The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

‘Before it hits the fan’: getting deal due diligence right

As lower energy and minerals prices drive acquisitions, Critical Resource has identified seven common pitfalls in companies’ approaches to assessing political and stakeholder challenges.

By Edward Bickham, Senior Adviser & Saskia Marsh, Senior Associate (July 2015)

When it hits the fan...

When it hits the fan…

The time is becoming increasingly ripe for acquisitions in the mining, oil and gas sectors. As asset valuations fall to more realistic levels, potential acquirers must ensure they pick assets which have both excellent commercial prospects and are not tainted by political and stakeholder flaws. How can they plan to manage such issues so that they enhance, rather than destroy, value?

Below is Critical Resource’s guide to common errors made by companies, both at the due diligence stage, and post development/acquisition – plus real-life examples (some of which are anonymised case studies from our own work).

Over the past eight years, Critical Resource has assessed around 250 mining, oil and gas projects across the world for political and stakeholder risk, and as the focus has moved from project development to acquisitions, undertaken an increasing number of due diligence assignments. Our premise is that companies and investors that better identify – and manage – political and stakeholder risks stand a stronger chance of securing their assets over the long term.

AIE scale

We measure that improvement (or deterioration) in management performance, and the consequent impact on the health of a project’s ‘license to operate’ through our unique rating scale, LicenseSecure (see the figure above for example projects on the scale). The following are the seven most common pitfalls in company approaches to assessing political and stakeholder challenges we have identified:

Mistake #1: Taking a simplistic country-level view

In the due diligence phase some companies and investors focus solely on national-level risks. For example, a ‘traffic light’ system is often used to assess national political factors. Such an approach is simplistic and neglects asset-specific, or regional, risks – as well as opportunities.


  • In a post-acquisition review of political/stakeholder context for a client in Peru, it became clear that the company had neglected important local dynamics. While the national government and regional president were broadly supportive of the project, the influential local mayor was significantly opposed.
  • Conversely, investors can overlook significant financial opportunities if they view political and stakeholder risks through a purely national lens. Using the example of the Democratic Republic of Congo, the national context is extremely challenging – but there are nonetheless vastly different ratings of the strengths of individual companies’ license to operate. First Quantum’s Kolwezi asset was expropriated – which, according to some, can be partly attributed to flaws in the company’s external affairs strategy at the time (although factors such as the government’s need for revenue ahead of elections played a key role). Yet Freeport McMoRan’s Tenke Fungurume mine is one of the company’s most profitable (albeit necessitating a highly proactive management approach to mitigate the multiple risks).

Mistake #2: Failing to anticipate political shifts  

Even in countries with entrenched power structures, politicians and/or personal relationships between key political figures or interest groups and company personnel can change – sometimes surprisingly quickly. While on the ground management teams may seem to have excellent national political relationships, how sure is the acquirer that these are transferable or the right relationships going forward? Moreover, if an asset has been excessively identified with an allegedly corrupt or autocratic regime it may be vulnerable to being made an example of by a successor regime.


  • Repsol’s experience in Argentina is a cautionary tale. Repsol, which acquired a majority stake in YPF, Argentina’s erstwhile state-owned oil company, enjoyed relatively good relations with President Nestor Kirchner, who endorsed YPF’s initial privatisation in 1993. But did the company fail to spot, or effectively respond to, increasingly vocal political resource nationalism under his wife’s regime? Argentina expropriated Repsol’s majority stake in YPF in 2012. Repsol eventually received a $5 billion settlement, half of what it had initially sought.
  • At a mining project in Central America, the owner failed to plan for alternative outcomes in presidential elections. Many commentators assumed that the candidate put forward by the incumbent president would easily win. When instead the opposition candidate won, the company was caught short – and was forced to quickly build new political relationships and broaden political intelligence gathering to understand how the shift in political power might affect its operations.

Mistake #3: Being ‘self-centred’ and unable to understand stakeholder motivations

Humans often struggle to understand each other. Companies suffer from the same problem. They often assume that everyone thinks like them and find it difficult to ‘get’ stakeholders who don’t share their perspective. In doing so they allow themselves to be blinded by positive signals from some stakeholders, which mask discontent elsewhere. Another common problem is for companies to fail to understand relationships or rivalries between stakeholders and how these may be influenced by their relations with the mine or oil and gas operation – to their detriment.


