Focusing on ESG in M&A

0:00This is a conversation with Casey Nult, Senior Vice President, General Counsel, and Chief ESG officer at Core Mining. He has nearly 25 years of experience as a corporate and securities lawyer at large public companies and law firms. In this interview, we discuss ESG and M &A. We discuss the importance of ESG in the mining industry. What does ESG diligence look like in M &A? Common red flags from ESG perspective, advice for practitioners. Hope you enjoy this conversation. This podcast is sponsored by our product lines, Firm Room and Deal Room. Take a minute to learn about them. It's the best way to support this podcast.

0:36What's the difference between Dealroom and Firmroom? I get asked this all the time. I know if we could have made the branding any more confusing. So let me break it down for you. Dealroom is an M &A lifecycle management platform. It's perfect for any company that does two or more acquisitions a year. It manages your pipeline, diligence, and integration. Also divestitures. It automates pipeline reporting and follow-ups. So you stay focused on conversations with potential targets. And this is where it gets good. You can run full diligence for all parties involved, internal, external, and counterparty in one work stream, then create a parallel work stream for all the integration planning.

1:17This allows your team to start integration planning at the start of diligence and iteratively update the integration plan with incoming information. This is how you get integration done faster. Nobody in the world does this better than Dealroom. I know that's a bold statement, but I will take bets on it. Now, Firm Room is a virtual data room that is as simple as it gets. Back in 2018, the team at Deal Room noticed many boutique investment banks and law firms that cared about their customers were just looking for a simple data room solution that wasn't charging ridiculous per page billing fees.

1:55So we did something about it and carved out the data room functionality in Deal Room and made it into a dead simple self-service data room offering. If your deal isn't that complicated, then probably a simple data room is the way to go. You'll find the best value with Firm Room. Pricing starts at 500 bucks a month. So there you have it. Deal Room versus Firm Room settled once and for all. You can check them out for yourself at dealroom.net and firmroom.com. Again, that's dealroom.net and firmroom.com. Let's get to the interview. I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience.

2:42This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:56Hello, M &A scientists. Welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about products and services we develop to support world-class M &A teams or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com. You can start by subscribing or a free weekly newsletter for the latest insights and events. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Casey Nault, Senior Vice President, General Counsel, and Chief ESG Officer at Core Mining.

3:35Core Mining is a U.S.-based, well-diversified, growing precious metals producer with a focus on gold and silver. Core Mining is an environmental steward and a recognized ESG leader with a target of reducing its GHG emissions by 35 % in net intensity by the end of 2024. Traded on NYSE under CDE, today we're going to talk about mining M &A and how ESG comes into play on those type of deals. Casey, how are you doing today? Pretty good. Thanks. Thanks for having me. Hey, thanks for taking the time to hang out. You're the first person to actually come hang out in our studio in Chicago because I built this thing during COVID and it was always remote interviews.

4:18Thanks for getting some use out of this in person over here. Yeah, sure. Glad to be here. We're just down the street, so it's easy to come by and you have a nice space here and it's better to do it in person. Can we kick things off with a little bit about your background? I started at big law firms. I was at big law firms for about six years in Los Angeles. I was lucky enough to work at a firm primarily that had a broad corporate department. I didn't have to specialize into a silo early on, which meant that I got to do a lot of everything, public M &A, private M &A, corporate finance from mature companies to startups and venture capital.

4:56So a broad range. And during that time, I found that the small private M &A deals were the most interesting and the best ones to learn on. And I got to do a lot of those as a junior associate. Then I moved in-house. My first in-house job was with Starbucks in Seattle. And that was a great position. Starbucks was in a rapid growth mode at the time. Part of that was M &A. And so we had some regional acquisitions of coffee chains and also some new product and brands that we added like Ethos Water while I was there. Moved on from there to Washington Mutual, which you might recall was one of the largest financial institutions to go under in the financial crisis.

5:33So that was interesting to watch that happen. And then bounced back to a law firm after that, where I did a lot of general corporate again, a lot of bank-focused M &A. Ended up getting this position at Core Mining, where I've been for over 11 years. And we're a very busy M &A shop, probably like a lot of companies. The deals that actually make it all the way and get announced are just a small portion of the deals that we work on and look at. So there's always something going on, and it keeps it interesting. So how many deals does it end up being typically per year, or what's the range? We've had some years where we've had a couple of pretty significant deals and then other years where maybe we won't have any.

6:09The ecosystem for mining M &A, broadly speaking, there's maybe three different categories of targets. One would be a very early stage. Basically, it's a mineral resource deal where you've had a company, a small public company. A lot of these are listed in Canada. There's a great Canadian market for mining companies, in particular junior companies. And you'll have a team that's principally geologists and investor relations and a CEO and a CFO. And they raise money and they spend it all on the ground proving up a big resource. And their whole model is to grow it to the point that a producer like us will come along and buy it.

