Myanmar mining: Long way round

Publication | November 2014

Introduction

*This article was first published in Mining World

By Nick Merritt, partner and head of the infrastructure, mining and commodities sector and Lily McMyn, associate at Norton Rose Fulbright

Myanmar quickly became a market of intense interest after a seismic shift in political ideology in 2011. A raft of political, legal and economic changes soon followed; the EU and the US suspended most sanctions and Myanmar opened for international business. Foreign investment has since grown dramatically – but not, it seems, evenly across the extractive industries despite the country’s enormous geological and geographical potential. The web of social, political, economic and legal complexities surrounding the mining sector is so multifarious that, for the present at least, Myanmar is losing out to jurisdictions with fewer bureaucratic hurdles and a more established mining regime.

There’s little dispute about what’s in the ground, despite some inconsistency in the estimates of quantum. Reserve estimates vary – one of the byproducts of a historic lack of systematic exploration of resources – but the industry appears unanimous in the view that copper, gold, silver, lead, zinc, tin, tungsten, antimony, rare earths and precious gems await extraction. In the precious gem subsector, around 90% of the world’s supply of rubies are sourced from Myanmar and the country is also the world’s largest single source of jade.

Myanmar’s mining sector is made up of large scale mining, small scale artisan extraction, and a certain amount of informal, ‘below the radar’ mining. The mining industry has been dominated by China to date. This is due partly to the opportunity presented by the imposition of EU and US sanctions and partly to Myanmar’s long standing close relationship with, and physical proximity to, China. The jade subsector is of particular interest to Chinese buyers, both as an investment and as a token of fortune and longevity. International researchers1 estimated recently that sales of jade reached US$8bn in 2011. The Government of Myanmar prohibits the extraction of precious gems by foreign investors; the subsector also remains subject to sanctions, thus entirely off limits to foreign investors for the foreseeable future.

Copper, tin, tungsten, gold and iron are, however, amongst the minerals and metals that are outside the current sanctions regime and attracting foreign investors. Copper makes up the largest export metal in the mining sector, and silver, lead, tin, tungsten and antimony deposits are widespread across the country.

Asian investors are amongst those showing interest in the Myanmar mining sector. Indonesia state-owned PT Timah has obtained various permits relating to a 10,000ha tin concession in southern Myanmar, and the company is also planning to build a smelter for processing raw ore2. Mid-sized Canadian mining and exploration companies appear to be particularly active; Centurion Minerals, for example, has been granted permits to explore two gold concessions in central Myanmar, a region accessible by road and in which exploration activities can be carried out year round. Concessions usually allow a mineral concession to be explored for up to 5 years, followed by 25 years of production. Foreign investors typically partner with local firms; Centurion is in a 80:20 partnership with a local exploration company3. Another TSX-V listed company, Northquest Ltd, submitted a gold exploration permit application 2012; latest reports indicate that the company is still waiting for the decision on its application, as well as for the new mining law4.

These latter two issues – permit delays and delay to the new mining law - are some of the reasons why the mining sector lags others in its ability to attract foreign investment at present. As of December 2012, foreign investment was concentrated in the power sector (at nearly 46%) and the oil and gas sector (at 34%), while the mining sector attracted only 6.82% of foreign investment5. (The manufacturing, hotels and tourism and real estate sectors follow at 4.6%, 3.3% and 2.5% respectively.)

Developments in the legal landscape

Myanmar is undergoing a rapid legal transformation across a range of sectors which will likely make it a considerably more attractive investment destination. The government has enacted several new laws since 2012, the most significant perhaps for foreign investors being the Foreign Investment Law, which has been generally well received by the market for the greater clarity it brings to the foreign investment regime.

Other legislation either already in place or in progress will effect changes to the foreign exchange and trade system, and introduce a new telecommunications law, a new anti-corruption law, and a draft arbitration bill. There are plans to revise the electricity law and develop a new companies act. The government is also starting the process of liberalizing bank lending: it is to grant up to 10 bank licences from a short list of 25 international lenders as soon as September 2014.

New mining law…..?

The lack of a new mining law is undoubtedly a contributing factor to the sector’s inability to attract significant foreign investment. In October 2013 a draft mining bill was submitted to Parliament by the Mining and Resources Affairs Committee. The draft has not been made public but it is thought to contain wide ranging amendments to the 1994 Mining Law. According to government officials, the new mining law has been drafted to international standards with a view to attracting foreign investment into the sector, and will set out a clearer legal and regulatory framework than is currently in place. A thorough overhaul of the mining law will be welcomed by the mining industry at both local and international level.

A key issue that the new mining law will need to address is the dynamics of the production sharing contract between the mining company and the government. Under existing legislation the private sector provides the mining investment for the project and the government is entitled to a ‘share of the production’6 – negotiable but thought to be around a 30% - 35% share of minerals (or value of minerals) extracted, plus applicable royalties (between 1 and 7.5% of sales value) and taxes.

Another area of concern is the permitting system; at present, mining companies must apply for new permits at each stage of the exploration and development process. This allows the unattractive possibility of a company investing in a project at an early stage, only to discover that it is unable to progress to recover its investment should a permit fail to be forthcoming.

