Reforms set to increase foreign investment and stimulate Myanmar's mining sector

 

Endowed with rich deposits of jade, ruby, copper, lead, zinc, tin, tungsten, silver, gold, antimony, nickel and barite, as well as a long history of mining that dates back to the 15th century, Myanmar’s mining sector has significant potential. Official statistics indicate that there are 291 known lead-zinc deposits, with a combined potential of 44m tonnes. More than 480 known deposits of tin-tungsten are found along the 1200-km granite belt that passes through Tanintharyi Region and the states of Kayin, Mon, Kayah and Shan, as well as east of Pyinmana in Naypyidaw. Tin-tungsten deposits are also widespread in Mong Hsat and Mongton in eastern Shan State. An estimated 341 occurrences of gold and more than 50 proven occurrences of copper exist across the porphyry gold-copper belt in Sagaing. Mogok Region is famous for the “pigeon’s blood” rubies, which are known for having a slight pinkish or purplish colour, and 90% of the world’s jade comes from Kachin State. While these rich and varied reserves indicate a bright future for Myanmar’s mining industry, there are numerous regulatory, infrastructural and societal challenges that need to be addressed before the sector can reach its full potential.

Background & Structure

By the end of the Second World War the mining industry in Myanmar was all but destroyed. What remained collapsed following the wholesale nationalisation of the economy in the 1960s. By 2013 mining accounted for a mere 0.1% of GDP by some estimates. Then, in an unexpected turn of events, Myanmar became the world’s third-biggest tin producer in 2017, accounting for 21% of global production. Its tin production jumped from 4800 tonnes in 2012 to 30,000 in 2014. This was largely due to the discovery of a rich, hard-rock tin deposit in Wa State, near the border with China.

There are five major mines in Myanmar. The most prominent of these is Bawdwin, a lead, zinc and silver mine that ceased production in 2010 but is now up for redevelopment. Gold is found in Benmauk, Kani, Kyaukpadaung, Yemathin, Tagon and Kyaukpons; copper in Shangalon, Kani, Kyaukpadaung, Heho and Monywa; tin and tungsten is mined near the Dawei River; nickel in MweTaung, Wuntho and Tagaung; iron in Marliphant; limestone in Indainggyi; and coal in Ngaphe. According to official figures, there were more than 1100 registered mines in Myanmar, and over 500 registered mining and quarrying businesses as of 2017. Only around 10% of these mining businesses are categorised as large operations, which means that they have more than 50 workers. Most are small operations, employing no more than 10-50 miners. Zaw Bo Khant, vice-chairman of the Myanmar Gems and Jewellery Entrepreneurs Association, told local press in July 2018 that there may be as many as 4000 of such small artisanal firms engaged in the mining sector, but many are likely to be inactive.

The mining industry in Myanmar is estimated to be worth $16.68bn, and is forecast to hit $25bn by 2025. According to the latest available statistics from the Myanmar Information System, in FY 2017 mining’s GDP totalled MMK902bn ($588m), representing 1% of total GDP. In 2017-18 mineral products accounted for 12%, or $1.8bn, worth of exports. The Extractive Industries Transparency Initiative (EITI) disclosures show Myanmar generated MMK460bn ($299.9m) in revenue in 2017 from the mining sector; however, this figure could be much higher if the sector was formalised. According to a study commissioned by the EITI, some 60-80% of gemstones produced in Myanmar are not declared, resulting in lost revenue.

Reviving Activity

Following a two-year freeze the Department of Mines, which operates under the Ministry of Natural Resources and Environmental Conservation (MNREC), began accepting applications from local and international mining firms for exploration licences in July 2018. The promulgation of new mining rules in 2018 clarified the permit application process and put into action the 2015 Mines Law, the implementation of which had been put on hold. In addition, the new rules fixed royalties and set the terms for joint ventures between local and foreign partners. Under the legislation, tenure is guaranteed and acquiring tenement rights of up to 2100 sq km is possible. Mining companies can now hold integrated pre-production permits for prospecting, exploration and feasibility studies for up to 12 years. The initial tenure for a large-scale production permit is 15 years, but it can be renewed for up to 50 years. Investors are free to move from one licence type to another. The amended law also requires investors to contribute to an environmental fund and submit plans for post-mine rehabilitation. Myanmar has started to implement a series of reforms aimed at making the processes for issuing licences, collecting revenue and publishing production data more transparent. In 2019 it was found to have made “meaningful progress” in implementing the globally recognised EITI Standard. In its validation report the EITI board commended Myanmar for applying policy reforms, improving data transparency and creating space for necessary dialogue among the various sector stakeholders.

Oversight

The 2015 Mines Law is the key piece of legislation that governs the mining sector and is widely regarded as a significant improvement over the previous legislation. The law regulates the mining of all minerals and precious metals, with the exception of gemstones, which is subject to the Gemstone Law 2017. Besides the Mines Law 2015 and the subsequent Mines Rules 2018, a litany of other associated laws and rules also govern investments in the sector, including the Myanmar Investment Rules 2017; the Environmental Conservation Law 2012; the Environmental Conservation Rules 2014; the Myanmar Investment Law 2016; the Environmental Impact Assessment Procedure; and the Environmental Quality Standards 2016.