6:49So that's one category we've done some of those. You could buy an asset from another mining company where a company has four or five different mines and they decide that one of them doesn't fit their strategic plans anymore. and they put it up for sale. And we've had some of those both on the buy and the sell side. And then you could have a traditional sort of corporate deal where maybe there's a merger partner or an acquisition target that has a number of operations and some exploration properties. It's a busy M &A shop and team. It makes it a lot of fun. You've worked across a lot of different industries.

7:22I've never touched a mining deal or even came close to it. What is it like working on those deals? What are the maybe things that make them unique? On the business side, one of the main risks and opportunities is that in a commodity industry, you're always pricing your assets based on what you expect the commodity price will be. And that tends to be driven by what the price is today. If we were looking at, let's say, a producing gold mine right now that was, let's say there's a process being run to sell somebody else's mine, We would value that asset based on the number of years of mine life that it has left based on reserves and how quickly they mine those reserves.

8:03For example, if a mine has a million ounces of gold in reserve in the ground and it produces 100 ,000 ounces a year, it's a 10-year mine life. So you apply the cost structure and you apply a gold price assumption and come up with a valuation. The gold price has fluctuated in the last seven, eight years. The gold price has gone from under$1 ,200 an ounce to over$2 ,000 an ounce. You price the asset based on analyst consensus for where they expect prices to be in the future. But those analysts' expectations are almost always wrong because it's such a volatile market. Valuation risk and opportunity is a key factor in mining M &A.

8:43These are highly capital-intensive operations with typically long lives. And so if you buy a gold mine with an expectation that gold's going to trade at$2 ,000 over the life of the mine, and then there's a price crash and gold trades at$1 ,300, you're looking at a huge impairment and a terrible deal. On the other hand, if you're lucky enough to acquire an asset at the bottom end of the price cycle, it can be a huge winner, regardless of factors like how well you operate or how well you control costs. Wow. That's interesting in terms of your market considerations and how that feeds into how you evaluate those deals.

9:21What about the structure of those deals itself that you find anything unique? A lot of times it's a cross-border deal. In fact, it's a rare deal in our industry that is not cross-border. And the reason for that, public mining companies typically are based in either Canada or Australia or South Africa. For some reason, that's just where mining capital has concentrated over the years. Canada being clearly a leader in the Western Hemisphere, almost every public mining company is Canadian. So straight out of the gate, regardless where the assets are, you're probably dealing with a Canadian company.

9:56We're one of the only US-listed precious metals mining companies. There's only a handful. The assets could be located anywhere. Our footprint is North America. So we have assets in Mexico, US, Canada. In the past, we've had assets in Bolivia, Argentina, Chile, Australia. And it's quite typical for mining companies to have assets in jurisdictions that are all over the world and that jurisdictions where as a traditional sort of M &A professional, you may not have ever done a deal involving an asset. It's not unusual to have at least three different jurisdictions involved in every transaction. Again, because you have parent company probably based in Canada, the asset based wherever it is, and we're a U.S.

10:39company. Those kinds of cross-border deal mechanics pretty much always apply in our situation. Really unique. You got a lot of unique factors about just the nature of these transactions, how you value them, and then the jurisdiction, I'm sure, adds some fun complexities to it. Yeah. And depending on the jurisdictions where the assets are located, there can be elevated risk and due diligence around things like FCPA compliance. There's a saying in mining that you can't control where the minerals are. A lot of the richest mining projects in the world are in some pretty difficult countries to do business in.

11:16Corruption is very high. The risk of nationalism of resources is very high. And if you're looking at acquiring, there might be a gold asset in a country that has fantastic grade, which means that your unit costs are going to be really low and maybe it has a long mine life and you can develop quite an attractive cashflow model for this asset. But if it's in a country that has recently had a military coup, the new military government steps in, like just happened in Mali in West Africa and says up until now, the government has taken a 20 % share of mining project profits. And as of now, it's going to be 35%.

11:53And in those situations, it can be very difficult to negotiate your way back to what the original deal was. You have to take into account political risk, both on the business side and also on the legal compliance side. What's FCP stand for? FCPA, Foreign Corrupt Practices Act, basically bribery. In a lot of countries, governments and government officials expect to get paid along the way as they process your permit application or renew your operating license or any number of government touch points. And for a company like us, it's based in the US that has the highest compliance and ethics standards.

12:34We can't operate that way. We won't operate that way. It's important to do diligence on assets in those countries to determine, number one, have the prior owners engaged in that kind of behavior. You don't know if you're buying from a private ownership group, or if you're buying from an ownership group that's based in a country where they're not as strict about ethics or where they don't have any corruption laws, the prior owner may have just paid those bribes when they were asked. And as a U.S. company, if you step into that, you could potentially incur that liability. You certainly will incur the liability if you don't conduct an investigation and immediately report anything that you find.

