Table of Contents
Very few mineral properties spend their entire lifespans from discovery to depletion in the hands of one owner. More likely, properties will have several owners, and partial interests may change quite often. Similarly, mineral companies are bought and sold with frequency, in recent years at what appears to be an accelerating rate.
The reasons for selling a property can be manifold – need for additional capital in other parts of the business, need for development capital, realization of a large gain at a perceived high point in the market, pessimistic commodity outlook, retirement of principals, or resolution of estate problems. Regardless of the reasons for a sale, there are specific steps that logically follow. Spruce up the business, package the information, market the property, negotiate the terms, close the sale, and make sure it stays sold. Adherence to certain very basic ground rules in property sales can maximize the profits and minimize the effort.
The Decision to Sell the Mining Property
Whether the project involves the sale of a small mine, a large asset base of several properties, or the entire company, it is critical to go through the thought process, analyze the options, and determine what it is desired to achieve. If the objective is to raise cash to employ elsewhere in the business, then there are a number of alternatives such as corporate equity financing or bank debt that must be at least reviewed prior to making the final decision to sell.
In considering the sale of a property, the impact on the income statement, balance sheet, and taxes must be considered. Perhaps a gain is needed to dress up the current quarter. If strong earnings are coming in from another sector of the business, perhaps this is a good time to sell a property and realize a loss. A corporate merger for stock can generally be done on a tax-free basis if that is attractive to the owners. A stretched-out payment plan for the purchase price may be an attractive tax attribute. The goal of this type of analysis is to arrive at a financial objective most favorable to the seller. This objective may dictate the spectrum of buyers to be contacted, i.e., cash buyers versus those who might pay in stock.
The decision process also must generate an asking price, and a minimum price for the transaction that the sellers are willing to accept. Price is determined by the degree of competition. If this is a unique, one-of-a-kind industrial mineral property, there is less restraint on the price than if this is one of 30 aggregate operations in the area, half of which are for sale. The important point here is to set a price objective that is realistic. It is extremely frustrating and disappointing to proceed well into a sales campaign, only to learn that the price range from a group of reliable buyers is far below the seller’s objective. This could necessitate aborting the sales effort, at best a wrenching experience for not only sellers but also buyers, the latter having spent considerable time and money analyzing the proposed transaction.
Packaging the Property
Fundamentally, selling an industrial mineral property is not unlike selling one’s house – paint a few rooms, fix the broken drain pipe, clean up the trash behind the garage, and in general create a neat and orderly appearance. Even though the fundamentals of a mine and mill will ultimately determine the transaction value, it is the cosmetic factor, particularly in the early stages of a review and analysis, that will initially stimulate and later maintain the buyer’s interest.
A new coat of paint on the crusher may be necessary. Junked equipment should be moved from the premises. Spruce up the financial statements, taking care not to “cook” the books, for they have to stand up to buyer analysis. Incipient environmental problems should be attended to. See if that nagging list of litigation can be settled .
Once the property has been put into attractive physical shape, the sales package must be prepared. The assembling and presentation of information about an industrial mineral property is the single most important step in getting from the decision to sell to the final closing. A descriptive memorandum is at the core of the package. It serves two functions – first, to get the seller organized and second, to describe the property or business to prospective buyers. The descriptive memorandum needs to be snappy and concise in order to grab the buyer’s attention and to avoid losing him in data overkill. Topics to be included in the memorandum are:
- business overview and history produces (chemical and physical characteristics)
- property description (including ore reserve data and potential)
- industry sector, markets, customers, and competitors
- management and personnel
- legislative and government considerations
- historical, current, and projected financials
- investment and banking relations
- public and stockholder relations
- terms of the proposed deal.
Ideally the descriptive memorandum should be of a size that can be easily read in 20 to 30 minutes. Beyond that time period, there is serious risk of losing the reader’s attention. Voluminous data is perhaps left for the prospective buyer’s on site due diligence review, but if supporting material is felt to be necessary in the memorandum, this is best added as appendicies.
Distributing a descriptive memorandum outside of the company is akin to bearing one’s soul, and sensitive confidential information could well be released. A better course of action can be to withhold such information, a customer list for example, until there has been an expression of strong interest on the part of the buyer. This is then a much more appropriate time to execute a confidentiality agreement, followed by the release of the sensitive information. The confidentiality agreement should be prepared with the advice of the seller’s lawyer and investment banker.
Distribution of a descriptive memorandum immediately brings with it two significant responsibilities.
- Tight control of and accountability for the copies sent out must be maintained, less the document receive too wide a distribution and fall into the hands of unauthorized persons possibly competitors or customers. Damaging results can be expected if this occurs.
