Recent reforms in Myanmar's mining sector sets new course

The immense wealth that lies beneath Myanmar’s soil continues to entice prospectors from around the globe, and recent structural reforms are expected to bolster the sector and attract much needed capital. Until recently, Myanmar’s long history of civil instability and unfavourable production agreements had dissuaded investors from financing the country’s large number of projects. However, the nation’s first democratic government has shown determination to remedy past wrongs and clean up a sector that has immense potential to fuel economic growth. Correspondingly, the new administration has inherited a wealth of intricate challenges that will require a vast amount of resources to resolve.

Given the country’s geology and the passing of long-awaited legal amendments, most of which are geared towards promoting foreign participation, mineral exploration is expected to accelerate.

New Dawn

Myanmar’s mining sector includes two subsectors: minerals and jade/gemstones. Each is governed by its own laws, with its own issues to combat. Arguably, the lifting of US sanctions on Myanmar jade and rubies in 2016 was the biggest success story for the sector as a whole, with international interest in the rare gems on the rise among gems dealers, who are now more eager than ever to engage in new business relationships in the country. Myanmar is the world’s largest ruby and jade producer and now has access to the world’s biggest gems market: the US. With official and unofficial export activity in jade estimated to be worth half the country’s GDP, the potential for growth is substantial. However, the new government of the National League for Democracy (NLD) has many challenges to overcome before trade volumes can be allocated to the treasury.

Currently, the vast majority of funds generated from the excavation of jade is captured by smugglers between China and the war-torn state of Kachin, in northern Myanmar. However, if trade was to be formalised and smuggling routes shut down, the government would create a much-needed revenue stream that could be channelled into the economic development of the country. Fortunately for the NLD, the previous administration initiated structural reform. The former regime’s decision to pass legislation at the end of President U Thein Sein’s tenure, in the latter stages of 2015, signalled the intent of the administration to move the mining sector into the modern era after decades of stagnation.

In August 2016 the Myanmar Gems Enterprise, a division of the Ministry of Natural Resources and Environmental Conservation (MNREC), announced a tender for the preparation of environmental management plans for the 10 zones of the Lonkin/Hparkhant gemstone area of Kachin to begin addressing the various environmental issues there, which include waste management and landslides.

Although the adoption of investment incentives is a major step in the right direction, the new government, under the helm of Nobel Peace Prize winner Daw Aung San Suu Kyi, has hurdles to mitigate – particularly the decentralisation of resource management, a key ingredient to reconciliation, the number one priority for the new government.

Modified Mining Law

By most accounts, the amended laws governing mining activity are a welcome change for a sector that has long been victim to regulation influenced by parties with invested interests. After almost three years of parliamentary debate, the amended legislation was signed into law on December 24, 2015, by outgoing president U Thein Sein. Outlined by members of parliament, with the advice of the independently funded Australia-Myanmar Chamber of Commerce and the Natural Resources Governance Institute, the revised legislation has almost completely removed previous conflicts of interest by allowing foreign investors greater flexibility in deciding who their local partners will be.

A notable update to the previous law, Section 4(f) of the 2015 Mines Law enshrines the ability of foreign investors to partner with local mining companies through a joint venture for small and midtier projects. In the past, foreign firms could only partner with large-scale mine operators. Currently, this reform only applies to metals and industrial raw materials, as gemstones remain off limits. However, the new law allows ventures to expand small mines into large-scale extraction operations.

The length of licensing for mine operations in the country has also been extended, with mining permits for large-scale production now being issued for up to 50 years, while medium-scale developments can be licensed for up to 15 years and small-scale projects for 10 years. Prospecting, exploration and subsistence production permits remain unchanged at one year, three years and one year, respectively, but oneyear extensions can be granted a maximum of four times for exploration and production.

A lack of conjunctive tenure was previously viewed as one of the most substantial hindrances to capital injection in the sector. Under Section 11(a) of the 2015 Mines Law, any company that undertakes prospecting or exploration, and conducts a feasibility study, is entitled to receive a production permit for that area, as long as it does not violate the laws and regulations for the sector.