13:11It's not a unique risk to mining, but it's an elevated risk for mining because these projects are so capital intensive. that you could have a half a billion dollars sunk into a project. If you run into any sort of political or regulatory trouble and everything stops, then it could be game over. I can see the sense of doing your own diligence for the sake of doing diligence on the deal. But then to stay in compliance with FCPA, is there certain protocols around that? Do they have certain information you need to provide? Or is more, these are sort of expectations in how you're transacting. And as long as you follow it, you don't have any issues.

13:48Yeah, there are requirements. M &A is really just an application of FCPA. It's not really an M &A law. It's anytime you're operating anywhere outside the United States, it's a criminal offense, not only for the company, but for its executives if there's any bribe to any government official. And bribe is defined broadly anything of value. So it doesn't have to be money. There are cases of companies arranging for internships for the sons and daughters of government officials who need to award a contract. So it doesn't have to be money. It's really anything of value. The company's obligation is to have a proactive training and compliance program where you're training your people on what's permitted and what's not, and where you have an audit program where you actually go and look for potential issues on a periodic basis.

14:43The only way for a company to avoid direct liability if an event happens is to convince the U.S. government that the company has taken all reasonable measures to prevent this kind of activity from happening. So it's a little like insider trading laws in that way, where both the individual and the company can be held criminally liable. And the only way for the company to absolve themselves of liability is to show that they really did everything they could to prevent it. Is getting people drunk considered bribery? That sounds like a law school exam question. I suppose you could come up with a very extreme example where maybe it would be.

15:18There is an exception for ordinary commercial hospitality. If it's normal when you're meeting with government officials, you buy dinner afterwards, that's not necessarily going to be an FCPA violation. But again, I think you could probably come up with an extreme example where that could be an issue. Yeah, I was just curious. You know, the way we get deals done tends to be, hey, let's meet up for a drink and hammer this out. Yeah. But then if you got to get these other stakeholders, the rules change here. Let's talk about the importance of ESG and get that sense of it. And then maybe break it down into what's like real versus what's inflated when people talk about ESG today.

15:57In many ways, ESG has always been important. It's a relatively new acronym. It's a relatively new label for a kind of broad range of issues and priorities that companies have paid attention to for a long time. Of course, in the current moment, there's a lot of political and even media noise about ESG. My opinion, my view is that most of that noise is because some people, when they hear the acronym ESG, something comes to their mind that, in their view, is an extreme issue that is unrelated to anything that a for-profit corporation should be concerned about. The people who are making the most noise and saying that companies shouldn't consider ESG, it's probably misguided because if you unpack it, and I'll just use our industry as an example, if you unpack it, there are a whole host of issues under the acronym that represent real risk and real impact on long-term value.

16:58So just taking the E, for example, environmental. A lot of people, when they hear ESG, the first thing they think about is climate change and decarbonization. And to them, that's ESG. It's reducing greenhouse gases. That's a key issue now for all companies, in large part, because it's a key issue for stakeholders. You can say that's not something that a company should be concerned about. But I come back to the people who own our company say it's a priority. If you imagine that instead of being publicly held, that there was a single person who owned your company and they came to visit you and said, okay, as you're preparing next year's operating plan, I want you to focus on this issue because this is one of the most important issues to me.

17:40And I want to make sure that you're doing what you can to address it. You can have your own opinion about whether that should be an issue that you should be concerned about. But if the owner of your company comes to you and says, this is what I want you to focus on, I think you better listen. And I think it should be a priority. That's a little digression on greenhouse gas emissions. But other more traditional and longer standing environmental issues for mining companies are things like tailing stem integrity. A lot of mines store tailings, which is basically like crushed rock that has gone through the processing to extract the minerals.

18:16And now it's just leftover rock, basically. And a lot of companies have tailings storage facilities that are big lakes behind dams. And there have been some catastrophic tailings dam failures where the integrity of the dam has been broken. The water and material that's been behind the dam has been released. Sometimes it has flowed into downstream communities and had huge negative impacts on local communities. Tailings dam integrity and proper management of tailings is a significant issue in the mining industry, and it has been for decades. And that also falls under ESG. That's just one example of how it's a significant risk.

18:56It is directly tied to valuation because companies that have a major tailings dam failure see their valuations kneecapped overnight because typically the mine has to shut down. There's enormous liability. There could be criminal liability, depending on the host jurisdiction. It's a real game changer and could be game over. Other ESG issues that are tied to risk and valuation are workforce. There's a talent shortage in the mining industry, just like in a lot of industries now. Our strategic advantage, we think, is being an employer of choice. And part of that means casting your gaze as widely as you can to find talented people, wherever they may be, whatever their backgrounds may be.