  • A company looking to acquire a mining asset in Latin America failed to pick up on deep local community opposition. As part of its due diligence process it met with supportive government officials and community representatives which had been hand-picked by the vendor company. As a consequence, the acquiring company has struggled to manage resistance leading to costly delays.
  • Prior to its acquisition of Riversdale Mining, Rio Tinto appears to have not fully understood the government’s position on export methods. It purchased the project partly on the assumption that riverine transport would be acceptable, while the government had foreseen the building of rail infrastructure. Alongside geological problems in assessing the nature of the coal resources, this factor led to Rio Tinto eventually selling the mine for $50m – compared to the $4.2bn it paid upon acquisition.
  • The Tintaya mine in Peru provides an illustration of the importance of relations between stakeholders. Community jealousies – going back to 2000, when the mine was owned by BHP – have led to persistent disruption as rival groups have sought compensation packages from the company. In 2004, after three years of negotiation, BHP Billiton was able to reach an agreement with five local communities. However, a conflict with a new community group led to a violent takeover of the mine in 2005, and a shutdown of operations. Under Xstrata’s ownership problems persisted. Glencore is now in the process of closing the mine.

Mistake #4: Underestimating legacy issues

Local environmental damage or poor relationships inherited from previous owners can haunt acquirers, with opposition or predatory attitudes towards the asset already entrenched. This is particularly the case in acquisitions from junior companies who may not have had the long-term perspectives or skills to engage with communities to build a trusting relationship. The potential impact of legacy issues doesn’t always show up if due diligence is too focused at the national rather than at the asset level, or local opposition is just treated as a risk that can always be managed.


  • Arrested development: protesters march against the Rosia Montana project.

    Arrested development: protesters march against the Rosia Montana project

    Rosia Montana is a classic case of legacy issues – in this case, deep-seated distrust over mining in Romania – arresting project development. Since first acquiring the license in 1999, Gabriel Resources has spent hundreds of millions of dollars under a succession of CEOs in attempts to get the project started. In the eyes of some, the company had initially failed to take into account stakeholder concerns over the use of cyanide (which has particularly negative connotations in Romania due to an earlier cyanide spill from the Baia Mare mine). It has been struggling against a persistent element of national and international NGO opposition ever since.

  • The acquisition of the Cerrejon coal project (by Anglo American, BHP Billiton and Glencore) in northern Colombia was dogged by reputational issues flowing from the way in which the previous owners had handled a community resettlement. Prior to 2001, five communities were removed from their traditional territories. All received cash compensation, rather than being resettled. While the current owners have sought to address associated negative social impacts, there is still resentment against the company locally and active campaigns by NGO groups and lawyers.

Mistake #5: Missing opportunities to turn around ‘diamonds in the rough’

As well as missing risks, acquirers can miss potential opportunities through failing to identify appropriate mitigation strategies. This can happen if acquirers only assess the risk level of external factors – i.e. the political and stakeholder environment – without looking at the tools, processes and management strategies that could be put in place.


  • An oil company, awarded a concession in a politically sensitive context, found that implementing a proactive political risk management strategy enabled it to monetise an asset initially considered too ‘hot to handle’. As a result, the company was able to secure a successful farm-in with an international investor. It did so by building credibility with the host and key third party governments, developing industry-leading positions on human rights/transparency issues and through strategic local social investment – much of which attracted praise from erstwhile detractors.
  • Bougainville Copper Limited (BCL)’s mine in Papua New Guinea is an oft-cited case of the socio-politics of resource development going terribly wrong – local grievances over the distribution of benefits escalated into a civil war, and the mine has remained closed since 1989. Rio Tinto, BCL’s major shareholder, is now reportedly looking to exit from the asset. It remains an open question as to whether the multiple and entrenched political and stakeholder risks could be effectively managed by a new owner. Yet, given the untapped resources (BCL was once the world’s largest open pit copper gold mine) – and the potential to transform the lives of Papua New Guineans – the mine could present a major opportunity (albeit an extremely high risk one).

Mistake #6: Riding roughshod over existing relationships

Post-acquisition, purchasers sometimes look to transplant new community relations and external affairs teams and processes, or to review commitments given by the previous owners to key local stakeholders. Delays or changes to project plans can undermine hard-won support from a host government or community. And changes to personnel, disruptions in communication, can seed suspicion and allow misinformation to grow.


  • The new owner of a recently acquired multi-billion mining asset in Central America is reportedly struggling to untangle the complex web of community relations and prior commitments it has inherited. Local communities previously engaged in disruptive direct action against the former owners due to high expectations of how the project should benefit them. The new owner will have to navigate this challenge, in tandem with determining how to sustain (or amend) potentially over-generous social investment pledges agreed by its predecessor.

Mistake #7: Allowing deal excitement to cloud political judgement

In the throes of thrashing out a commercially compelling opportunity, companies can sometime be seduced by supposedly incontrovertible legal advice but forget that political considerations play a key role.


  • BHP Billiton experienced political backlash when it attempted to acquire Potash Corporation of Saskatchewan in 2011. It appears to have underestimated discontent from the provincial government, which believed the deal would not provide sufficient benefit to the region. The federal government in Ottawa eventually blocked the $39bn deal, and BHP was left nursing costs of $350m arising from the failed bid. This followed an earlier apparent underestimation of competition authorities’ reservations about a tie-up between BHP Billiton and Rio Tinto’s iron ore assets.