The term “mining auction” refers to movable and non-movable assets within the mining sector. This includes a range of sought-after mining equipment such as excavators, shafts and scrap metal - the list is endless. However, potential buyers will be interested to know that mining auctions are not limited to equipment but include the ability to purchase fully functioning mines and mining rights.
In 2018, an operating mine in Botswana made headlines after it was purchased by a buyer for $8 million during an online auction. Southern Africa is a sought-after international mining investment destination, holding vast quantities of minerals, including gold, platinum, iron and copper. The abundance of mining opportunities makes investment in the mining sector a win for many potential buyers.
While purchasing a mine on auction may seem far-fetched, it has actually become more commonplace than one may think. The primary benefit of participating in these auctions is the opportunity to enjoy an objective and transparent disposal process in which the highest bidder acquires the assets. This process not only benefits buyers by providing unique investment opportunities but also ensures that sellers receive the highest possible price for their assets.
But what is the auction process and legalities associated with purchasing a mine at auction?
Why Mines Go on Auction
There are various reasons mines go on auction, but here are just a few key reasons:
Financial Distress: Mining companies may face financial challenges due to factors such as fluctuating commodity prices, high operational costs, or economic downturns. In such cases, assets, including mines, might be put up for auction as a way to address financial distress or debt obligations.
Liquidation: When time is a constraint and the mine needs to be sold immediately, the auction process provides an excellent option. In cases of insolvency or bankruptcy, the assets of a mining company, including mines, buildings and infrastructure, transport and maintenance vehicles, drilling and blasting equipment, and conveying systems may be liquidated through auctions to satisfy creditors and distribute proceeds.
Asset Optimisation: Mining companies may periodically evaluate their portfolio and decide to optimise their assets. This could involve selling mines that are less productive or no longer fit into the company's long-term plans.
The Auction Process
The process of buying a mine on auction in South Africa generally involves several key steps. It's important to note that the specific details and requirements may vary according to the seller or auction house, and it's advisable to seek legal advice and guidance tailored to your situation.
Preparation and Research:
It is crucial that a prospective buyer conduct thorough research on the mines being auctioned, including their geological potential, existing infrastructure, and any regulatory considerations.
Registration and Financial Qualification: Purchasing a mine is no small investment. Interested parties typically need to register for the auction in advance, and registration may involve providing personal and financial information. These financial requirements ensure potential buyers have the financial capacity to participate. Pre-qualification may include submitting proof of funds or obtaining a letter of credit from a financial institution.
Understanding Auction Terms and Conditions:
Review and understand the terms and conditions of the auction, including any specific rules, deadlines, or requirements set by the auction organisers. It’s important to note that interested buyers have the right to ask key questions about the mine before the auction starts. This allows them to gain a better understanding of the processes, as well as the investment needed to ensure the mine operates optimally. Additionally, the buyer should understand why the mine is being auctioned and what other costs are involved in getting it up and running again.
Transfer of Mineral Rights:
Once the auction process is complete, there will be a formal process to transfer the mineral rights from the previous owner to the new owner (the successful bidder). This process involves submitting documentation and obtaining approval from regulatory authorities, such as the Department of Mineral Resources and Energy (DMRE).
Compliance with Regulations:
South Africa’s mining industry is facing increased public pressure to address its environmental impact. As such, the government aims to promote optimal and orderly exploitation of mineral resources for the benefit of all South Africans. Therefore, when purchasing a mine at auction, interested buyers need to comply with all applicable mining regulations and laws. This includes obtaining any necessary permits or licences and adhering to environmental, health, and safety standards.
South Africa does have a legal framework for mining and mineral rights, and it is possible to buy mining rights through auctions or other channels. However, the process and regulations can be complex and there are a number of points that need to be considered before stepping onto the auction floor.
For example, Section 11 of the Mineral and Petroleum Resources and Development Act states that when a prospecting or mining right is transferred or disposed of by the mining right holder, the Minister of the Department of Mineral Resources and Energy is required to provide consent under section 11 before the transfer or disposal can take place. This ensures a vetting process takes place to ascertain whether the acquirer meets the requirements of section 23 of the Mineral and Petroleum Resources Development Act. Therefore, potential buyers will need to keep this in mind when looking at purchasing mining rights on auction.
Here are a few more points to keep in mind:
Mining Rights:
The government grants mining rights to an individual to mine minerals in a designated area. The Department of Mineral Resources and Energy oversees this process and requires applicants to adhere to the following in order for these rights to be granted:
- the mineral can be mined optimally
- you have the funds and expertise to conduct the proposed mining operation optimally
- the financing plan is compatible with the intended mining operation and for the duration thereof
- no unacceptable pollution or damage to the environment will occur as a result of the mining operation
- you have made financial and other provisions for the prescribed social and labour plan
- you are not contravening the Mineral and Petroleum Resources Development Act, 2002 (Act 28 of 2002) (MPRDA)
- the operation is in line with the Mining Charter
Upon winning the auction, the successful bidder will need to go through a formal process to transfer the mineral rights from the previous owner to the new owner. As previously mentioned, this process involves submitting documentation, complying with legal requirements, and obtaining approval from regulatory authorities. This is usually based on the above points.
Purchasing Mining Equipment on Auction
Most mines on auction will come with all the bells and whistles, such as mining equipment, but this is not always the case. Starting a mine in Southern Africa is laborious and costly, especially when acquiring or replacing large pieces of equipment at an existing operation. Importing brand-new products from overseas at premium prices can stretch an already tight budget and timeline, but auctions offer a chance to purchase refurbished equipment in Africa. This allows mining companies to save time and money.
If you’re interested in buying mining equipment at auction, it does involve a few steps. There are certain prerequisites and considerations to keep in mind to ensure a smooth and successful process.
Auction Registration: As with all auctions, you will need to register with the auction house or platform where the mining equipment is being sold. Potential buyers need to be FICA compliant and are required to bring their proof of ID and address in order to register. Additionally, a deposit is required which is payable upon registration and varies according to the auction house. However, for mining and commercial auctions, the deposit is usually around R20 000, but this deposit may differ based on the value of the asset being sold.
Due Diligence: Whenever possible, potential buyers are encouraged to inspect the equipment in person, noting any wear and tear before making a bid. Additionally, it’s advised to verify confirmed ownership with the auctioneer.
Financing: Some auctions may have specific requirements for payments. Therefore, it’s best to ascertain how you will finance the purchase. If it’s through financing, make sure this is arranged in advance.
Mining auctions provide a remarkable opportunity for investors to acquire comprehensive assets such as mines and equipment. However, embarking on the journey of acquiring such assets is a venture that demands strategic foresight and meticulous planning. As the gavel falls, remember that preparation is crucial and understanding the prerequisites is the key to creating a well-chartered course towards operational success.
