Due Diligence – Commodites

I have mentioned this before, but my my perspective as a participant is that the most important first steps in any possible deal is due diligence … not only of the buyer (if possible at this stage) but ask for their source and the verification of all the information that a “contact” brings to you from their own communications.

These steps are essential in my view ..

  1.   What is their position in the chain of people who have brought the deal to you? If someone is more than one or perhaps two people away from a mandate or a buyer … it will be highly unlikely the deal will proceed … if you are a contact make sure you verify formally where you are in the chain with the buyer… also if you wish to be paid, make sure that the Buyer or their mandate authorises you to offer their requirement to your contacts.
  2.   What work have your contacts done to ensure the “buyer’s” veracity? and what have they accepted without question from their contact – this all reflects on the credibility of the contact and the possible deal itself.

Other Important points are :

What form has the enquiry come in? Verbal, a written via a general letter of Intent or letter of interest …. or via a Bank, a Hedge fund or trading platform – first step in to check when the enquiry was issued, if it is out of date ask for enquiry with a current date. Then contact the issuer to confirm it is valid.

Our first step after we have done the above is to ask for a profile of the buyer, then once received, do due diligence on the information therein – first thing is to check for dates, as so many times statements provided in these briefs can be verified or not by doing a simple google searches for location of offices, Corporate Officers and company registrations are fairly straight forward … also then search for corroborating articles in relevant news sources, concerning the alleged buyer. If no articles are found it is likely the whole enquiry is a fiction. If you have any doubts I would suggest contacting a due diligence service before you take it to a seller.

Statements made in concerning say tank storage can be verified, the easiest way is to do this is check with the relevant port facilities.

If you are a seller or direct to a seller, insist on talking to the buyer or the mandate … if you do not get the information from a gatekeeper, the least stressful option is to insist on the contact, if it is not provided, walk away.

If a contact insists on having a commission agreed to before connecting you, it is way to early for this, as the commission for the buyer side is specified by the buyer mandate … issuing a commission split before you have had an contact with a buyer, is basically a waste of time, the buyer or the mandate will specify who will be paid and how much, the seller mandate only controls the commission on the sell side, although in some circumstances I have agreed to allocate an amount to a buyer contact, the amount of which varies greatly but the basis of it comes down to what work they have put into the deal, if someone has taken an enquiry from their inbox and sent it out without any due diligence, which means we have to do all the work, then if a deal culminates the commission would be no more than a small spotters fee … nothing is for free … if a contact wants a commission he has to have actually contributed to the deal.

For me I will give a contact two chances …. for every deal that does not complete affects our own credibility with the supplier or refinery … hence if a deal does not complete due to a foreseeable error or oversight, you get one more chance and then we shall no longer engage.

Although this post actually applies more to Oil, minerals & other refined commodities as well as crude Oil, this general procedure also applies to such items as Gold, both bullion and unrefined such as Dore bars and nuggets … if you have any interest I shall post on this topic in the future … in the meantime, I wish you every success.

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