A due diligence process is typically required to support project financing, either during a project development phase or for a merger and acquisition process.
Due diligence exercises can be commissioned by either the project owner or the potential lenders. A typical scope is to examine all of the technical aspects of a
project and opine on the completeness of work and importantly, whether capital and operating cost estimates are suitable for use in financial modelling, or whether any adjustments or sensitivities are required. If a project owner commissions a due
diligence, they should take care to allow a truly independent review for potential
lenders to take place.
Key aspects that are highlighted during project development financing due diligences are discussed below. A typical shortcoming for junior mining companies is to produce studies that are not based on any formal study guideline. This often results in a so-called definitive feasibility study, in reality being a compilation of work done along the spectrum of a pre-feasibility study to a feasibility study. Companies should consider two international guidelines (AusIMM Cost Estimation Handbook, Monograph 27 and AACE International Recommended Practice No 47R-11) that provide valuable guidance to the required contents for study phases.
Defining an achievable contract strategy is critical, particularly for mineral processing facilities. It is noted that more complex flowsheets are required now to treat more complex mineralogies. A key aspect that should inform a contract
strategy (and who should be assigned what risk) is the level of engineering definition immediately prior to project execution. Projects that are approved with lower levels of engineering definition can have increased levels of execution risk for both owners and contractors, when poorly defined elements only become visible partway through execution.
The assignment of contingency is a critical aspect for project financing. Contingency is required in all capital estimates and can also be needed for operating cost estimates. Study guidelines recommend a range of contingency, depending on the study level. Dependent on the quality of execution readiness, a realistic level of contingency should be selected and referenced to benchmarking for similar projects. More use is being made of probabilistic contingency assessments. It is noted that while the outcomes portray a high level of apparent precision, in reality this method routinely fails to identify the real cause of capital overruns when they eventuate. Hence a good degree of human intellect is required when assessing contingency to ensure a realistic outcome.
Merger and acquisition due diligence reviews need to consider the above points for development projects; however, reviews may also include operating assets, where key consideration needs to be given to historical performance and how that relates to potentially adventurous future estimates.
