The need for due diligence prior to mining project investment

INTRODUCTION:

The opportunity to invest in mining projects is exciting and lucrative where one invests in the right project. However, there are many issues that one needs to consider before diving into a mining investment. This brief shall explore some of the critical issues that need to be assessed by a prospective investor, be it a small or large-scale project.

The process of assessing a prospective opportunity is called a due diligence exercise. To acquire all the information referred to in this Brief, the Parties need to sign a non-disclosure and non-circumvention agreement to ensure that safeguards are in place to avoid the misuse or negligent handling of information divulged between the Parties during this process.

This brief will look at the exercise from the perspective of the investing party, that is, the person who has been invited or the person considering investing in a mining project.

A practical due diligence exercise requires extensive knowledge of the potential partner, the state of progress on the project, an on-site inspection to verify what has been physically established, and analysis of all documentation available regarding the proposed project scope and terms. The due diligence consideration for established mining companies differs from the issues one would look at with green filed projects. Following the same, the assumption of appropriate professional legal, geology, and financial expertise is essential when undertaking a due diligence exercise to receive the requisite advice on key considerations. Notwithstanding, some key and common key areas of due diligence include the following:

1. THE LEGAL STATUS OF THE PARTNER AND FINANCIAL ASSESSMENT

It is vital to establish whether an incorporated entity or an individual holds the concession or mining right. Where an incorporated entity has the mining right, it is important to establish its type (e.g., private limited company or Trust) and verify if its constitutional/ founding documents are in good standing. Where an individual holds the mining right, it is essential to assess how the proposed partnership would be affected should such person become deceased and what contingencies should be put in place to address such risk.

Where the mining project is already operational, it is also essential to investigate the financial state of the entity. Of note is the need for disclosure and discussions regarding legacy debts to service providers, outstanding statutory obligations, debts to financiers, customers, or employees (or any other). The presence of any financial liability/ historical debt should be disclosed as such debts directly impact the economic viability of the project. Accordingly, the following should be requested, inspected, and verified:

1.1 All company Constitutional Documents – Certificates and documents of incorporation, Memorandum and Articles of Association, Share Holders Agreements etc.

1.2 Company Audited Financial Statements. Where the entity is not independently audited, one can request management financials/ cashflows.

1.3 Declaration of legacy debts or obligations (e.g., outstanding salaries, loans, court judgments).

1.4 Valid tax clearance must be provided to verify the tax standing of the entity.

1.5 Verification of standing of statutory key fees and levies, e.g., Land Development fees to Rural District Council Fees to RDC's (this levied in terms of section 96 (1) (b) of the Rural District Councils Act [Chapter 29: 13] as read with section 188 (7) and (8) of the Mines and Minerals Act), Mining License Annual Renewal fees, annual environmental management (EMA) agency levies etc.

1.6 It is also important to fully disclose all and any material adverse information or status that is current or anticipated. Such disclosures are a prudent measure in assessing the financial and legal viability of the investment.

1.7 Investigating the project's social impact is also a critical component of the financial due diligence exercise. The social development plan, if any, gives insight into the extent of the commitments or pledges to communities that will need to be fulfilled.

2.THE RIGHT TIME TO MINE/TITLE

No one can mine or claim to have the right to mine on any concession without a license duly issued under their name in accordance with the Mines and Minerals Act Therefore, it is vital to examine the mining right, which must be valid and must correspond with the concession/project on offer. Following the same, the issues below need to be assessed:

2.1 There are various licensing instruments which include mining certificates, special grants (if the mining area is in a reserved area), ordinary lease, special lease, and tributaries. It is important to identify the type of the right and whether it is issued in the name of the prospective partner/project. A mining right needs to be valid and current and in the name of the prospective partner/project. The Ministry of Mines and Mining Development (Ministry) can easily assist in verifying these facts.

2.2 It is crucial to verify the exact delimitation of the concession by requesting and confirming the maps of registered mining claims/concessions. The Ministry can verify these maps to confirm the size and coordinates of the concession.

2.3 In the case of a special grant/ lease or special lease, the text of the grant/lease will reveal the tenure of the right and any additional conditions which apply to the right.

3. EXPLORATION AND GEOLOGICAL REPORTS

3.1 Exploration Reports are central to one understanding the available mineral reserve. The profitability of a mining project relies on the size and quality of the known/verified mineral reserve.

3.2 For large projects, it is vital to procure independently verified exploration reports of the mineral reserve, including the Mineral Resource and Mineral Reserve Statements, Life of Mine projections, and the Project Feasibility Analysis/ Business Case. These core reports are critical for an informed assessment of the project's feasibility. If an independently verified Report/Study is not available, the resource statement should at least be "bankable".

