Due diligence in domestic mining M&A

China’s 13th Five-Year Plan pointed out that the central government should support mining enterprises to upgrade technologies, guide the merger and acquisition (M&A) of small mines, and close outdated and environmentally unfriendly mines. In the Development Plan for the Nonferrous Metals Industry (2016-2020), the Ministry of Industry and Information Technology said the regional consolidation of mines should be promoted across the country to expedite large-scale development and intensive use of resources.

M&A projects in the mining industry are unlike other ones for special core assets (non-renewable mineral resources), requiring high levels of expertise in value evaluation and in evaluating various risks. During the legal due diligence on such M&A projects, attention should be paid to following aspects:

The authenticity of mineral reserves

For mining sector M&A, the mineral reserve is one of the biggest risk factors, apart from market price and conditions for mining and mineral processing. The estimation of mineral reserves involves multiple factors, such as the complexity of an ore body’s geological structure, the control and study of ore deposits, the choice of exploration grid density and engineering techniques, and the choice of estimation methods. When performing legal due diligence on such M&A, lawyers should advise the acquirer to hire experts to examine existing mineral reserves and/or commission evaluation centres where the target mines are located to review exploration reports, on top of reviewing annual inspection reports on resource exploitation, exploration reports, and examination registration reports of target companies, as well as their real production and sales. The purpose is to ensure the authenticity of mineral reserve information provided by target companies.

Sun Yunzhu is a partner and Zhong Ming is an associate at East & Concord Partners in Shenzhen