Foreign investment in Myanmar’s mining industry, and locally-owned development of international standard mining operations, remains significantly ‘underdone’ by comparison with most other geologically prospective jurisdictions. Current political, economic and security-related instability makes international investment in mining projects in Myanmar particularly challenging. However, even before current issues arose, there was little investment in mining in Myanmar for a range of historical, regulatory and developmental reasons.
That said, Myanmar remains highly geologically prospective, and international mineral industry investment and project development is typically a ‘long game’. We may therefore still see some appreciable investment activity in the sector in Myanmar in coming years if sufficient stability returns to the country and regulatory attitudes to foreign investment in the sector improve.
The below list of categories of queries provides an overview of most or all of the categories that an international investor would typically look at if considering taking over the whole of, or taking a majority stake in, a company that is a mineral explorer or producer – referred to as the “target company”. (An investor considering a minority investment may not feel the need to consider all of these issues). Many of the categories are relevant to merger and acquisition activity across sectors. But there are a number of categories of inquiry that are specific to the extractives sector, in particular mining.
If the target company’s management is actively seeking investment and wants to try to render the target company’s business more “investment ready”, it can be informative to consider the issue from the perspective of a potential investor conducting detailed pre-investment due diligence. The idea of this approach is to have in mind what enquiries investors are likely to make and work towards positioning the target company to adequately respond to those inquiries in an investment scenario.
(Note that the below categories largely reflect a general approach for the global mineral industry. It is likely that some of these issues will be difficult to adequately address in Myanmar. However, where this is the case, the target company should still consider how it would respond to investor inquiries on those issues).
Another important point for the target company to consider will be its own strategic goals in relation to attracting foreign investment. What is the target company looking to get out of an investment? Cooperating with an investor who can bring technical assistance to the target company’s projects? A simple cash injection to fund development? If it is seeking a cash injection, has the target company considered whether it has a preference for debt versus equity funding? What long-term and short-term goals does the target company have in place – increase in cashflow, future IPO etc.?
Detailed consideration of, and determinations on, these strategic issues may help the target company to better identify what sort of investment(s) and investor(s) it is looking for – in the short and long term – and therefore what issues it should particularly focus on in seeking its preferred investment scenario.
Overview of Due Diligence Categories/Queries and Related Comments
What is the company structure that holds the assets? Who are the shareholders and what is the capital and quasi-capital structure? What are the material terms of the relevant company constitution(s) and any shareholder agreements? Are there any share or option plans? Has there been any material restructures, takeovers or other corporate actions?
Investors will want to confirm what rights and obligations they will have if they become shareholders. They will also want to assess whether there are any unresolved issues arising from previous corporate activity.
Who are the directors and executives/senior management? What is their past experience with comparable mining projects and in comparable jurisdictions?
Investors will want to assess whether the target company has in place a management team that is capable of developing and operating the target company’s assets successfully in accordance with its budgets and forecasts.
Properties, Permits & Right to Mine
What mineral properties/assets does the target company hold? What mining and exploration permits have been granted to it? What is the current status of those permits? Have there been any material communications with relevant government authorities regarding the permits? Does the target company also hold property rights to the relevant surface land – as opposed to mining/exploration rights for the minerals under the ground – to allow it to operate in its permit area? Are there any royalties or other third-party rights affecting the target company’s projects? Has the target company obtained all other permits necessary to operate, such as water use, construction, explosives etc.?
Investors will want to verify that the target company holds all necessary legal rights to be able to conduct its operations on the properties it claims to hold. If there are any “gaps” in those rights, investors will want to identify such gaps and assess whether the target company has appropriate plans in place to address them.
Resource & Reserve; Exploration
Have any international-standard resource and reserve estimates been performed? What exploration has been undertaken for the target company’s projects and what are the results? What future exploration is planned and what are the work programs and budgets?
Investors will want to assess the level of mineral resource estimation, and plans for further exploration to upgrade and/or add to the resource, in order to assess the value and viability of the target company’s projects. Although not essential, it is likely that many investors will require at least an “indicated” resource estimate before they will be willing to invest.
What environmental impact studies have been completed? Are environmental management plans, policies and procedures in place as a result of those studies? Are all required environmental permits in place? Have environmental audits been conducted? Have there been any material communications with relevant environmental authorities regarding operations or permits?
Investors will want to assess the standard of environmental protection that has been put in place in relation to the target company’s operations – not just in relation to initial studies but also with regard to whether ongoing management processes are in place. This may be assessed from the perspective of compliance with local environmental laws. However, some investors and financiers may also have their own internal policies regarding the level of environmental standards with which a project must comply before they will invest in it or provide loan facilities to it.
Community Relations & Social Programs
What agreements and consents have been obtained from local communities impacted by the company’s operations – both ethnic minority or indigenous communities and otherwise? What social and community relations programs and support is being provided?
