Myanmar mining – an update on recent developments

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Myanmar’s mining industry has largely remained a no-go zone for investors, mired in land disputes, civil unrest and environmental risks relating to projects such as the Letpadung copper mine in Sagaing Region.  Low levels of transparency and accountability, combined with reports of an illegal jade trade worth US$8 billion annually, have helped keep investors on the sidelines.

As one of the last mining frontiers, however, Myanmar continues to attract world-wide attention, and it is worth having a closer look at recent steps to address long-standing challenges.  Changes to the Mining Law, for example, aim to promote investment.  Myanmar’s first Extractive Industries Transparency Initiative (EITI) Report, issued late in 2015, is a promising baby-step towards openness.  There is a long road ahead, but with new political leaders taking the stage, Myanmar has the opportunity to focus on reform and reconciliation with renewed vigour.

How important is the mining industry to Myanmar?

Natural resources – including  oil and gas, power and mining – attract the lion’s share of FDI into Myanmar.  For 2013/2014 official figures show the export value of minerals at US$1.15bn, and the Myanmar Gem Emporium is estimated to have sold US$3.4 billion of gems and jade.  However, these figures do not take into account in-country stockpiling or the black market, which is reportedly substantial.

From an outsider’s point of view, there is plenty of scope for the government to extract more value from the mining industry by legitimising the black market and attracting sustainable FDI into the rehabilitation of existing projects and the development of new ones.  Given the deep-rooted nature of the challenges, this will not be an easy win but the rewards could include substantial royalty increases to plough into infrastructure development and other social objectives.

What are the Mining Law changes?

Rather than a sweeping overhaul, changes to the Myanmar Mines Law 1994 rejig  several discrete aspects of the current regime.  The biggest change is to introduce the possibility of the Myanmar government taking equity in a project instead of the usual 30% entitlement under a production sharing contract.  The departure from mandatory production sharing, which has been a big sticking point with investors, is a promising step.    However, these changes alone fall short of providing a clear regulatory framework for investors.  It is important that regulators move to establish a clear procedure for divestment to the public sector, including carefully considered risk allocation and equity contribution arrangements.

One positive upshot is that the door is open, at least in principle, to establishing a framework for public-private partnerships in the Myanmar mining sector.  Co-operation between the state and the business sector can produce a win-win situation, with buy in from local communities, but there are also challenges if clear objectives and realistic assessments of each side’s capabilities are not laid on the table early on.  These challenges can be particularly acute in a lob-sided deal where the private developer must provide the required technical expertise and funding to make the project happen, while in parallel relinquishing control over operations.  If the sole objective is simply to extract profits from the venture, other options such as a concession-based investment regime may be more attractive and carry less risk from the state’s perspective.

The speed bumps faced by the Oyu Tolgoi project in Mongolia, for example, where the Government of Mongolia holds a 34% stake, provides valuable lessons on the issues that may arise if decision-making is politicised at a shareholder level.  Arguably, these issues could be mitigated if a more rigid concession structure is used to govern the project, such as the mining agreement contemplated by the MMDA Model Mine Development Agreement.

Other changes to the Mining Law include a royalty reduction for some minerals, with the highest rate capped at 5%.  Mining companies will pay 5% on gold, platinum and uranium, 4% on silver, copper and nickel, 3% on iron, zinc, lead and aluminium and 2% on raw material of industrial minerals (e.g. coal) and stones (e.g. quartz, marble and granite).  Permit periods have been extended to 50 years for large scale production, with the maximum period for medium and small scale production changing to 15 years and 10 years respectively.

A further change is to allow investment in small and medium scale projects through a joint venture with a Myanmar company and applying for an expansion permit from the Ministry of Mines.  If properly implemented at both a national and local level, this could provide an opportunity to redevelop artisanal or abandoned sites and breathe life into rural communities as well as shore up environmental risks.  However, prior to substantial investment, it is critical that investors conduct due diligence on local conditions and counterparties, as well as develop strong relationships with local communities.

Addressing environmental issues

In early January 2016, the Ministry of Environmental Conservation and Forestry announced new requirements for assessing the environmental and social impacts of investment projects in Myanmar.  This is an important development in light of environmental damage that has reportedly arisen from artisanal mining and the use of antiquated mining equipment and techniques.

The requirements are set out in the Environmental Impact Assessment (EIA) Procedure, which specifies the assessments required for projects that could cause environmental and social harm.  The Environmental Quality (Emission) Guidelines, on the other hand, provide the basis for regulation on noise and vibration, air emissions, and liquid discharges from various sources in order to prevent pollution and protect human and ecosystem health.

Official metals exchange

Myanmar intends to establish an official market for gold and metal trading in 2016. The Myanmar Federation of Mining Association is currently working with the Government to create the exchange, which has the potential to increase the transparency and regulation of gold and metal prices in Myanmar.

Conclusion – incremental change

The end of the commodities boom has heralded a time of intense pressure for the global mining industry.  Accordingly, if Myanmar’s mining industry is to become a success, it is critical that the industry starts to focus on efficiencies, embrace clean energy and other innovations, and deal with environmental concerns in line with global targets.  International know-how and assistance is ready to help.  All of this must be done, however, in parallel with addressing domestic challenges such as violent internal conflicts, increased regulatory scrutiny and resource nationalism.

Nevertheless, as Myanmar opens up to ASEAN and the world, there is an opportunity to be a first mover in embracing change and setting the wheels in motion for the development of a sustainable and profitable Myanmar mining industry.

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