Equity Shares

Viewed as an essential change, mining companies now have the option to enter a form of profit- or equity-participation agreement with the Myanmar government. Historically, the lack of equity investors has hindered the progress of the industry. This move in itself has been viewed as a critical step, needed to promote exploration activity. In the past, firms were subject to hefty production-sharing contracts (PSCs) – sometimes as high as 30%, depending on the mineral being produced – in addition to very costly royalty fees.

The move away from PSCs is viewed as a major game changer for the sector. According to Michael Phin, director of Valentis Resources “The introduction of profit and equity mechanisms will vastly alter the economics of mining in Myanmar and will encourage foreign investment.” Still, the full impact of the amendment will not be felt right away, he said. “The mining sector is rife with opportunities, but it is still too early for large-scale operational mining investment, as most projects are now in exploratory phases. Direct foreign investment and joint venture activity has increased recently, and we expect this trend to continue in 2017.”

Hailing to the call of miners, the legislation has standardised the royalties regime for trading in minerals. The rate for gold, platinum and uranium has been set at 5%, and at 4% for silver, copper, tin, nickel and titanium. Zinc, lead and iron ore will attract taxes of 3%, while for industrial raw minerals and gems the levy will be 2%. In most cases, unlike rates under the old legislation, the new laws remove variables by setting fixed rates, rather than an adjustable figure to be applied by the Ministry of Mines, which now falls under the umbrella of MNREC.

The fixed rates are a step in the right direction, although some industry players argue that potential investors would prefer to see royalty payments based on net sales, as this would help offset uncertainty in the commodities market.

Mining Permit Participation

Decentralisation has become something of a buzzword in Myanmar’s extractive industry. Under the 1994 Mines Law, domestic and regional decision-making on mining permits was prohibited. Now, however, Section 6 of the 2015 Mines Law allows for the decentralisation of the application process for the following: prospecting, exploration, production, processing and trading, and subsistence of small-scale production. It is worth noting, however, that foreign investors are still required to deal directly with the central government prior to acquiring permits at the state level.

Often viewed as a key piece of the puzzle, some within the industry are sceptical of how successful the process will be, with production monitoring and revenue collection expected to be challenging. Regardless, decentralisation is a critical step for moving the peace process forward.

While the revised law has been approved by parliament it is yet to be codified. The 2016 Mine Rules was scheduled to be enacted within 90 days of the passing of the amended laws, but as of December 2016, no concrete date had been set. According to Valentis Resources, the rules are expected to solidify four points of the 2015 Mining Law: exploration permit size and rental fees; quantification of profit and equity models; the operation breadth of Permit Granting Boards in regional areas; and details on social and environmental considerations.

Clearer Picture

A major effort to shed light on the mineral resources industry was taken on March 18, 2016, with the launch of the first Extractive Industries Transparency Initiative (EITI) report. To date, the report is the most comprehensive data on Myanmar’s extractive industry and is earmarked to be the biggest stepping stone in alleviating corruption. According to the National Resource Governance Institute Index, Myanmar was ranked 58th out of 58 countries for natural resource management in 2013. While the EITI report has resulted in the raising of more questions than answers at this stage, the initiative has already improved transparency surrounding what was previously a very opaque sector.

According to the report, extractive industries contribute a total of 6% to GDP, 24% to government revenue and 38% of exports. While the majority of funds come from oil and gas production, the figures give an indication as to the national income generated from mining, though there is still a significant gap in data. Only a fraction of more than 1000 precious stone companies reported and barely half of the known revenues go into central treasury accounts. In addition, compiling data is made difficult by the continued use of paper-based systems, and there is a lack of unique tax identification numbers.

