Last week Strictly Boardroom was contacted by an exploration company on the subject of a potential acquisition of a non-core asset held by a larger company.

The asset was rumoured to be flagged for near-term divestment: did I have any thoughts on the matter?

To duly observe confidentiality, the following description has been sanitised as to the nub of the acquisition “opportunity”

• Proximity: the asset is half a planet away from the exploration company’s current area of focus
• Commodity: the project contains a material resource of a commodity of which the exploration company has little prior experience
• Development: the potential mine requires a little nation-building along the way to get it up and running. Start with “just a few hundred kilometres of rail – oh – and a port upgrade” and go on from there
• Risk: the project sits in what most companies would consider a fairly risky jurisdiction. My family would certainly not be keen to holiday there any time soon
• Capital: the exploration company has scant funds available with which to buy the asset, and thereafter there’s that rail line and port upgrade, but then permitting, and working capital, and in-country relationship-building, and the likelihood of facilitation demands, and far more, no doubt. Throw in business class airfares to get to and from the destination as an additional corporate overhead in coming years
• Inside running: the exploration company did, however, have the scoop – of sorts – courtesy of a non-exclusive corporate advisor who had approached them on the deal and who would only require a fee if the company proceeded to the next stage.

Let’s take a step back here.

This is a pretty good exploration company by the way.

It is so good that it could (and probably should) continue to do just that – explore to the best of its ability – especially in those areas where it already has local in-depth knowledge of the geology and prevailing mineral policy that give the company an advantage over several of its peers.

So who should acquire the above non-core asset then?

That question is easy. The “natural owner” of the asset should.

Natural ownership is a straightforward concept, championed by McKinsey & Company* among others.

Defining the concept is not quite as straightforward, however – but you know a natural owner when you see one (and the explorer is certainly not one with respect to the non-core asset in question).

At the risk of gross oversimplification, a natural owner can extract more value at less risk from an asset than anyone else who might develop the mine.

How exactly? The list is a long one – it took McKinsey 24 pages to explain but I would start with something like:

• Proximity: companies already active in the region, ideally capturing scale and scope economies
• Commodity: an existing experienced operator
• Development: a track record of delivery
• Risk: the asset adds a level of value to the company portfolio consequent with the risk level
• Capital: a suitable balance sheet
• Inside running: start with an exclusive track to achieve acquisition, add in existing in-country relationships and go from there.

The explorer in question has none of the above.

Another party, however, will tick most, if not all, boxes.

It is the latter company and not the explorer that should be the one buying the asset – and it probably will unless another company decides to pay too much for it!

Good hunting.

Allan Trench is a professor of mineral economics at Curtin Graduate School of Business and professor (value & risk) at the Centre for Exploration Targeting, University of Western Australia, a non-executive director of several resource sector companies and the Perth representative for CRU Consulting, a division of independent metals and mining advisory CRU Group (allan.trench@crugroup.com).

*Getting risk ownership right – McKinsey Working Papers on Risk #23 (2010)