Finally, land acquisition poses additional problems and has been a source of conflict at a number of existing mines. Social unrest leading to violence at the Letpadaung copper mine has been well documented; one of the causes of the tension appears to have been the acquisition of land by the Government and the related compensation for displaced people. A complicating factor is that the documentation relating to land use rights is opaque, even for domestic companies. Foreign investors are particularly sensitive to land acquisition and permitting issues, given that these are a prerequisite for any company seeking bank finance with a security package that will satisfy potential lenders.

Whether the new mining law addresses these matters remains to be seen. The draft mining law is awaiting review by Parliament and there is no indication of when a revised draft might be released.

Progress in anti-corruption and transparency

Progress is, however, identifiable in the broader arena of disputes, anti-corruption and transparency. In 2013, Myanmar acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’). In essence, this means that the Myanmar courts will be obliged to give effect to any foreign arbitration clause in a contract being enforced in Myanmar and to enforce arbitral awards made in other signatory states which include the vast majority of jurisdictions from which investment is likely to come. Foreign investors in Myanmar will then be able to elect a neutral offshore arbitration tribunal for the resolution of any disputes that may arise with the comfort of knowing that the decision of the tribunal will be supported onshore.

The Government has not yet adopted the domestic legislation required to implement the New York Convention in Myanmar, but it is thought to be imminent. Myanmar is also party to a range of multilateral and bilateral treaties, and it is currently negotiating its membership of the Multilateral Investment Guarantee Agency (MIGA). MIGA provides political risk insurance for foreign investors in emerging markets, and helps investors and lenders ensure that projects comply with international best practice – clearly a useful benefit while the political situation remains fluid.

More significantly for the mining industry, Myanmar has commenced the application process for membership of EITI, the global Extractive Industries Transparency Initiative. In early July 2014 Myanmar was accepted by EITI as a ‘candidate’ country, joining 44 others that have signed up to the global transparency standard. The standard requires extensive disclosure and measures to improve accountability in how oil, gas and minerals are extracted.

Under the EITI, Myanmar will need to publish accounts showing all payments received by the Government from the extractive industries, and it will need to make certain information public, such as that relating to licence holders, production and state owned enterprises7. Within Myanmar, the oil, gas and mining industries will need to work together with NGOs in an EITI multi-stakeholder group to agree jointly on transparency standards. These measures will go some way towards counteracting criticism, both nationally and internationally, of the lack of transparency of licensing processes.

While legislative and economic reforms are under way, a number of major stumbling blocks remain to be addressed. The country lacks some of the basic infrastructure necessary to attract whole scale mine development - the World Bank’s Logistics Performance Index, for instance, ranks Myanmar at 145 out of 160 countries in 20148. Port capacity is low, although there are plans for new deep water ports at Dawei and Thilawa which will be able to accommodate large container vessels. Transportation is therefore primarily by road. Power generation capacity is insufficient; only around 26% of the population have access to power, although the Government has plans to increase the power generation capacity from 4,000MW to 16,000MW by 2030. There is a lack of skilled workers in Myanmar, and long standing civil conflicts need to be addressed. The country fares poorly in the Global Competitiveness Report 20139 at 139 out of 148 countries, due in large part to policy instability and corruption.

Despite these issues, Myanmar has undeniably made progress in its political development and legal framework. Predictions are that the economy will grow steadily, benefiting from foreign investment, higher global import demand and regional and global integration10. Foreign investment into the mining sector in Myanmar will come, but it will take time for the country to catch up with its peers. Foreign investors into the mining sector should prepare for the long haul.


  • 1 Creating a future: using natural resources for new federalism and unity’ Harvard Kennedy School Ash Centre for Democratic Governance and Innovation http://www.ash.harvard.edu/extension/ash/docs/creating.pdf
  • 2 Timah set to begin Myanmar tin exploration in June’, Jakarta Post 5 February 2014
  • 3 ‘Centurion receives Myanmar Mining Ministry Approval for Concessions’, Centurion Minerals Ltd press release November 12, 2013
  • 4 Northquest Ltd website announcement: www.northquest.biz/myanmar
  • 5 ‘New Myanmar FDI Law and Opportunities for Foreign Investment in Mining Sector’, presentation delivered by the Directorate of Investment and Company Administration (DICA)
  • 6 Myanmar Ministry of Mines, www.mining.gov.mm
  • 7 www.eiti.org/news/myanmar-admitted-eiti-candidate
  • 8 Logistics Performance Index, World Bank http://lpi.worldbank.org/international/global
  • 9 Global Competitiveness Report 2012-2013 http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf
  • 10 World Bank, East Asia and the Pacific, Global Economic Prospects (June 2014) Chapter 2  http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2014b/GEP2014b_EAP.pdf
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Contacts

Nick Merritt

Nick Merritt

Singapore
Lily McMyn

Lily McMyn

Singapore
Craig Loveless

Craig Loveless

Singapore
Laurie Pearson

Laurie Pearson

Singapore