Seamless Mine Site M&A: Mastering Supply Contract Transitions for Operational Readiness

Mining operations require significant inputs of goods and services to enable them to operate and produce commodities for sale. The majority of the goods and services requirements should be covered by supply and services agreements with preferred suppliers to ensure continuity of supply of goods & services at the desired quality, at competitive pricing, and under fair and reasonable contractual conditions.

When a buyer acquires a mining operation, it is critical that these supply and services agreements are in place at the completion date to ensure ‘operational readiness’ of the site under the new ownership. In an acquisition the seller may assign or novate these supply & services agreements to the buyer, or the buyer may have to establish new agreements with the current or alternative suppliers. This process can take a considerable amount of time and so the buyer should have an implementation plan in place well in advance of the completion date.

The risk of not having an implementation plan in place and a capable team to implement the plan is a mine site that is not operational on completion date resulting in significant financial losses to the new buyer, and potentially defaulting on commodity sale contracts.

Argon & Co’s heavy industry team have worked with the buyers of mining operations to ensure the critical supply and services agreements are in place for operational readiness. In our experience the keys to success of a transition are:

1. Sale agreement

Ensure all supply contract and purchasing related requirements are negotiated into the sale agreement, including all novated supply contracts documentation, item master data, vendor master data, inventory data, current purchase orders, and last 24-months purchasing history. This will ensure the transition team has the required information to negotiate stand-up supply agreements and purchasing systems can be populated ready for day 1 of operations.

2. Prioritise supply agreements

Prioritise the goods and services agreements in terms of their size of spend, criticality to the operation, and current supply constraints. Items such as major services (contract mining, and drill and blast services), labour hire, subcontractors, operational IT licences, and goods such as fuel, OTR tyres, OEM parts, and explosives should have a high priority.

Agreements that have to be stood-up will also have a higher priority than those agreement that are being novated to the buyer, as a tender of sole source negotiation will have to be completed for critical supply items to ensure a supply agreement is in place.

If the buyer has current supply agreements with the new site’s incumbent suppliers, this makes the sole source negotiations considerably easier with amendments made to the current agreements to include the new site volumes. In many cases due to the increase in volume, better pricing and contractual conditions can be achieved.

Lower criticality items may not require an agreement to be put in place, with purchase orders to suffice until a contact is developed if required.

3. Review novated agreements

The novated agreements should be reviewed before any novation deed is executed to ensure the agreements do not have any unacceptable risks such as take-or-pay obligations, exclusivity of supply, or unfavourable price rise and fall mechanisms.

If market pricing is available from the buyer’s current supply agreements with existing operations, a price benchmarking exercise should be complete to provide the buyer with confidence that the novated supply agreements have competitive pricing based on the supply volume.

When these reviews have been completed, the novation deed should be executed with the correct signature blocks.

4. Implementation team

The buyer’s business-as-usual procurement team will typically not have the capacity and/or capability to transition the agreements to the buyer within the required timeframe. A designated implementation team is required to allocate 100% of their time to ensure all agreements are transitioned for day 1 of operations.

Adequate legal resources also need to be allocated to the project to ensure the stand-up agreements are finalised within the timeframe. There can be significant contract departures that can overwhelm the business-as-usual legal team, causing bottlenecks in the contracting process. The preference is to utilise additional internal legal resources if possible as they better understand the buyer’s risk profile and are not billing on time.

It is important that there is clarity of roles during the implementation phase as there are typically many implementation teams working on areas that have the potential for double-up of work or key work areas to be missed. For example the collection of vendor pricing needs to be validated with their supply agreement pricing and there may be two separate teams collecting this information.

5. Key Stakeholders and contract ownership

The higher prioritised agreements should have a nominated contract owner, contract holder, and subject matter expert to ensure the agreement meets the buyer’s requirements and there is contract management resources in place from day 1. The implementation team will likely not provide the on-going management of the agreements, so there needs to be sufficient handover to ensure the contract holder understands the on-going tasks and obligations under the agreement.

6. Governance procedures

A project specific governance process to review, endorse, approve and execute the deeds of novation and new supply agreements needs to be established at the start of the transition. The business-as-usual agreement signing process is typically not suitable for executing the volume of agreements within the timeframe, so amended delegations of authority should be established. The novated supply agreements are typically non-negotiable, so these agreements only require the appropriate risk and commercial reviews before execution.

7. Communicate with vendors

The transition process can be very nervous time for the site’s incumbent suppliers, particularly the local suppliers where the mine site may represent a high portion of their business. For this reason it is essential communicate with all suppliers regularly through the transition process and provide assurance to the suppliers that their supply to the site will not change. A town hall can be a quick way of communicating to suppliers and is more personable rather than a letter.

A supplier communication protocol should be in place between the seller and the buyer. This provides a clear guideline of when the buyer can start direct communications with the site’s suppliers. For stand-up contracts this is typically after an introduction meeting with the seller, buyer, and each key supplier attending, and after deeds of novation are executed for novated agreements.

A supplier hotline should be set-up so that suppliers can speak to the buyer if they have any concerns.

8. Regular status meetings

Regular status meetings with attendees from the seller and the buyer are important to manage the sale agreement transition plan, to remove roadblocks, and escalate any issues and risks that may put operational readiness at risk. These meetings are typically weekly to ensure issues and risks do not remain un-addressed for too long.

9. Document sharing platform

A document sharing platform is a necessity to share documents between the seller and the buyer teams. This ensures an efficient document exchange process and provides project governance. Any document registers and status reports should be shared via this platform so there is one source of the truth and minimises duplication of work.

To ensure your mine site M&A transition is seamless and your new operations are set up for success from day one, contact Argon & Co’s heavy industry team today. Our expertise in operational readiness and supply contract transitions will guide you through the process and help you avoid costly disruptions. Let’s discuss how we can support your upcoming acquisition and secure the continuity and efficiency of your operations. Reach out now to get started: Procurement.australia@argonandco.com

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