Before it hits the fan: Getting due diligence right

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

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?

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 responsibly securing their assets over the long term.

The following are the five 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.

Mistake #2: Failing to anticipate political shifts  

Even in countries with entrenched power structures, 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 the right relationships going forward?


  • 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.

Mistake #3: Being ‘self-centred’ and unable to understand the motivations of stakeholders

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.


  • 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.

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. 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.


  • 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 cyanide use (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.

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

As well as missing risks, acquirers can miss 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 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 and through strategic local social investment – much of which attracted praise from erstwhile detractors.

Edward Bickham is Senior Adviser and Saskia Marsh is Senior Associate, Critical Resource. A version of this post was originally published on the Critical Resource website.

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