Epic aggregates due diligence fails
Fatal flaws with geology or deposit are the leading causes of project failure in aggregates acquisition and development projects. How do you improve your chances of success?
Replacing reserves with greenfield developments or acquiring existing aggregate operations is important to the long-term viability of your aggregates business.
Unfortunately, we see many cases in which projects are crippled or doomed because fatal flaws with the geology are missed or ignored. These slow-motion fails may not be as gripping as an internet video, but they occur—and here are two reasons why.
Fatal flaw #1: no reserves
Yes, this happens. Property is bought, the plant is built, and mining starts. The champagne corks pop and then…nothing. Tens or hundreds of millions of dollars are invested, the project spends years in development, and then the deposit turns out to be smaller than assumed or absent altogether.
This fail is avoidable. Savvy aggregates companies conduct geological investigations early in the project. Before spending the big bucks, they conduct a drilling campaign, supported by desktop geology. Critical decisions and investments are based on these initial findings.
Such investigations costs 1-2% of the development or acquisition price. It is a relatively cheap way to get peace of mind and can help secure your investment.
Fatal flaw #2: the resource is not economically viable
New entrants or investors looking for a quick flip often invest in poorly performing or idle assets at an apparent discount. However, whether to save a few bucks or because they don’t know better, they sometimes skip their geology homework.
Unfortunately, when the deposit does not support aggregate production, investors can lose it all. I recall a seller trying to sell a quarry a few years after buying it. Our side offered $5 million. The seller had invested $50 million.
What did we see that the seller had not?
In this case, we looked beyond the market (a good one) and the plant (brand new) and saw a deposit that could not be exploited economically due to overburden and high waste. Our experience with mining that kind of geology was critical.
Information costs time and money
Projects can fail because of risky behaviors driven by factors like management pressure to get the deal done, FOMO, biases, budget, or simple hubris. Sometimes, projects are just a mistake.
In the aggregates industry, we cannot mitigate all the risks. The true nature of the geology is hidden below the ground, and the information needed to move forward with confidence costs time and money. But it is worth it. A well-planned geologic investigation, conducted by a professional who is experienced in aggregates, can identify critical risk factors that could threaten the success of the project.
Will it take valuable resources? Will it eat into potential profits? Yes, and yes. However, it can also identify fatal flaws—minimizing your risk and saving you from a costly mistake.
About the author:
Erik Warm is senior consultant for Inlet Capital Group. A professional geologist, he has more than 20 years of experience in the aggregates industry. He can be reached at ewarm@inletcapitalgroup.com or 561-529-5569.