Investors will want to assess compliance with legal requirements for community consents and support and also whether the target company has built a “social licence” for its operations. That is, is the target company engaging with and supporting local communities impacted by the mining operations in such a way that those communities support the target company’s operations and feel that they are sharing adequately in the social and economic developments arising from those operations?
What programs and activities are in place in relation to engagement with relevant government authorities? What is the current status of relationships with the government and have there been any material communications with relevant government authorities regarding the company’s operations?
Investors will want to assess whether the target company is liaising regularly with relevant government authorities and maintaining a relatively strong and positive relationship with the government to support future activities.
What material contracts are in place in relation to the target company’s operations and what are the terms of those contracts?
Depending on the status and state of the target company’s operations, investors will be particularly interested in contracts relating to exploration services, technical services, design/construction/procurement services, mining services and procurement of key materials and expendables (e.g., chemicals, reagents, explosives).
Assets (other than real property)
What material assets does the target company hold (other than land)? What agreements are in place regarding the acquisition, financing and operation of those assets and what are the terms of those agreements?
Investors will want to assess the target company’s non-property assets, in particular machinery, vehicles and equipment that are used for its mining operations.
Operations & Development (Mining & Processing)
What is the current “Life of Mine” plan? What feasibility studies have been undertaken for the project overall? What mining method is used? What processes and methodologies are used in the processing plant? What specific design/feasibility studies have been undertaken for the mining process and for the processing plant operations? What are the current operating costs, operating budgets and future cost estimates and what methodology was used to produce them? What are the current production levels and forecasts and what methodology was used to produce them? How are tailings being stored and treated and what tests and studies have been undertaken on the tailings?
Are any productivity improvement initiatives being undertaken or planned?
Investors will want to assess the current performance of the target company’s operations, and forecasts for future production and costs, both in respect of mining and processing. This area goes directly to the economics of the core operations and whether it appears that the target company has detailed plans in place to support profitable mining operations for the foreseeable future.
What is the target company’s organisational chart? What are the summary details of its current workforce, including remuneration, incentives and accrued benefits? What specific employment and service agreements are in place with key personnel? What industrial awards and standards, retirement benefits and other minimum standards of employment conditions/benefits apply to the company’s workforce? What employment and HR policies does it have in place? What outsourcing and contracting agreements does it have in place? Are there any current or threatened material employee disputes?
Investors will want to assess the current status of the target company’s human resources, including ongoing employee and contracting costs, retention risks in relation to key personnel – or, conversely, the ability to dismiss key personnel – and the risk of employment disputes.
Health & Safety
What health and safety policies and procedures are in place? Are health and safety audits and inspections being conducted and what are the results? What are the accident records and statistics for the target company’s operations? Have there been any material communications with relevant health and safety authorities?
Investors will want to assess the current status and adequacy of the target company’s health and safety records and policies/procedures. It is standard practice for international mining operations to commit to very high standards of health and safety in their operations.
Legal & Regulatory
Are there any actual outstanding, or pending or threatened, litigation proceedings or disputes in relation to the target company and its operations? If so, has the potential or likely exposure been assessed and estimated? Have there been any material settlements of disputes in recent years? Have there been any other material regulatory issues? Are there any other material legal encumbrances affecting the company and its assets (not mentioned elsewhere)?
Investors will want to assess whether the target company and its operations are subject to any actual or potential risks and exposures in relation to legal disputes.
Insurance & Risk Management
What material insurance policies and arrangements does the target company have in place? Have any material insurance claims been made?
Investors will want to assess whether the target company has sought to mitigate risks of major disruptions to its operations through an appropriate portfolio of insurance policies.
Finance & Tax
What finance/loan facilities does the company have in place and what agreements govern those facilities? Does the company have in place any other material finance agreements (e.g., finance leases)? Does the company have any other material finance documents and reports? Does the company have any production hedging agreements in place? Have there been any material communications with relevant tax authorities?
Investors will want to review the target company’s recent financial statements, management accounts and income tax returns, and to assess the target company’s core financial and balance sheet metrics, including in relation to its ability to either service existing debt or take on new debt. This is done with a view to assessing the basic financial viability of the target company and its operations.
Jurisdiction/Country Risk and Security
Have any assessments and summaries been prepared in relation to particular Myanmar jurisdictional issues, political stability risks for the jurisdiction and local security issues (if any) in relation to the area of operations?
In particular in relation to developing countries such as Myanmar, investors may appreciate having access to reports and assessments on country-specific and site-specific political and security risks.
Have any independent valuation reports been prepared for the target company and its assets?
This is not essential, but – if it is feasible to do so – commissioning an independent valuation of the target company and its operations may be beneficial as background for negotiations on any significant investment.
Strategy & Planning
What future capital commitments and expenditures are planned (if not covered elsewhere)? Does the target company have in place any material strategic plans for its business and operations (not covered elsewhere)?
Investors will want to assess plans for future capital expenditure projects and other strategic initiatives from the perspective of both the target company’s ability to meet its capital expenditure commitments and opportunities for the target company to continue to expand its operations profitably.