The merger of a Public Company and a Private Company is not as simple as it may first seem. The Public Company is required to conform to statutory regulations
for reporting, whilst the Private Company has less stringent reporting protocols. In this situation there are many factors to consider through the process of independent technical review before finalising the viability of the merger.
SRK recently completed an Independent Technical Review (ITR) of two companies to support a potential loan to the Acquirer. SRK reviewed the assets of the Acquirer
and the Vendor: underground mines, processing plants, new projects and associated infrastructure assets (dams, dumps and stockpiles).
SRK’s assessment covered the initial 5 years of the Mineral Resources/Ore Reserves (to be in accordance with JORC Code 2012 guidelines), exploration upside, mine planning and mineral processing; and for the valuation model inputs, the Acquirer’s and Vendor’s combined acquisition model, the MergeCo model.
A high-level ‘red flag’ approach was undertaken to highlight fatal flaw issues; during the site visit, discussions with management were held and supplied documentation
was reviewed. Upon identification of potentially material issues, further investigation and benchmarking to confirm the veracity of the information, estimates and forecasts were completed.
Critical company differences
The Acquirer, an Australian Securities Exchange listed company, was required to conform to numerous regulations, including the JORC Code. No material issues with respect to JORC Code compliance were identified, and SRK was able to sign off.
In contrast, the Vendor, a private company with less-stringent reporting regulations, was non-compliant in terms of JORC Code reporting. Reporting has been done under a combination of 2004 and 2012 JORC Codes, and the Ore Reserves incorporated Inferred Mineral Resources (70% of the Vendor’s main ore source) within the first 5 years of the MergeCo plan.
The Vendor’s Mineral Resource estimation methodology was also fundamentally
flawed due to misclassification of Mineral Resources (also impacting the validity of
the Ore Reserves). The Mineral Resources were not considered compliant with the
JORC Code and SRK was unable to sign off on these.
Did it work? Greater comfort for the Acquirer and Lender
Resolving and reporting to the 2012 JORC Code provided greater comfort to both the Acquirer and its lenders that the ore tonnages and grades were available and mineable.
A key lesson from this assignment was the importance to understand the corporate structures of Acquirer and Vendor companies, public versus private, early in the ITR process to prepare for likely issues that may be encountered, and identify the areas that 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 timeous process and potentially fewer surprises and delays in any potential transaction.
