Friday, May 11, 2012

Increased foreign expansion exposes Canadian mining companies to risk

TORONTO— The current economic climate has created an ideal setting for the growth of Canadian mining companies. And for many, there may be no better way to embrace this opportunity than through foreign expansion. Grant Thornton LLP announced today the release of Venturing into new territory—mining and risk in emerging markets, a white paper that explains the changing environment for companies expanding into new markets and provides advice how those companies can proactively manage risk.

“Canadian mining companies are looking for opportunities for growth,” says Mark Zastre, Global Mining Industry Leader, Grant Thornton LLP in Canada. “Previously unexplored markets offer numerous advantages for mining companies looking to spread their wings. Strong commodity prices mean resources that were once economically unviable—or located in areas of the world that would have once been considered too high-risk for the return on investment—are an increasing target of foreign investment.”

But expanding into new markets comes with its fair share of risks, particularly for mining companies looking to expand into countries where corruption, bribery and fraud may be more commonplace than at home. It’s prudent for mining companies to be aware of and address risks associated with foreign expansion.

Investing in an economy whose social and business activity is in the process of rapid growth and industrialization can present investors with risks from a multitude of angles. Fragile governments, unclear laws surrounding property ownership, the absence of clearly defined legal systems, structures and processes, and increased risk of political interference are but a few additional factors that can add to the risk of doing business in these markets. Add to this increased incidents of bribery, expectations of facilitation payments or other such accommodations, and the possibility that reports, agreements and contracts may not be as “iron clad” as companies may have been led to believe.

To reduce exposure to foreign expansion risks, it’s important that mining companies conduct proper due diligence and ensure that the correct procedures are in place to help ward off any threats. Companies can also be more prepared by reviewing the advice found in Venturing into new territory—mining and risk in emerging markets.

The report expands on advice such as:

  • Thoroughly research the new country and understand the specific risks involved. Conduct a detailed risk analysis, and when acquiring an existing company, pinpoint all of their locations, define their activities and review their existing anti-corruption procedures.
  • Build the right internal and external teams to help navigate through the new risks. This sometimes means making changes to the teams.
  • Examine current processes and business plans to see where improvements can be made. Conduct a gap assessment—compare the existing “state of the nation” to determine where the company might be exposed and put a plan into place to bridge any gaps.
  • Have a trusted adviser on the ground—one who is familiar with both the country and the culture—and who is in a position to go right to the source and evaluate claims made in any resource estimates and financial statements.
  • Take the time to understand the applicable laws in the new market. Evaluate the processes involved with business plans to assess legislative risk—for example, if transporting across borders.
  • When acquiring the assets purported to be held by a target company, don’t take reports at face-value. Take the time to verify ownership.

In addition to providing timely advice to growing mining companies, Venturing into new territory—mining and risk in emerging markets explains changes in current anti-corruption and anti-bribery legislation to help companies understand these new risks. Government in countries like the US and the UK—and to a lesser degree Canada—are now tackling bribery and corruption more vigorously and from a global perspective. This means the risk of fines, penalties and jail time for senior executives and officers is increasing. In some instances, such as with the UK Bribery Act, simply not having an anti-corruption policy in place can get companies into trouble.

This means mining companies need to consider take a proactive approach to anti-corruption legislation, including conducting a corruption and bribery risk assessment to identify gaps and taking the time to educate employees and local partners. Companies should also ensure that any overseas acquisitions, joint venture partners and other entities have unblemished records to avoid guilt by association.

Advance copies of Venturing into new territory—mining and risk in emerging markets were distributed at The Prospectors and Developers Association of Canada’s (PDAC) Convention, the mineral industry’s largest annual convention, on March 4, 2012. The final version is now available to the public at http://insights.grantthornton.ca/issue/57403.