A bankable Feasibility Study means a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental, and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production

3.3 For small-scale mining operations, it is important to request and extensively interrogate the sampling results, sampling plan to have a clear understanding of the projected yield per tonne, or average yield per tonne. If no geological work has been conducted, it is crucial to invest in sampling through trenching, drilling or magnetic surveys as may apply to the mineral being mined.

4. OPERATIONAL/PROCESSING REQUIREMENTS OF THE PROJECT

The geological information availed from exploration work is critical in developing the mining plan and forecasting the technical requirements and processing requirements of the project. This assessment requires the assistance of the metallurgist. The mining and processing considerations are key to understanding the operational and financial requirements of the project. For small-scale mining projects miners are expected to submit a Sight of Works Plan to the Ministry of Mines prior to commencement of operations. It is important to establish whether the project is compliant with this requirement as it can cause the operations to be shut down.

5. ENVIRONMENTAL PERMISSIONS

Mining operations cannot be established or commenced without an Environmental Impact Assessment and Certificate (EIA) being issued. This is in accordance with the Environmental Management Act (Chapter 20:27) as read with SI 7 of 2007. Following the same, a prospective partner should be able to avail the following:

5.1 Finalized Environmental Impact Assessment Report – even where an entity has an EIA certificate, it is important to request and analyse the report to understand the extant environmental and social impact of the project on the surrounding eco-system and its communities. This also enables a glimpse into the environmental and social obligations and the required mitigatory considerations that will influence operations.

5.2 A finalized and assessed report results in the issuance of an EIA Certificate issued by the Environmental Management Agency (EMA). The certificate should be in good standing and the annual inspection reports from the EMA must also be made available for assessment.

5.3 It is also mandatory for small- scale mining projects to acquire an EIA Certificate and there is a specially abridged version of the certificate which is applicable to the artisanal and small-scale mining sector.

5.4 If a prospective project has not initiated or acquired its EIA Certificate, it is important to commission the assessment with a clear understanding of the importance of the process to the commencement of lawful operations, attainment of viable social acceptance (social licence to operate) and the importance of clear insight into the environmental protection initiatives that the project is expected to undertake and maintain.

6. REGISTRATION WITH MMCZ/ FIDELITY (GOLD)

Depending on whether the prospective project has sold a product before, it is worthwhile enquiring if they are known and recognized by the MMCZ as a producer. Where gold is concerned it is important to make sure that the entity/ persons with the mining licence are registered with Fidelity Printers and Refiners which is the sole gold buying entity in Zimbabwe.

7. OPERATIONAL PERMISSIONS/LICENSES

There are various other licenses and permissions which may be part of a due diligence exercise where one is assessing functioning mines. The applicability of these licenses depends on the nature, scale and scope of operations being considered; however, these include but are not limited to:

7.1 Custom Milling License (applicable on the sale of a Mill),
7.2 Annual Mine Inspection Receipts,
7.3 Labour Returns,
7.4 Production Returns,
7.5 Mine Managers Certifications,
7.6 Water permit (Water extraction licenses), water disposal license,
7.7 Effluent discharge license,
7.8 Emission License,
7.9 Radiation Licenses (should mine have equipment with equipment which is recognised as radiation emitting. In this case a radiation licence is required from the Radiation Authority)
7.10 Blasting licenses,
7.11 Mine Magazine Certification,
7.12 Export licenses, and
7.13 Closely connected to export licenses is an assessment into whether the entity has been red flagged by the Reserve Bank of Zimbabwe for acquittal irregularities as arises under exchange control regulations.

DISCLOSURE LITIGATION:

When one is investing or buying into a going concern, it is important to have all known or anticipated litigation disclosed. Litigation has direct implications on the financial and legal standing of the project. Material litigation includes contestation of the mining rights, labour related cases and any environmental or social litigation involving the project.

The importance of conducting a comprehensive due diligence before buying into a mining project are indispensable to one investing in the right project and to reaping financial rewards from their efforts.

The author, Selina Zhuwarara, is a mining law expert and Consultant at Muvingi & Mugadza with an LLB (honours) from the University of Zimbabwe, an Executive Masters in Business Administration from Africa University, Zimbabwe, and an LLM in Extractive Industry Law in Africa (University of Pretoria, South Africa).

For further information or assistance in the first instance please contact Nobert Phiri at phiri@mmmlawfirm.co.zw

Further reading:

Import changes to Zimbabwe's mining regulatory framework

AGA expands legal membership to Zimbabwe through appointment of Muvingi & Mugadza Legal Practitioners in Harare

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