Foreign expansion exposes Canadian mining companies to risk

Grant Thornton releases advance copies of new white paper at PDAC Convention

TORONTO, March 6, 2012 /CNW/ - Grant Thornton LLP released today advance copies of their forthcoming white paper, Venturing into new territory—mining and risk in emerging markets at the Prospectors and Developers Association of Canada (PDAC) Convention in 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.

"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 also 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.

Conference attendees will be able to pick up advance copies of Venturing into new territory—mining and risk in emerging markets at the Grant Thornton Discovery Lounge, where conference attendees can meet and network with other attendees and exhibitors at the The Prospectors and Developers Association of Canada's (PDAC) Convention, the mineral industry's largest annual convention, taking place March 4-7, 2012 at the Metro Toronto Convention Centre. The four-day annual convention is the event of choice for the world's mineral industry, drawing over 1,000 exhibitors, 27,700 attendees from 120 countries.

Notes for editors

Media can access an advance copy of this report now at http://insights.grantthornton.ca/issue/57403. The report will be more widely distributed and posted to the Grant Thornton website before the end of March.

Grant Thornton's Vancouver-based global mining industry leader Mark Zastre will be in Toronto to talk about the report and other issues facing the Canadian mining industry. He is available for media interviews.

About Grant Thornton in Canada

Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms operate in close to 100 countries worldwide.

About Grant Thornton LLP's mining practice in Canada and around the world

Today's mining industry is facing volatile commodity prices, sustainable development pressures, a growing global marketplace and a myriad of other challenges. Grant Thornton LLP is a national Canadian organization, and also a member firm of Grant Thornton International Ltd., one of the six largest global audit, tax and advisory organizations with nearly 500 offices in over 100 countries, including all major financial centres on every continent. Grant Thornton has the resources and the knowledge necessary to provide seamless access to professional mining expertise across the globe.

Productivity improvement, international tax, financial reporting advisory and fraud controls are just some of the services offered to the mining sector. Whether companies are in a newly incorporated exploration stage or later in the development stage as a senior producer—Grant Thornton has the knowledge, instinct and services that can help the business grow.

For companies at the exploration stage In all likelihood, securing funding-whether it's through private financing, joint ventures or public equity-is a feat in itself. Throw in exorbitantly long development times, permit acquisitions, and geographical obstacles such as limited infrastructure and potential political instabilities, and it's not a surprise that many mining projects don't progress beyond the exploratory stage. Grant Thornton LLP can help alleviate some of the stress associated with this high-risk exploration stage. As a member firm of an international organization, we have access to a vast array of resources and expertise across the globe-a benefit to any company venturing into a foreign country for the first time. Grant Thornton can offer assistance with: Tax structuring and implementation Compensation advisory services Tax compliance assistance Bookkeeping Assurance and audit services Fundraising Internal controls advisory and certification assistance Fraud risk controls

For companies at the development stage As the most expensive stage of the mining cycle, development poses its own unique set of obstacles. With a lot of money going out-thanks to high upfront capital costs-and little coming in, you're likely facing some critical cash flow issues. Fundraising is yet again a crucial, and time-consuming, component of the process, as is keeping your workforce safe. External forces also play their part. Political instability in a host country can take a toll on your project, as can interventions from human rights groups and local governments, who are looking out for the interests of local communities. It's increasingly important, therefore, to make sure you have as many bases covered as possible. Grant Thornton can help in a number of ways: Compliance assistance, including tax compliance matters across a number of jurisdictions Transfer pricing Assurance services Certification requirements Cash flow forecasting Suggesting best practices

 

Tania Freedman
Senior Manager, Media Relations
Grant Thornton LLP
T [phone]
E tania.freed[email protected]