The MNREC is the governing ministry responsible for the administration and regulation of the mining industry. The Department of Mines, which sits within the MNREC, is responsible for the administration of mineral policy, mine inspection, environmental conservation, and most importantly, royalty collection. The Department of Geological Survey and Mineral Exploration (DGSME) conducts geological surveys and mapping as well as exploration. The MNREC also oversees four state-owned enterprises that undertake commercial mining activity: No 1. Mining Enterprise is responsible for lead, iron, zinc, antimony, silver, nickel, copper, chromite; No 2. Mining Enterprise is responsible for the extraction of tin, wolfram, scheelite and gold; the Myanmar Gems Enterprise issues gemstone mining licences and mines and trades in gems; and the Myanmar Pearl Enterprise is in charge of the production and quality control of natural pearls.

The Myanmar Investment Commission (MIC), the agency for foreign investors in Myanmar, is responsible for foreign investment approvals. A key feature of the mining permit regime in Myanmar is the distinction made between large-scale, medium-scale and smallscale production. What determines the size of a mine is the expected life of the mine, the amount of investment made in a mine and the equipment that is used during production. Small- and medium-scale mining is restricted to citizens or companies that are considered to be owned by Myanmar citizens. However, small- and medium-scale mines may be upgraded to large-scale in order to allow joint ventures with foreigners. For large-scale mineral exploration and mining, companies can apply for a concession size of up to 2100 sq km.

Production Sharing

Mining is usually conducted under production-sharing contracts (PSCs), which tend to be split on total production. The updated laws and regulations provide investors with the option of an equity or profit-sharing model. This encourages state participation to be more competitive and in line with international benchmarks. A straight split of the total production is preferred in large-volume, low-price and low-cost-production minerals, such as limestone and coal. For more valuable minerals, such as gold, PSCs come with cost-recovery riders. The law allows for a cost-recovery type of PSCs where a certain percentage of revenue offsets production costs. The sharing of production costs may be fixed or calculated on a sliding scale, depending on the level of production. The MNREC is flexible in negotiating such terms. Investors can enter into a joint venture either through competitive bidding or direct negotiations. The royalty rate for gold, platinum and uranium is set at 5%; silver, copper, tin, nickel and titanium at 4%; lead and iron at 3%; and gemstones at 2%. Although the royalty rates are reasonable by international standards, performance bank guarantees and signature bonuses are not considered. Performance guarantees can range $100,000-200,000 and signature bonuses $50, 000-100,000. These are charged in addition to dead rents, which add to the cost of mining in Myanmar. Corporate tax is set at 25% for all companies in Myanmar, including those in the mining industry. Taxes are collected by the Ministry of Planning, Finance and Industry. Regional governments do not have the authority to do so. Companies are required to contribute 3% of an employee’s salary towards social security, with the amount capped at MMK9000 per employee ($5.87).

Permits

A prospecting permit (PP) is granted for a year, but can be extended for another year. Prospecting must commence within 90 days of the permit being issued, and there are minimum expenditure requirements set out in the PP. It allows the permit holder to conduct preliminary surveys and collect rock samples for analysis, but it does not give them the right to drill. As a measure of security, the 2018 Mines Rules give the PP holder the exclusive right to explore or conduct a feasibility study. Any application for an extension must be made no less than three months prior to the expiry of the PP.

The holder of a PP has the automatic right to apply for an exploration permit (EP). The application process is similar to that of a PP. An EP is granted for three years, but can be extended twice for a maximum of one year each time. In exceptional cases, additional one-year extensions can be granted for a maximum of three years. This is when either significant foreign investment is at stake or the project is considered to be in the public interest. In effect, for a large-scale investment an EP can be held for a maximum of eight years. The investor is required to commence exploration activity within 90 days of being granted the permit and must also meet the minimum expenditure obligations stipulated in the EP.

The feasibility study permit (FSP) is granted for one year but can be extended twice for a maximum of one year each time. The permit holder is required to commence the feasibility study within 60 days of the issuance of the FSP, maintain records of all activity and submit reports to the DGSME.

The holder of an EP or an FSP has the exclusive right to apply for a PP over any part of the permit area. If, however, the permit holder decides not to proceed with the application, the concession area can be opened for others through tender. The validity of the PP for large-scale production is determined by the expected life of the mine. It could, therefore be anything between 15 and 50 years, with a possible five-year extension. Medium-scale PPs are limited to 10-15 years, with a possible two-year extension, while for small-scale production it is set at five to 10 years, with a possible two-year extension. A PP also authorises the holder to process and trade minerals extracted from its mines without the need to obtain a separate processing or trading permit. However, it does not allow them to process or trade other minerals obtained from any other party or mine. Therefore, if a PP holder wishes to process minerals on behalf of other miners they will need to obtain a mineral processing permit (MPP). Similarly, if a PP holder wants to trade third-party minerals they will need to apply for a mineral trading permit. The validity period of MPPs is similar to that of PPs, but unlike the PP, extensions can be renewed repeatedly.

