Judging by the size of its mineral deposits, you would expect a bonanza: Myanmar has an abundance of gold, silver, platinum, tin, tungsten, zinc, copper and gemstones. Yet very little of this has been exploited. Insurgent activity and poor transport have made the more ore-rich areas of the country hard to reach, while a host of foreign sanctions, some still in effect, have made hindered foreign direct investment (FDI) and international financing. The government, having nationalised the sector and further reduced productivity of the land in its control, opened operations only slowly.
Things are now changing, however. Foreign investors are free to become involved in most areas of the sector, and the government, keen to tap the country’s latent wealth, is ready to make it easier for them to do so. The two sides are much agreed on what needs done, progress is under way and the vast resources still below the ground have, at last, a good chance of seeing the light of day. So far Asian mining companies have been leading foreign activity in the sector; however, firms from across the world are showing increasing interest.
Groundwork
The country’s mining history is long. Rubies have been extracted for centuries. Records of tin mining in Mergui (now Myeik) stretch back 500 years (some speculate it dates to ancient times). In the 13th century, the Yunnan government sent missions to search Myanmar for jade. Early Western explorers arriving on its shores remarked extensively on the country’s great mineral wealth, and the colonial powers that followed took special note. They also observed that much of it was underexploited, pointing to a lack of capital and the country’s many logistical challenges.
Production of gemstones spiked following the establishment of the Ruby Mine Company Syndicate, which used modern techniques in resource-rich Mogok. After the company collapsed in 1934, however, the area returned to small-plot mining owned by individuals, and production declined. It dropped further when Mogok was sealed off by the government in 1962, again when mining companies were nationalised in the mid-1960s and once more in 1969, when private exploitation of gems was forbidden and all mining assets were declared the property of the military.
After 1989 the government began to reform, and more foreign participation was allowed. Liberalisations were formalised with the Myanmar Mines Law in 1994, which, in one go, repealed the Upper Myanmar Ruby Regulation of 1887, the Mines Act of 1923 and the Union of Myanmar Mines and Minerals Act of 1961. This set new terms under which mines could be privately developed and laid the groundwork for foreign investment.
Era Of Sanctions
Since this opening-up, both output and productivity have increased, at least in certain areas. Private investments provided new inflows of capital and availability of spare parts. Still, development has been mercurial, due to political instability, the varying interests of investors and, above all, the embargoes imposed by a number of Western nations. The US, starting in 1990, enacted numerous measures against Myanmar over the next two decades, restricting trade, preventing new investment and prohibiting the provision of financing. The UK, the EU, Norway, Canada and Australia enacted their own sanctions, making investment in the country’s mining sector all but impossible. Even the selling of equipment to Myanma mines became a hassle as, given the extent of sanctions, it was a challenge to get paid. In time, the US targeted the mining sector specifically. The Tom Lantos Block Burmese JADE (Junta’s Anti-Democratic Efforts) Act of 2008 banned the import of rubies and jade from Myanmar altogether, even via third-party countries.
These sanctions led to a major shift in the country’s investment partners. Before the restrictions began to have a palpable effect, and following the reforms of 1989, a number of Western companies were active in mineral exploration and production in the country.
These included Newmont Mining (which pulled out in 1997) and East Asia Gold of the US, Australia’s Diversified Mineral Resources and Canada’s International Panorama Gold. Most notable of all was Ivanhoe Mines, also from Canada and now known as Turquoise Hill Resources. In 1996, it signed a 50:50 joint venture with the government’s Mining Enterprise No. 1 to develop the country’s largest extraction site, a copper mine at Monywa, 120 km west of Mandalay, which is Myanmar’s second largest and most central city.
Asian Influx
In recent years, most exploration and production has been undertaken by Asian companies not following the sanctions, such as China, Thailand and Korea. The China North Industries Corporation ( Norinco) took over copper mining at Monywa in 2011. Taiyuan Iron & Steel Company, or TISCO, has invested in the Tagaung Taung nickel mine 220 km north of Mandalay. Zijin Mining, a Fujian-based mining company, owns 90% of the Mwetaung nickel mine in the country’s western Chin State, 380 km north-west of Mandalay (Norinco, which also makes weapons for the Chinese Army, owns the other 10%). Other companies active in the country include Russia’s Nobel Gold, which signed an agreement to conduct surveys in Bhamauk Township, Sagaing Region; and China’s North Mining Investment, which is doing a study on nickel in Chin State.
Most sanctions are now lifted, and Western countries have retracted scores of restrictions on activity in mining and other industries in Myanmar. The notable exception is the ban on imports of jade and rubies: the US government still believes that trade in these precious stones is benefitting entrenched interests and could lead to conflict with ethnic minorities.