The EITI is only the initial step. For all the gaps identified, the report has made a total of 14 recommendations which are aimed at promoting transparency. According to the World Bank there have already been positive spin-offs as a result of the first EITI report, such as regular meetings between Myanmar Alliance for Transparency and Accountability and extractive ministries. In addition, Myanmar’s EITI Multi-Stakeholder Group aims to establish the first publicly available mineral licence registry and mining cadastre, as required by the EITI Standards. In an effort to achieve this target, the World Bank has provided a four-yearlong, $3.5m grant financed by UK’s Department of International Development and Australia’s Department of Foreign Affairs and Trade.

Geology

Stretching over 676,577 sq km, Myanmar is the 40th-largest country in the world and the second-largest in South-east Asia, behind Indonesia. Equally impressive is the country’s diverse geological composition. Situated on the Burma tectonic microplate, which forms part of the Eurasian plate, Myanmar is wedged between the Indian plate to the west and the Indochina plate to the east. The ancient collision of these tectonic giants led to the creation of Myanmar’s four geographic belts, known as the Eastern Highlands, Central Lowlands, the Western Ranges and the Arakan Coastal Plain – all of which run north to south, from the Himalayas down to the Andaman Sea. Also running north to south are the country’s eight mineral belts of tin-tungsten, antimony, leadzinc-sliver-barite, porphyry copper, nickel-chromite, gold and copper, oil and gas, and precious stones.

While Myanmar remains relatively under-explored from a modern viewpoint, statistics from the Department of Geological Survey and Mineral Exploration (DGSE) suggest that the country hosts more than 2000 occurrences of 72 different commodities, including lucrative deposits of tin, tungsten, copper, gold, silver, zinc, lead and precious stones. According to the DGSE, as of 2008, a total of 70% of geological mapping was made on the ground, with the remaining 30% made with the aid of aerial photos and remote-sensing GIS techniques.

Precious Stones

Tucked away in the upper part of Myanmar, the Mogok Stone Track has been producing the world’s most valuable rubies since the 16th century, while unofficial records suggest that mining commenced well before that in the sixth century. The region is home to the most concentrated gemstone mines on the planet. Furthermore, the nation’s stone tract produces almost all types of gemstones, an extremely rare occurrence by geological standards. According to a report, which was published by National Geographic, Mogok – or “pigeon-bloodcoloured” rubies – are the most expensive of all gemstones. In May 2015 a 25.59-carat “Sunrise Ruby” from Mogok was auctioned by Sotheby’s for a record-breaking $30m, and such finds are not uncommon in the country’s rich geological matrix.

The complex geology of the stone tract consists of high-grade metamorphic schists and gneisses; granite intrusives, including gem-bearing pegmatites; peridot-bearing ultramafic rocks; sapphire-bearing syenite and skarn; and ruby- and spinel-bearing metamorphic marble. While, the deposits are of a high grade, the long history of mining in the region is beginning to slow. Secondary deposits are quickly declining and miners are having to move away from traditional techniques and employ mechanisation to reach reserves, which comes at a higher cost. Although the geological experience of miners in the country is considered to be of a decent standard, the lack of funding and modern equipment has hindered the progress and capabilities of local small-scale miners. Industry estimates place the number of mining operations along the stone tract in excess of 1000, many of which are run by local “kanase” miners, who re-work the spoil and tailings of mines hoping to locate any overlooked gemstones.

Downstream

The lack of downstream processing has also long been a major roadblock to the mining industry as a whole. Experts in the field have assessed that the inability of local mining companies to add value to the resources they extract, particularly gems, results in only 10% of value being received in comparison to the final sale price. The remaining 90% goes predominantly to more mature markets, such as Thailand. Now, with the lifting of sanctions, investment opportunities geared towards promoting the industry’s value chain, is at an all time high.