International Interest

The introduction of an integrated 12-year, three-stage pre-production permit that allows for prospecting, exploration and feasibility studies is a recent attempt by the government to attract foreign investment in the mining sector. Although the MNREC has issued integrated permits to mining companies from Australia, Thailand and China, the projects have yet to reach the production stage. While they provide investors more assurance on the tenure of the lease, the pre-production permits are still unclear on what terms the government would be willing to grant a PSC before a resource is identified. That decision is usually made when granting a PP, although an earlier decision could help remove uncertainty for potential investors. Securing the terms of state participation early in the multi-stage pre-production permit process is critical for investors.

Foreign investors can hold 100% equity in the mining sector, but they are limited to investments in largescale mines. Many investors, however, prefer to enter into joint ventures with local partners. In addition to applying for various permits with the MNREC, international investors are also required to obtain an investment permit, which needs to be granted by the MIC once the investor has negotiated all the necessary agreements with the MNREC.

Streamlining Processes

Since 2018 the responsibility for issuing permits for artisanal and small-scale mines has shifted from the federal government to the state government. However, provincial officials often lack the technical skills to take informed decisions, and the decentralisation process has not run entirely smoothly thus far. The regional government of Sagaing, for instance, received over 4000 applications between August 2018 and March 2019 but did not issue a single permit. Inefficiencies in the permitting process at the regional level make it more difficult to curb illegal mining operations.

In order to attract substantial private investment, it is necessary to remove the ambiguity surrounding land titles. To this end, the authorities established a cadastral system to help them manage land titles and permits. In 2019 the MNREC opened a tender for a contract to design, install and test a computerised version of the mining cadastral system, which is expected to become operational in 2020. Once launched the Myanmar Mining Cadastre System will provide investors full access to the cadastral data for the entire country.

Foreign Investment

The introduction of new legislation is expected to attract more foreign direct investment (FDI) to the country. In the first eight months of 2019 the MIC approved 71 FDI proposals in the mining sector, worth a combined $2.9bn. Myanmar also plans to loosen a ban on gold exports.

In July 2018 PanAust announced it had received approval from the MNREC for three exploration licences in Wuntho Massif, in Myanmar’s north-west. The three blocks – Ton Kuang, Taung Kon and Naughphat – cover an area of 562 sq km and are thought to hold significant deposits of copper and gold. The new leases complement three other concessions – Hel Chain, Pin Hin Hka and Nam Awl in Sagaing Region, – which span 213 sq km. Australian-incorporated and Chinese-owned PanAust holds an 80% stake in Wuntho Resources, the joint venture it formed with local partner Myanmar Energy Resources Group. Elsewhere, the MNREC is seeking feedback from state and regional authorities on 40 exploration proposals.

In 2019 the Canada-based mining firm Asia Base Metals announced its intention to invest in Myanmar. The firm is hoping to find lithium – a key mineral used in the production of batteries – in a 74-sq-km mountainous area near the town of Thazi in central Myanmar. If its application is approved, Asia Base Metals will be the first mining firm to explore lithium in the country. In May 2019 the Australian-listed Myanmar Metals declared that its Bawdwin polymetallic project could kick off production as early as 2021. A pre-feasibility study of a starter pit has been completed, and the firm plans to invest $267m to get the mine up and running. The mine is expected to produce about 118,000 tonnes of lead in concentrate; 10m oz of silver in concentrate and 49,000 tonnes of zinc in concentrate per year. It is the world’s largest lead deposit and ninth-largest source of silver.

Outlook

Mining in Myanmar still remains a highrisk, high-reward proposition. Although progress has been made in modernising the sector and opening it up to foreign investors, elements of the mining industry remain dominated by illegal operations, and poor transport infrastructure is a major hurdle to mining bulk commodities. Myanmar also suffers from an energy deficit. In addition, FDI decreased by 11% to $3.6bn in 2018. This fall was partly the result of a 48% decline in foreign investments in the extractive industry, which dropped from $645m in 2017 to $333m.

The single biggest factor that determines the outlook for the mining sector is the level of demand from China. China’s appetite for natural resources will ultimately underpin development in the country’s mining sector, as the country remains the top destination for Myanmar’s mineral exports. In 2017 the world’s second-biggest economy imported $1.75bn worth of metals and minerals from Myanmar. However, growth in China is projected to slow to 6.1% in 2020 and moderate further to 6% in 2021 amid continuing global and domestic headwinds. If this trend continues it would inevitably reduce the demand for natural resources. Myanmar is already the top supplier of tin to China, most of which comes from open-cast mines in Man Maw in the autonomous Wa State, an area that is experiencing unrest. Indeed, turbulence in other regions of the country potentially presents a risk to mining operations, with some deposits located in areas with a history of armed conflict.

However, despite the possible risks and remaining obstacles, the long-term outlook for the mining industry in Myanmar remains generally optimistic. At least seven international mining companies have sought exploration activities, and, given its potential, Myanmar is likely to continue to attract investment.

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The Report: Myanmar 2020

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