- Once a memorandum has been distributed, any changes or new developments within the company (over even a short period of time these are inevitable) must be distributed promptly to the recipients of the basic memorandum. This is absolutely essential in order to maintain a level playing field for all who are seriously considering the purchase of the property.
The remaining part of the package is the back-up data. This is usually voluminous and is best presented in a data room in the seller’s offices.
The prospective buyer should be given the inventory of the data presented and if the buyer wants copies of anything, the seller makes the copies and the buyer signs for the material being taken. The seller must keep a clear record of what the buyer has seen and what has been taken. It goes without saying that all data presented should be up-to-date.
The use of an investment banker to assist in the sale of an industrial mineral property can afford advantages far beyond the cost of this outside advisor. An investment banker provides an external opinion on the entire sales process, in addition to his direct services. Such services include assisting with or actually preparing the descriptive memorandum; analyzing the sales decision and providing early alternatives for comparative purposes; identifying and qualifying prospective purchasers; controlling the dissemination of information; maintaining the data room procedures; interfacing with interested parties; advising in negotiations; and assisting in the closing of the transaction. These services can be paid for by a retainer, an hourly fee basis, or a contingent or performance fee basis (i.e., no completed transaction, no fee earned). Usually an investment banker will require reimbursement for out-of-pocket expenses that are incurred as a result of the transaction.
Marketing the Property
The first step in the marketing process is the identification and qualification of buyers. These can be competitors, companies looking to diversify, wealthy individuals, institutions, and even customers wishing to integrate upstream. The qualification process is important in order to avoid spending time on buyers who ultimately do not have the ability to complete the desired transaction, for financial or other reasons. The seller should be particularly wary of “movie set” buyers. These are companies or individuals that are little more than shells with no substantial financial base behind the facade. Such buyers will scurry to resell the property to an entity of substance, retaining a profit from the transaction. It is much more desirable to deal directly with principals that can complete the transaction from their own resources or readily available financing, rather then deal with intermediate brokers.
The form of the sales procedure should be decided at the start of the marketing stage. A sale can be handled in one of two ways – a negotiated sale or an auction sale. Most buyers prefer to deal on a negotiated basis. All other things being equal, the seller will probably come out better by conducting an auction sale. In part, the characteristics of the industry will guide the decision to some extent. Where the property to be sold is a unique deposit, with special characteristics and a solid, well defined market, an auction sale is far superior. If the buyer wants the material provided by this property then he must bid up for it. Where the property has no really unique characteristices, such as an oil and gas lease in a large producing region where there are many similar leases, an auction sale may be a strong negative to potential buyers because of the nearby availability of many similar properties. In this latter case a carefully negotiated sale may prove more beneficial. Also, sometimes sellers don’t want to “bare their souls” to a number of buyers and prefer a negotiated one-on-one transaction.
Once a selling plan is adopted, execute it with diligence and aggressiveness. While time is not entirely of the essence, no property or company can stand extensive exposure on the selling block. Sooner or later this will hurt the business and the perception will arise that there is an unknown problem. The word that a company is for sale can quickly get back to employees. Morale can suffer and key employees can begin to drift away, to the detriment of the package for sale. This problem can be headed off by offering bonuses to key employees who will stay through closing. Customers can also become extremely nervous and shift their business to competitors. While a hasty sale is certainly to be avoided, the importance of maintaining momentum in the sales effort can not be overemphasized.
Investigation and Due Diligence
The descriptive memorandum will not suffice as the only source of information upon which an interested buyer can base its bid. Extensive investigation is essential to the serious buyer in order to arrive at a valid offer. During the course of its investigation the buyer will need information on at least the following subjects :
- production – present and historical volumes, recent trend
- prices – present and historical, recent trend
- sales – customers, contacts
- costs – production, processing, SG&A
- financials – current statements, monthly, quarterly, historical, three to five years, related balance sheets
- debt – long term, short term, bank lines, letters of credit
- facilities – original cost, depreciation, current condition, operating problems, adequacy, constraints
- title – property and equipment, problems
- partners – status of relationships, credit standing
- potential – product upgrading, new products, reserve additions, cost reductions
- unique assets – processes, patents
- government relations – local supervisors, federal inspectors
- taxation – local, state, federal, loss carry forwards
- environmental – current status, EPA relations, effective permits, reclamation
- health liabilities – employee, public
- permits – local, state, federal.
Perhaps the most important consideration for the seller during the investigation period is to keep control of events and prospective buyers activities. The seller must take careful notes of conversations and maintain a log of data that has been given to the buyers. Insofar as is possible, all buyers should receive the same information. As the investigation proceeds, this becomes a near impossibility but it is critical to retain as much control as possible throughout the process. Maintaining a data room at the seller’s headquarters is very desirable and one of the best ways of remaining on top of what is usually a rapidly developing situation. Scheduled visits to the data room and to the properties and facilities for sale should always be in the company of a representative of the seller. Comments, reactions, and questions from the buyers should be recorded during these visits.