As the economic pressure eases, the Myanma government and the Burmese people have taken to re-evaluating their country’s close relationship with China. It was always a partnership of necessity. Myanmar needed to sell its resources; China had a great demand for them and was one of the very few large countries with which it could deal freely. It was also a relationship effectively administered. Communist leaders found it expedient to deal directly with Myanmar’s military government. With decisions hidden from the public eye, no one could interfere with them. “The Chinese deal with the government not the people,” says U San Wai, managing director of The Silver Lion Mining Company.
The Burmese are not only asking lots of questions. In some cases, they are taking action. In late 2012, local residents at the Monywa mine began to riot. The villagers claimed the government had forced them off their land to expand the site, which Norinco controls. The protests were effective, and in mid-2013 the terms were renegotiated. The Chinese company increased its investment, agreed to a smaller share of profits (30% rather than 49%) and pledged $2m a year to compensate those who were displaced by its activities.
Ups & Downs
Despite the lifting of sanctions and the government’s levelling of the playing field, developments in mining will take time, and the sector is liable to roller-coaster through its transition to foreign involvement. One tall hurdle will be information. Only about half of the country has been geographically mapped, and what work has been done is rarely of international quality. Surveys conducted before the country’s independence in 1948 were incomplete, and much was lost during the Cold War. Record keeping has been patchy and inconsistent. The government has not been able to get to some of the most promising areas for years.
While the country has potential resources nearly everywhere, a good deal of its proven mineral wealth lies in areas historically controlled by insurgents. Heavy concentrations of gold, coal, iron, lead and tin lie in the states of Kachin, Shan, Kaya, Kayin and Mon, all of which are at least in part self-administered, according to Tractus Asia, a consultancy. While peace has been achieved to a degree, some of the agreements are quite new, and all are subject to breach. The Kachin Independence Army signed a ceasefire in 1994, but the peace was broken in 2011. Other ceasefires in place – with the Shan State Army since 2011, and with the Karenni Army and the Karen National Liberation Army since 2012 – remain tenuous. Occasional spurts of violence threaten order.
What mapping does exist is patchy. It is available primarily at the provincial level, and gives only a very general sense of what is below the surface, according to Georesources Group, a Myanma firm specialising in mine cartography. The company has developed its own database using bits of information available from government and private companies. To this it has added lore collected in more creative ways, such as sourcing historical maps from second-hand sales. Even so, exploration involves a good deal of guesswork. “They know there’s gold there, they just don’t know where it is,” said U Zay Htat, the group’s managing director.
Capital shortage is another issue, and not one unique to mining. Many people looking to finance minerals-related projects say the banks simply do not have the capacity to issue the sort of loans they need. The financial sector is underdeveloped and cannot take on the risk of sizeable ventures. This leaves foreign investors as the primary source of funding for mining projects. “We cannot get support from banks, so we are trying to get support from international investors,” said U Yan Win, chairman of A1 Companies, a diverse group currently developing mining projects. “You not only need technology and experience, but also money.”
The need for large amounts of capital from abroad creates its own set of challenges. For Myanmar to develop its assets, it will likely have to accept a lot of foreign control. History suggests that so much non-local investment can lead to tensions and backlash. This is especially the case with natural resources, which are often considered a collective national treasure. To transform them into cash, however, Myanmar needs to find significant capital from overseas.
Bureaucracy
Along the way, foreign investors will have to pass a number of intermediate bottlenecks. The first will be bureaucracy. After years of working mostly with other governments directly, the Ministry of Mines lacks certain administrative capabilities and expertise. The ministry is trying its best to get the process right. It does not want to choose investors only to be later accused of wrongdoing. But its sincere efforts come at a price. Executives say that the level of care, combined with big gaps in capacity, is slowing the process considerably. “They want to do everything in a transparent way but don’t know how,” said U Zay Htat. For Myanmar, simply getting used to operating in an open environment will take some time. Its bureaucrats have little experience dealing with others on an equal and open basis, let alone under constant public scrutiny. The cultural shift will not be easy.
The laws and regulations, too, make investment difficult. The main hindrance is the cost of doing business. As in most countries, investors in Myanmar must pay a number of taxes and fees for the right to engage in mining, and to extract and then sell what they mine. Myanmar charges royalties (3-5%), land rent (ranging from $59 to $7059/sq km), a corporate tax (25%), a value-added tax and requires companies to sign a production sharing contract (PSC). According to some in the industry, the total is high. In some types of mining, given the ratio of those costs to market prices, they may in fact be prohibitive. The PSCs, they say, are most problematic of all. They require a mining company to absorb all of a project’s capital and running costs (the government makes no investment) and to hand over a large slice of its output, usually 30%. In March 2013, the Myanmar Federation of Mining Associations sent a letter to the Ministry of Mines and the Ministry of Finance, raising tax concerns of this sort.
