The merger of a Public Company and a Private Company is rarely easy - but just how complex is the process? And how can an ITR illustrate what factors need to be addressed? The Public Company is required to conform to statutory regulations for reporting, while the Private Company has less stringent reporting protocols. In this situation, there are many factors to consider through the process of an independent technical review before finalising the viability of the merger.
SRK recently completed an Independent Technical Review (ITR) on two companies to support a potential loan to the Acquirer. SRK reviewed the assets of the Acquirer and the Vendor; including underground mines, processing plants, new projects, and associated infrastructure assets (tailings dams, waste dumps, stockpiles, old open pits).
SRK’s assessment was on the first five years of the merged operation, relating to the Mineral Resources/Ore Reserves in accordance with JORC Code (2012) guidelines, exploration upside, mine planning, and mineral processing. Both the Acquirer’s and Vendor’s mine and financial model inputs were combined to create the MergeCo model that served as the basis of the valuation.
SRK adopted a staged, high-level ‘red flag’ approach to highlight fatal flaw issues identified during the asset site visits, discussions with site personnel, and a review of the documentation supplied. Upon identification of a potentially material issue, SRK examined specific areas in greater detail and conducted benchmarking to confirm the veracity of the information, estimates, and forecasts.
Critical company differences
The Acquirer, an Australian Securities Exchange listed company, was and is required to conform to numerous statutory regulations, including the JORC Code (2012). There were minimal issues associated with the Acquirer’s assets with respect to JORC Code (2012) compliance, and SRK was able to sign-off on the JORC Code reporting.
In contrast, the Vendor, a privately held company with less-stringent reporting regulations, was non-compliant in terms of JORC Code reporting. There was a combination of 2004 and 2012 JORC Codes, and the mining schedules incorporated Inferred Mineral Resources in the stated Ore Reserves. Potentially not a major issue if these Inferred Mineral Resources were an immaterial proportion of the production profile or in the later part of the MergeCo scheduled life of mine plan. However, they were in the first five years of the MergeCo plan and accounted for 70% of one of the Vendor’s main ore sources.
The Vendor’s Mineral Resource estimation techniques were also fundamentally flawed due to misclassification of Mineral Resources. As a result, the reporting of the Vendor’s Mineral Resources and Ore Reserves were not considered to be compliant to the JORC Code (2012) and were therefore unable to receive sign-off, and had to be re-estimated.
Did it work? Greater comfort for the Acquirer and Lender
Resolving and reporting to the JORC Code (2012) guidelines provided greater comfort to both the Acquirer and its lenders that the Vendor’s ore tonnages and grades were available and mineable.
A key learning from this assignment was the importance of understanding the corporate structures of Acquirer and Vendor companies, both public versus private, early in the ITR process in order to anticipate likely issues that may be encountered in the review, and hence the areas that potentially require greater interrogation and understanding. It also provides both parties the benefit of early identification of areas where additional work may be required to meet the standards of public reporting. Early understanding results in a more timely process and potentially fewer surprises and delays in any potential transaction.