Loss of control during the investigation stage can lead to embarrassing moments when negotiations begin with a purchaser. It is important to know exactly what knowledge the buyer has about the property. Bad surprises can result from loss of control, such as finding out that the buyer has a map or other data that the seller did not realize was in the buyer’s possession.
Negotiating a Price
Once a prospective buyer has indicated serious intent to proceed with a purchase offer, or an offer has been received, the buyer and seller must negotiate the terms of the transaction. At a minimum, the seller’s negotiating team should consist of an individual with the proper responsibility for the negotiation and a second individual to take notes. The principal decision maker on the team could be the notetaker, rather than the point negotiator. This team should go into any negotiating session with a strategy developed in advance. The basis for this strategy can be generated out of the impressions received from time spent with the buyer during the investigation period.
As is the case throughout the entire sales process, momentum is important in negotiations. If this means extra time and travel, so be it. Once momentum is lost, it may not be possible to pick up the trail and resume the discussions on a satisfactory basis. It is probably best not to even start serious negotiations until a clear course can be seen to a final resolution of the deal.
There are two important “don’ts”: don’t have unrealistic expectations as to value and don’t let emotion get in the way of arriving at an agreed-upon deal . The sales effort can flounder on a price that is far out of line with reality. An issue such as management succession, particularly when the seller’s management has long historic ties to the business dating from inception, can prove to be another difficult, even impossible hurdle.
Successful negotiations will result in the execution of an agreement. This may take one of a number of forms. A simple letter agreement may serve to hold the deal in place until a definitive agreement can be drawn and signed by the parties. The negotiation may result in an option to purchase, exercisable within a set period of time (from the buyer’s standpoint the shorter the better). Definitive agreements may be signed at the closing, or after a verbal agreement the parties may proceed directly to a definitive agreement followed by a closing at a later date, without the interim step of a simple letter agreement.
The two cardinal points of agreements are:
- get it in writing as soon as possible, and
- establish an upset date for the finalization of the sale.
Transactions often fall apart when there is an extended period of time between the initial agreement of the parties and the commitment of that agreement to writing. Also, if there is no target for the final closing of the transaction, the buyer may have little incentive to move the process along in an expeditious manner. If there are unfavorable market or operational developments during a dragged-out documentation period, the deal has a very good chance of collapsing.
Closings can be very difficult, and to paraphrase an old adage, “Its not done until its closed”. The closing is the domain of the attorney, with management, investment bankers, and accountants providing input to the process. Management must remain on top of the closing process because occasionally during a closing overlooked points will arise requiring instant resolution.
Sometimes these points can prove to be fatal flaws, but if appropriate authority vests in those representing the buyer and seller at the closing, problems of this sort have a much greater chance of being overcome.
Up to this time it is important to have a backup candidate. If things do fall apart, at or prior to closing, there should, if possible, be a secondary buyer to whom the seller can quickly turn. The worst case scenario is to have the closing blow up, following which the seller must start all over again from the beginning, contacting companies, distributing the descriptive memorandum, beginning the investigation process, etc. Momentum has been lost and the risk is high that the property will be perceived by a prospective buyer as shopworn.
Once the property is sold, there can commonly be a few aftershocks. Clearly there is often a lot of grunt work to be accomplished by both buyer and seller in advising suppliers, customers, and the public of the sale, completing transfer of property and equipment, and handling personnel matters.
There is always the risk of rescission litigation, and a close rapport with the buyer in the months immediately following the closing can help to minimize the chance of this occurring. The best way to avoid litigation resulting from a sale gone sour is full disclosure during the marketing and investigation phases.
A buyer who has gone into the purchase with eyes wide open, and has been allowed to turn over all the stones, will be very unlikely to attempt to rescind the transaction through the courts. The seller is well advised to remember the ancient Chinese saying – he who sells a pig in a poke ultimately gets poked.
The sale of a property or company can be confusing, physically exhausting, emotionally upsetting, and unduly costly at its worst. However, careful attention to the selling process, extending from the decision to sell through the final closing and into the immediate post-closing period, will get the seller from here to there with a minimum of disruption, in the briefest elapsed time, and at the lowest transaction cost.
Play fair with perspective buyers and disclose all – both the good and the bad. Keep the playing field level so that all buyers are working from the same information base.
Finally, maintain tight control of the sales process at all times. Control the distribution of information, control the investigation of data and due diligence, control the negotiations, and only relinquish control at the closing. By keeping firmly in command, the journey from here to there, from decision to closing, will be the most financially rewarding.