Analyzing And Allocating Environmental Risks In Acquisitions

The mining industry has seen a flurry of merger and acquisition activity of late. Rising metal prices, increased spending on infrastructure in developing nations and the growing demand for companies to diversify have helped fuel M&A activity in this industry. Many analysts believe that the robust M&A activity will continue, particularly if the demand for mineral resources in India and China remains strong. Because prospective purchasers need to evaluate the various risks confronting target companies, acquiring mining companies requires a considerable amount of due diligence. Of these risks, environmental risk is critical and warrants significant analysis. The failure to properly assess environmental risks associated with remediation, reclamation, compliance or litigation can undermine the transaction. Such assessment is a difficult endeavor, however, due to several challenges that companies face when assessing environmental risks. To make matters more complicated, despite these challenges, many sellers ask buyers to assume all environmental risks with limited post-closing indemnification rights. This article addresses the most significant issues that commonly arise when conducting environmental due diligence and allocating environmental risk in connection with M&A transactions in the mining industry.