Hidden Challenges
Foreign investors, especially those in mining, face a high risk of expropriation, according to Maplecroft, a UK-based global risk consultancy. In its Expropriation Index, which evaluates not only the danger that governments will nationalise assets directly but also “creeping nationalisation” through the erosion of property rights, named 21 countries as of “extreme risk” in 2013. Of these, Myanmar ranked ninth most at risk, above Guinea-Bissau, Equatorial Guinea, Venezuela, Angola and Kyrgyzstan. The government is encouraging joint ventures, and investors say there is a big push for downstream processing. Historically, though, Myanmar has operated its resources sectors in an opaque and hardly above-the-board manner, according to international advocacy groups. This suggests that multinationals may find hidden challenges along the way. The country ranked 58th – last – in Maplecroft’s Resources Governance Index, and scored low in all categories, including one for “institutional and legal setting” (though in the data Myanmar was ranked only for its hydrocarbons industry).
Practical issues, too, could hinder exploration and production, and ultimately discourage investors. Transport to many mining areas is slow, inefficient and expensive. The banking system still falls short of the service level that multinationals expect. Immigration and Customs can be problematic, and the country lacks a base of companies skilled in supporting services. The national grid may be insufficient to power large mining projects and to transfer power from mine-mouth power plants. “The limited capacity of power and gasoline are the major challenges in the mining sector,” Ding Ying, chairman of Delco Mining, told OBG.
Meeting Of Minds
Despite the costs, gray areas and bottlenecks, progress is likely in the near future. Mining is the country’s jewel, and the government knows it must make the industry machine turn if it is to draw in foreign reserves and create high value-added jobs. Only about 90,000 people are employed in the mining sector, yet these jobs are some of the most profitable in the country. According to McKinsey, a consultancy, workers in mining generate an annual value of $10,590, far above those in manufacturing ($5550), transportation and communications ($5500) or – the sector where half the population are employed – agriculture ($1270). Minerals, meanwhile, make up 5.4% of exports, according to the International Council of Mining & Metals. The mining sector has already received waves of FDI, and expectations are that, once the rules are clarified and taxation is aligned with international standards, output could jump. From 1988 to July 2013, the sector attracted $2.83bn of foreign funds, making it the third-highest category for FDI, after power ($19.24bn) and oil and gas ($14.37bn). Manufacturing, the fourth highest, attracted $2.75bn.
The government says its focus is on transforming the sector and how it is managed. Dr Myint Aung, the minister of mines, has assured the international community that steps are being taken to improve sector processes. Transparency and fair access are top of the list. Many international reports on the sector, often from 2012 or earlier, are bound to be inaccurate, so fast is the industry changing. Myanmar, notes Dr Myint Aung, has gone from a military mindset to one that functions on democratic principles, and is now working to form a legal framework that is appropriate to its new environment and internationally acceptable.
Building Trust
To this end, the country is looking to join the Extractive Industries Transparency Initiative (EITI), a global standard for accountability in the oil, gas and mining sectors. Launched in 2002 at the World Summit on Sustainable Development, the initiative requires its adherents to apply international standards in the governance of natural resources, to disclose government revenues from extractive industries and encourages development of relevant industries such that all of a country’s citizens share in the wealth generated. A total of 23 countries are EITI compliant, including Iraq, Peru, Togo and Mongolia, and 16 others are being considered. Myanmar says it wants to be on the list.
To become an EITI candidate, a country must do four things. The government must make a formal statement that it wants to join, appoint an EITI leader, commit to working with society and the private sector on implementation, and establish a group of EITI stakeholders. As of late 2013, Myanmar had achieved the first three. According to public comments by a World Bank official, it is expected that Myanmar will be able to file its application in early 2014. Foreign government and EITI officials have said that the process seems well understood and is receiving a good deal of positive support from the highest levels of the Myanma bureaucracy.
Most important, the country has promised a new mining law. The statute is expected to clarify equity and land ownership limits and include a raft of incentives. Legislators and private sector investors have said that tax laws will also probably be addressed. They hope that the new law will bring more fairness, transparency and efficiency to mining businesses, call for equal treatment of investors and present them with a clear road map. More legal safeguards have been suggested. Some market players are calling for integrated licenses or automatic triggers, such as the discovery of exploitable deposits, to assure investors that successful exploration would automatically allow for production.
Outlook
Given the huge demand for Myanmar minerals and the positive bearing of the government, it is expected that sizable new exploration and production projects will get under way in the next few years – just as they did after the reforms of the late 1980s. Goodwill is strong and spreading, so transactions are likely to multiply. Timing, however, will be an issue. Myanmar is moving from a military government to an open and democratic one, and that will require much institutional and legislative reform. It is making headway, but foreign players may get impatient. As capital flows in, Myanmar may find it challenging to balance its constituents’ demands for more resource wealth with the requirements of foreign shareholders. Resource nationalism, if it turns strident, could also easily take a toll.
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