19:40We're looking to bring in people wherever we can find them. Our diversity, equity, and inclusion initiatives are not because it's part of someone else's woke agenda. It's because we're trying to find good people wherever they may be and whoever they may be. Just a couple of examples as to how ESG is important and why it's related to risk and valuation. Why are they bundled together? Because they're pretty different things. The environment and the social. It's a great question. And I think what you may be seeing, we may be on the verge of disaggregating them because the acronym has become a lightning rod in the US.

20:21I don't think it's the same the rest of the world, but the US is big enough to influence. Even earlier this year, there was some attention paid to the annual letter from BlackRock on, they call it stewardship. But I think somebody pointed out that the acronym ESG doesn't appear anywhere in the letter this year because BlackRock has become a lightning rod for the kind of anti-ESG investing crowd because BlackRock has been a leader for the last five, 10 years in driving companies to have better, whether you call it sustainability or responsibility or stewardship. or these factors that can drive or negatively impact long-term value.

21:01We may be on the verge of calling it something different or stop bundling it all together and just take each of these categories as they stand individually. For the longest time, companies have been rated on their governance. Do you have good governance or not? And that's been viewed as a valid and important investment criterion. Suddenly, if you bundle it under the ESG acronym, then you draw negative attention and you have people holding press conferences and trying to introduce legislation saying you shouldn't be allowed to consider that. It's form over substance, but maybe we'll just stop calling it ESG.

21:34That would make more sense to me. When we look at sustainability and you look at the marketplace, what does that sort of variance look like from one extreme to the other and also trying to get at how important it is to be sustainable today? There are a range of ways to evaluate. There are some leading third-party rankers and raters who will give you a rating as a public company. In large part, it's based on your own disclosures. In some part, it's based on the raters' assessment of your risk exposure. For example, the mining industry is viewed as inherently high risk. No matter how well we do at managing those risks, we are not going to have as high of an ESG rating as some other companies who maybe just aren't exposed inherently to the same level of risk, like a tech company or a financial services company.

22:25The other way that you can plot companies along a spectrum as far as how good they are or not on ESG is just what's their performance on the issues that have been identified by the leading stakeholders as most important. So mentioned a few minutes ago, greenhouse gas reduction, carbon footprint. This is a key issue for investors around the world, despite, again, the political and media noise these days. There are over 5 ,000 signatories to the principles for responsible investing. There's a group called the Net Zero Asset Managers Coalition that has over 300 signatories, and they manage over$59 trillion in assets.

23:06And as the name implies, they have committed to have a net zero portfolio. despite the noise we're still hearing from our own investors and in the macro investment landscape that these issues are still important the issues that those investors lay out as important whether it's greenhouse gas reductions DE &I in the workforce good governance community relations indigenous relations all these issues that have been identified as the most important ones that we should be focused on in our sector, it's fairly easy to judge just based on companies' own disclosures and track records. How are you doing on those?

23:46I want to get into that part of just how do you put these considerations around diligence? But before that, I'm still trying to wrap my head. I'm thinking of the balance scale and you have your sustainability and what you can actually achieve and then you have profitability on the other hand. I just feel like one's going to count on the other. Like, yeah, how do you think through that? I think there are some situations where it's a trade-off and there are many situations where it's directly aligned. One of the leading risk surveys in mining is done by EY every year. Everyone looks at it, EY top 10 risks in mining.

24:17They've been doing it for a long time. It's a comprehensive survey. They get input from mining company executives around the world. The most recent version, ESG risks are three of the top four in the mining industry. Number one is just called ESG. Number three is climate change. Number four is a phrase called social license to operate, which is common in the mining industry. So if you don't do those things well, then your profitability, your valuation is going to be negatively impacted and sometimes brought to zero. Just a few examples. There's a project that straddles the border between Chile and Argentina.

24:51It's a massive gold, copper, silver, polymetallic deposit way up high in the Andes. One of the largest gold companies in the world has invested$5 billion in this project to date. And it came to a halt several years ago because its environmental permit was challenged by an environmental group. And the environmental permit was revoked, and the project has been stuck ever since. that relates to the ESG component of community relations, of to some degree, indigenous relations, making sure that your host communities support the project, that they see long-term benefits from the project. And then this gets to your question about diligence.

25:34This is a key area of diligence when you're doing a deal is to look at that. But that's an example where without good ESG, your business can be dead in the water if a major$5 billion project can just be stopped. Yeah. So it's funny, the factor around the valuation that you aren't doing these things, it'll impact your valuation. And then you got a bigger risk of it, potentially putting your deal at risk or effort. And then I guess the other part I was thinking when you mentioned that is being a public company, you're probably falling under more likeliness of just scrutiny in general, if you get those kinds of things associated back to you when you're publicly going about your ESG initiatives.