Jade

In addition to lucrative rubies, Myanmar is also home to 90% of the worlds jade production. Considered capable of warding off evil spirits in Chinese culture, “Imperial Jadeite” has long been in high demand by Myanmar’s north-eastern neighbour. However, with rampant illegal trade it’s difficult to put an actual trade figure on jade. According to a report by Global Witness in 2015, the industry was valued at $31bn in 2014 alone. In comparison, official records suggest the Myanmar Gems and Jade Emporium generated a record $3.4bn in October 2014, illustrating that the vast majority of jade activity is via unofficial routes. On the official side, according to recent data from the Ministry of Commerce, jade exports were valued at $377m in November 2016 while for the same period in the previous year the figure was $544m. The decline is due to a combination of tightening regulation, a temporary ban on jade mining and a slowdown in Chinese demand, by far the largest consumer.

Progress

With a new government in place, some are hopeful that illegal trade will be curbed, although, considering the green stones’ role in supporting ethnic divides and long-held business ties, finding a solution will take considerable time. In addition, safety standards continue to damage the reputation of the jade mining segment, with poorly managed excavations resulting in a large number of fatal accidents in the Hpakant mining district Once in power, the NLD did not waste time stamping its authority on the mining industry. In March 2016 the Ministry of Mines, which overseas jade, was merged with the Ministry of Environmental Conservation and Forestry to form the MNREC. Shortly after, Minister U Ohn Win began efforts to improve safety, by passing legislation that limited the number of heavy machines that jade mining companies could own. To protect the environment, as of June 2016, mining firms wishing to extend their licence would need to conduct environmental research. Furthermore, the MNREC announced that 950 block licences would expire at the end of November 2016. While these efforts have not yet solved all the problems, they have slowed down the accident rate and brought some order to a previously disorderly jade industry.

A testament to the wealth beneath Myanmar’s soils was announced when a staggering 175-tonne jade boulder was unearthed in Kachin state in October 2016. Measuring some 5.8 metres in length and 4.3 metres in height, the boulder is estimated to be worth in excess of $170m. This was the second-largest jade stone ever recorded in history, behind a carved statue at the Jade Buddha Palace in China, which weighs 260 tonnes. According to local reports, the stone is to be shipped to China where it will be made into jewellery, with revenues going to the Myanmar government.

Valuable Metals Potential

In terms of minerals, the government has historically encouraged foreign direct investment (FDI) towards the production of copper, gold, lead, zinc, iron and steel. Over the years, significant investments have been made, leading to the discovery of substantial copper, tin and nickel reserves, among others. However, from a geological perspective, the true depth of Myanmar’s mineral wealth is still a mystery.

Extending along the southern tail of Myanmar, the tin-tungsten belt passes through the Tanintharyi Division, Kayin, Mon, Kayah, and Shan states, while sharing its eastern border with Thailand. According to official estimates from the DGSE, there are 480 proven deposits along the 1200-km belt with a total potential of 40m tonnes. Historically, Myanmar has not been known for tin mining. However, it is now the third-largest mined tin producer after China and Indonesia. According to estimates by the UK based non-profit tin research house, International Tin Research Institute, Myanmar produced 45 tonnes of contained tin in 2015 up from 1 tonne in 2009, which led to a steep decline in tin prices worldwide. The dramatic surge in supply, which disrupted the global metals market, came from a major discovery at Man Maw mine in the Chinese dominated Wa State.

According to a report by Reuters in October 2016, deposits from the mine could be depleted within the next few years. However, various industry experts have also claimed that the depth of the mine’s tin resources is still not fully known, largely due to the limited geological data available on the mine. Therefore, the mine’s life cycle still remains uncertain. In addition, with the revision of the mining law and the easing of sanctions, mining activity for tin is expected to increase significantly, especially considering the size of the discovery in the Wa State.

Lead & Zinc

Running down the north-eastern part of the country, the lead-zinc-sliver-barite belt is predominantly located in the western part of Shan State. According to data published recently, there are a total of 291 known lead-zinc deposits, with an estimated potential of 44m tonnes. Myanmar has a lengthy history of lead mining that dates back to the Ming dynasty. In terms of mineralisation, there are five known existing styles of deposits. First, a volcanogenic massive sulphide deposit type is found at Bawdwin mine – once under the management of Herbert Hoover who later became 31st president of the US. The second is a Mississippi Valley deposit, found at Bawsaing mine. Third are the cavity filling vein-type deposits in the Yadanatheingi mine. Fourth are the veins of skarn type deposits near the contact between granitic rock and marble at the Phaungdaw mine, and lastly, there are secondary deposits of zinc carbonate at the Long Hken mine.

