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Legal Focus

JANUARY 2013

Due Diligence for Mining Acquisitions in Myanmar: 5 Key Issues

With the easing of foreign sanctions in relation to Myanmar, foreign mining companies that were previously excluded from doing business there are focusing their attention on Asia’s last frontier. Whether for nickel, tin, iron, copper or gold, mining companies are looking into Myanmar with a healthy interest.

to address in a due diligence when acquiring a mining interest in Myanmar, for example, when acquiring an equity interest in a Myanmar company (“the Company”) that holds an exploration license or a Production Sharing Contract (PSC) with the Government.

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Myanmar is one of those markets where “on the ground” knowledge and access to the latest practices applied by regulators is absolutely crucial to get a deal through safely. This is particularly so in the resource sector, where few detailed laws and regulations are available. In addition, as Myanmar enhances transparency and attractiveness to foreign investors, practice and legislation is currently in flux. For example, the Ministry of Mining is at present working on a new Mining Law, to be presented to the National Assembly in due course.

Issue 1: Which rights has the company obtained from the Government and for how long?

Under the Mining Law of 1994, exploration licenses are often separate rights from the PSC, vested in a different document. So, legally speaking, a new agreement is needed to pass from the exploration phase to the development phase. There may be uncertainties in terms of the legal rights of the Company in this process. In contracts where at least some of the PSC terms are fixed from the outset, such uncertainties are mitigated.

In practice, there are important differences in contract periods between PSCs. PSCs for sites that are in production might be very short, e.g. five years. Extensions are most likely available.

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o find out more, Lawyer Monthly benefits from an exclusive piece written by Edwin Vanderbruggen and Kyi Naing from VDB Loi in Yangon. Here, they take a look at the five key issues

Issue 2: Background of the local shareholder

Business with certain individuals and companies remains under sanction from, for example, the United States (the so-called “SDN list”). A quick background check, which should include verification of local corporate registers and court records, would be the first logical step to avoid any adverse reputational damage for the investor.

Issue 3: are there any claims by local residents?

Most mining PSCs state that the Company needs to compensate certain persons, usually local residents, for the loss of certain economic activities or other losses. Unfortunately, it is often unclear on what basis this compensation needs to be calculated. This may trigger uncertainty and even disputes, particularly when the expectations of local residents and the Company are difficult to reconcile.

Issue 4: does the company have the right to sell and export the metals or minerals?

The PSC will set out whether the Company may freely sell the extracted product or if the Government will be the purchaser. Normally, the Company may sell to the domestic market without any issues. As a principle, export of raw ore is not permitted, but the Company may agree with the regulator on this issue in detail.

Issue 5: Is foreign ownership of mining enterprises allowed in Myanmar?

As a rule, foreign-owned companies can obtain an exploration license, a development license or conclude a PSC with the Government. There is no formal requirement to have a local partner. An exception is the mining of gems,

which is reserved for investment by Myanmar citizens. Foreign investors can also finance mining companies in Myanmar, on a farm-in basis, for example. In practice, one should secure the permission of the Ministry of Mining for such an arrangement, as well as (in case the financing is in foreign currency) the permission of the Foreign Exchange Controller and the investment regulator of the borrower. LM

Edwin is based in Yangon, where he oversees a large team of local and foreign lawyers and tax advisers. VDB Loi is one of the leading law firms in Myanmar, and the first foreign tax advisory firm to be established in the country. VDB Loi also has offices in Cambodia, Indonesia, Laos and Vietnam, plus a liaison office in Singapore.

Kyi Naing is a Myanmar-qualified lawyer with seven years of work experience, most recently with DFDL in Myanmar. He holds a bachelor’s degree in law and a master’s degree in international law from Dagon University in Myanmar.

contact details:

Edwin Vanderbruggen Email: edwin@vdb-loi.com tel: +95 9421156077

Kyi naing

Email: kyi.naing@vdb-loi.com tel: +95 94 2112 9769

Website: www.vdb-loi.com