Higher commodity prices have historically led to a commensurate increase in merger and acquisition (M&A) activity within the natural resources sector. Extraordinary economic growth in China during the period 2002-2012 resulted in supply shortages, driving up global commodity prices. In its Global Mining Deals Outlook (2013), PwC reported that the aggregate value of global mining M&A increased five-fold during this illustrious decade.
Recent growth in emerging markets, and the demand for metals required in the race to net zero emissions, are once again driving up commodity prices. As we stand on the cusp of what could arguably be the beginning of the next commodity boom, companies and investors that have managed to weather the Covid-19 storm are gearing up for strategic acquisitions.
For every acquisition there is of course a disposal. Sellers have traditionally focused on a “clean” exit, in terms of which they seek to limit their obligations and liability after exiting the asset or business. However, achieving a squeaky clean exit, particularly within the natural resources sector, is somewhat of a myth for a number of reasons, including that purchasers will generally seek post-closing protections in the form of warranties, guarantees and indemnities. There are usually complex transitional mechanisms relating to permitting arrangements, ongoing statutory obligations imposed on sellers, as well as a continued association with the particular asset or business from a public or media perspective.
To complicate matters, risks associated with environmental, social and governance (ESG) issues are now front of mind (or should be) for both sellers and purchasers in any mining and metals transaction. There is good reason for this. In its ESG Sector Risk Atlas (2019), S&P Global identified the metals and mining sector as the sector most susceptible to ESG risks.
Though sellers will continue to focus on a clean exit, there has been a noticeable shift towards achieving a balance between a “clean” and a “responsible” exit. While at first the two concepts may appear contradictory, they are by no means mutually exclusive.
A responsible exit involves the sale of an asset or business to a purchaser that will continue to operate the asset or business in a responsible manner and in accordance with international best practice. There are various ways in which sellers could seek to achieve this outcome while creating value for their business or asset.
First, sellers should ensure their assets or businesses are being operated responsibly at the time of exit. A vendor due diligence is a helpful tool to identify existing issues and what actions need to be taken to rectify these issues, or what disclosures need to be made to mitigate liability. Though a vendor due diligence is certainly not a new concept, ESG considerations are beginning to play a far more prominent role in these investigations.
Second, sellers should conduct their own due diligence on the purchaser to satisfy themselves that the purchaser does not have a history of conducting operations in an irresponsible manner. While due diligences on purchasers have traditionally been carried out to assess the financial health and ultimate ownership of a purchaser, extending this investigation to the purchaser’s mission statements, ESG policies, memberships of voluntary organisations and initiatives that promote international best practice as well as any negative media coverage, will assist sellers in gaining a better understanding of the purchaser’s position on ESG issues.
Third, sellers could consider potential structures and contractual protections that enable a responsible exit. For example, sellers could put in place policies, committees or agreements focused on responsible operations before exiting that would continue post-exit. Additionally, sellers could impose post-exit obligations on the purchaser under the transaction documentation in relation to operating standards, stakeholder commitments and end-of-life rehabilitation actions. A failure by the purchaser to comply with these obligations could result in financial penalties or call (buyback) options.
Careful consideration would, however, need to be given in relation to contractual obligations that involve an ongoing relationship with the purchaser or the operations and how this may affect the risk vs reward profile of the seller.
Lastly, active and continued engagement with all relevant stakeholders throughout the sale process is an essential tool in achieving a responsible as much as a clean exit. Confidentiality undertakings should be carefully crafted to ensure that key stakeholders such as the regulators, local communities and labour are not excluded from or blindsided by any sale process.
This article was written by Patrick Leyden and was first published on Business Day’s website on 16 March 2021.
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