Copper & Nickel

Commencing in the central volcanic arc in Mount Popa, there are more than 50 proven occurrences of copper mineralisation across the porphyry copper belt and the gold-copper belt. Chinese-led projects continue to dominate investment in copper mining, but none more so than the Monywa copper project, which comprises the Sabetaung and Kyisintaung mines, and the controversial Letpadaung copper mines.

According to official figures from the Directorate of Investment and Company Administration (DICA), Nickel exploration represents the second-largest foreign investment in mining, after copper. There are two principal nickel laterite deposits in Myanmar, Mwetaung mine in the Chin Hills, and Tagaung Taung mine near Mandalay. The latter is under the management of CNMC Nickel company, and is the largest nickel-laterite ore exploration undertaken by a Chinese enterprise overseas. With an initial investment of approximately $855m, the mine is estimated to contain 40m tonnes of high-quality nickel (Ni 2.06%), according to figures released by the DGSE.

Gold Potential

There are some 341 proven occurrences of gold along the gold-copper belt in the Sagaing region. The historically limited foreign investment within gold mining stems from previous legislation that banned foreign companies from exporting recovered gold, as well as ore and coal. While the export of raw ore remains in place, the 2015 Mines Law now permits foreign participation in the trading and processing of minerals, including gold.

As such, prospectors from Australia and Hong Kong are now probing the country for potential gold deposits. The largest local gold miner is the National Prosperity Gold Production Group which operates the Modi Momi mine, with a total processing capability of 400 ounces of gold per day.

Remaining Roadblocks

The adoption of new legislation and improved transparency has eased the concerns of potential prospectors. However, various obstacles still hinder project execution, such as an unstable supply of electricity, a lengthy licensing process and ethnic conflict which occurs in some of the most mineral-abundant regions.

To add to those challenges, thousands of smallscale miners often use out-of-date exploration and production methods that are harmful to the environment and neglect basic human rights. “Due to a lack of economic activity, many locals in rural areas have relied on small-scale mining as a source of income.” U Htun Lynn Shein, chairman of Myanmar Precious Resources Group, told OBG, “This has been difficult for the government to control.” However, now that foreign companies can partner with these smaller entities, there is a sense of optimism in the sector that techniques will modernise and better practices will gradually spread through the mining community. Still, how the government plans to curb unlicensed operators, which degrade the landscape of the country and are extremely difficult to monitor given their mobile nature, remains to be seen.

Outlook

Uncertainty and volatility in the commodities market will continue to create a very cautious investment environment. However, the easing of sanctions by the US, coupled with a more transparent legal framework and an abundance of mineral resources, has placed Myanmar’s mining sector on a uniquely positive footing for the longer term. There are still several major obstacles to be mitigated by both the government and potential prospectors, such as land disputes with small-scale landholders. However, the option to use profit or equity structures is a welcome change. While the new means of injecting investment into the sector are not sufficient to guarantee large-scale capital injection in the short term, particularly at a time when commodity prices are low, the move places the sector on positive ground.

Given the infrastructure shortages, logistics costs are high, and combined with costly exploration and the fact that much of Myanmar’s wealthy minerals are situated in conflict zones, this will continue to obstruct the entrance of international investors. However, the playing field is gradually improving and the potential for major discoveries remains high.

Much of the sector’s success will depend on the government’s ability to decentralise resource management, particularly within conflict zones. Political stability has been achieved at the central level, but regional cooperation is still vulnerable. Achieving a comprehensive resource-allocation guideline will help to foster national reconciliation efforts, at the same time stabilising the mining industry’s future.

 

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The Report: Myanmar 2017

Mining chapter from The Report: Myanmar 2017

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