Key Considerations for Cross-Border M&A in the Mining and Metals Industry

Recent years have been eventful in the mining and metals industry, to say the least. Commodity prices have risen and fallen, free cash flow has been generated, geopolitical trends have asserted prominence, and demand for low-carbon energy sources has continued to expand. All the while, opportunistic miners and producers have searched for attractive acquisition targets to build scale, enhance value chains and diversify.

In 2022, notwithstanding volatile markets, mining and metals companies explored M&A at the highest levels in years. While domestic production is incentivised and growing, the nature of the industry and the location of critical minerals has led to significant M&A activity occurring on a cross-border basis. Despite uncertainties in the current climate, cross-border transactions are expected to continue to offer compelling opportunities.

Successfully completing a cross-border acquisition, sale or strategic investment can be an intricate and far-reaching undertaking. A thoughtful, well-advised and agile approach is required to achieve the potential rewards of dealmaking in a fluid market. Below are certain key considerations for mining and metals companies undertaking a cross-border M&A transaction.

All cross-border M&A requires co-ordination among a broad range of constituencies and advisors, including management, directors, shareholders, financial advisors, counsel, accountants, consultants, public relations professionals and regulators. In the mining and metals industry, interdependencies among stakeholders are magnified by the globe-spanning course of business and the exposure to government scrutiny. It is critical to be well-prepared and well-advised from the outset. An early understanding of local deal structure, approval and listing requirements and insight into local conventions will permit a company to effectively manage the process, avoid pitfalls and seize opportunities.

In recent years, competition regulators and foreign investment screening regimes in many jurisdictions (including the US, the UK, the European Union and China) have increasingly scrutinised cross-border transactions, resulting in a greater number of investigations and enforcement actions. In some instances, the heightened regulatory focus has been specifically targeted at the mining and metals industry, given its economic and geopolitical significance. In September 2022, the Biden administration issued an executive order instructing the Committee on Foreign Investment in the United States (CFIUS) to consider reviewed transactions’ effects on supply chain resilience, and specifically noted increased focus on critical minerals. Similar regulation has been introduced in Canada and Australia.

The preliminary steps for embarking on a cross-border transaction should include identifying the jurisdictions of relevant operations, assets and revenue streams, which will facilitate determination of potentially applicable regulatory regimes and development of a plan to minimise risk.

Parties should be mindful of countries’ trade policies and economic incentives, particularly if any funding, subsidies, credits or other benefits may be available or surrendered as a result of a cross-border transaction. For instance, the US government has taken steps to accomplish national security and energy transition objectives by incentivising production of lithium, nickel, cobalt and rare earth elements necessary for electric vehicles, stationary batteries, wind turbines and other advanced technologies closer to home. Accordingly, among many other things, the Inflation Reduction Act of 2022 includes an electric vehicle tax credit available in certain circumstances where sufficient battery material is sourced from countries that have free trade agreements with the US, perhaps an important consideration for those considering a deal in the space.

Given that government officials and other state actors often hold influence over or even control the land, infrastructure and permitting necessary to operate, local government relations and compliance matters can play a significant role. An acquiror’s due diligence review and integration planning should include examination of government contacts, affairs and agreements and anti-corruption and other compliance programmes. Depending on the location and operations of the target business, counsel and other advisors well versed in the local regulatory environment can serve as invaluable resources.

Boards and management teams have increasingly grappled with new and evolving expectations regarding performance on ESG measures, as communicated by shareholders, employees, customers, suppliers, lenders, regulators and others. In addition, the SEC and other securities regulators and stock exchanges have made public disclosure of ESG matters a priority, particularly in relation to climate risk and diversity.

In the context of a cross-border transaction, an acquiror should carefully review the land and water usage, pollution sources, required environmental remediation, archaeological data, processes, supply chain integrity and sustainability, management teams, employment practices and labour relations of the target business, among other things. These factors and others will be part of the acquiror’s ESG profile following closing. Further, they may impact relations with and acceptance by the local community in which the target business operates.

Cross-border mining and metals transactions regularly involve complex and multi-faceted tax and cash management considerations, often resulting from significant income across foreign tax regimes. The potential long-term financial implications form yet another reason to involve the right experts early in the process, including to strategise optimal transaction structures. Parties should consider the impact of a transaction on any existing tax incentives, particularly if the transaction involves a foreign acquiror. After a transaction is completed, the acquiror will need to evaluate its plans for funding the acquired business’ ongoing operations and ability to efficiently repatriate cash, in light of tax laws and exchange rate fluctuations. The acquiror will also need to examine transfer pricing policies and practices, among other things.

Publicly traded miners and producers need to consider cross-border implications with respect to their public disclosure obligations. SEC reporting companies engaged in material mining operations must comply with technical public disclosure requirements relating to their mineral resources and reserves under Subpart 1300 of Regulation S-K. While the SEC adopted these rules in 2018 to more closely align with current industry and global regulatory practices and standards (as embodied by the Committee for Reserves International Reporting Standards), conforming a target business’ existing data and reporting to satisfy Subpart 1300 may require time, expense and effort. In addition, in connection with the acquisition of a sufficiently significant non-US business, SEC reporting acquirors may need to convert financial statements previously prepared in accordance with international or other accounting standards to ones prepared in accordance with US generally accepted accounting principles (GAAP) for purposes of the public disclosure of certain required historical financial statements and pro forma financial information.