooth exterior lay a sordid web of blood diamond deals, extortion rackets and even kidnap threats. Our mining man only escaped this Kurtzian nightmare when the conman was hospitalised after being bitten by a mule.
Had he conducted even basic research into the background of this individual, he would have known to avoid all involvement. Despite the obvious advantages and indeed the necessity of conducting thorough due diligence, I am regularly bombarded with a barrage of excuses by prospective clients who are desperate to avoid what they perceive as a time-consuming irritation and unnecessary expense. In these straightened and increasingly regulated times, many people claim penury as a valid reason for not carrying out suitable checks on prospective business partners or even on establishing the physical presence of potential assets. But there really is no excuse.
Whenever prospective clients cite a lack of funds as a reason for not undertaking due diligence, I always proffer the following cautionary tale in an attempt to make them reconsider: the prospective client on this occasion was an experienced gold miner operating in Ghana who, despite making encouraging profits, was refusing to make the inward investment necessary to ensure that they knew absolutely everything about a gold mine that they wanted to acquire. The most cursory of attempts to research the people behind the potential acquisition would have revealed a miserable litany of litigation, bribery and falsified results. But, like Nelson raising a telescope to his blind eye at the Battle of Copenhagen, they willfully ignored the glaringly obvious, having become fixated by supposedly easy profits. Ultimately, the gold miner’s refusal to invest less than £10,000 in the due diligence process (for a deal which, overall, was worth tens of millions) resulted in a deal which fell apart six months later amidst a storm of costly litigation, vicious retribution and serious financial loss. After my last meeting with the recalcitrant gold miner prior to them proceeding against my advice, I mentioned, semi-tongue-in-cheek, that our other key service was litigation support. Whilst I took no pleasure in their plight, we eventually provided this service to them at far greater expense than the original due diligence would have cost, thus neatly illustrating that a little investment in due diligence at the opening stages of a deal is money well spent.
Jonathan Charles, Managing Director of Lionsgate Communications, a specialist public relations adviser to growth companies in the natural resources sector, believes that mining companies are becoming more professional in their approach to due diligence. Jonathan says, ‘Those days of consummating a deal on a handshake are well and truly over. A company’s board of directors would be doing its investors a great disservice by not instigating a proper due diligence programme as part of good corporate governance. In fact, we are noticing that African governments are actively encouraging our clients to place greater emphasis on both Corporate Social Responsibility and project due diligence, as they also want to see our clients succeed.’
In these more regulated, post-Bribery Act days, transparency has become paramount, and being seen to conduct due diligence in an open manner is an excellent way of projecting good corporate governance and banishing damaging labels of corporate opacity. The London Stock Exchange has recently been on the receiving end of a damning report by the business and human rights group Rights & Accountability in Development, which details how companies continue to trade despite a terrible regulatory track record. In particular, it highlights how the infamous Central African Mining and Exploration Company was allowed to trade on the AIM despite links to Mugabe’s notorious ZANU-PF party, dubious exploration rights and the appalling antics of the company’s management. A thorough due diligence investigation would obviously reveal these distasteful characteristics and this case echoes a recent piece of business intelligence research I undertook for another prominent African miner, who was very grateful when I was able to highlight how his partner had been funding a guerilla movement by illegally mining zinc, amongst other equally outrageous activities.
Whilst understanding a company’s track record and the reputation of its directors is crucial, companies looking to invest in Africa and in particular the mining sector need to go beyond this. The mining sector is often beset with a myriad of labour issues, complex domestic political wranglings and a whole raft of delicate corporate and social responsibility programmes in which a potential partner may be involved.
Scouring corporate and litigation records in dusty archives, or interviewing sources to gain an insight into how a company really operates, comes a poor second to the excitement of pulling precious metals out of the ground, but conducting due diligence is an integral part of any successful business venture. The next time some safari-suited operator approaches you with the deal of a lifetime, do not get caught up in the Graham Greene-ness of it all – take a deep breath, conduct your due diligence, and look forward to making the perfect decision.