22 March, 2016
With abundant mineral wealth, the Myanmar mining sector is potentially a very attractive investment opportunity for miners and associated service providers. However, various factors, including an archaic and unclear legal and regulatory framework, have so far held back significant western foreign investment into this sector.
Recent amendments to the Myanmar Mines Law of 1994 through the enactment of Law No. 72/2015 on 24 December 2015 (the "Mines Law Amendments") constitute some progress towards addressing areas of concern to potential investors.
The laudable changes brought by the Mines Law Amendments include:
(i) Increasing the maximum production permit period, for large scale production projects only, to 50 years;
(ii) Giving exploration permit holders a clear right to production permits;
(iii) Allowing joint ventures, between foreign investors and local investors, in the case of small and medium scale production projects upgraded to become large scale production projects;
(iv) Specifying the criteria for determining size of individual production permit areas; and
(v) Providing a guaranteed right to extraction/production permit for those who have successfully carried out prospecting and exploration and completed a feasibility study.
A summary of the major amendments under the Mines Law Amendments is provided in the table annexed to this article.
While some progress has been made in addressing areas of concern to western foreign investors, many important issues remain unclear or outstanding and much further clarification and/or work is required to increase the confidence of such investors.
Firstly, while the Mines Law Amendments increased the maximum production permit period for large scale production projects only from 15 to 50 years, there has to be a residual concern that the reference to “maximum” may mean that, in practice, parties may only receive 15 years initially when they are issued with a production permit for a large scale production project, thereby obliging them to seek successive renewals thereafter in order to obtain the benefit of the full maximum production permit period of 50 years. This could substantially dilute the otherwise perceived benefit of a 50 year production permit period for large scale production projects.
Secondly, while the Mines Law Amendments provide the Myanmar State (through the Ministry of Mines) an express state participation right, either jointly or through a joint venture in the form of production sharing (with allowance for certain expenses), equity sharing or profit sharing (based on the parties' respective contributions), it is unclear as to when and how the state participation right will apply. For instance, more clarity is needed on whether the state participation right will automatically apply to all production stage projects or if it is something to be discussed, negotiated and agreed upon between the production permit holder and the Myanmar State. In addition, where an equity sharing model or profit sharing model is to be used, it is unclear whether the Myanmar State’s equity share or profit share will be “free carried” or “not free carried”. If the Myanmar State’s equity share under the equity sharing model is to be substantially “free carried”, such “free-carried" interest may substantially impact the viability of future equity capital raisings, especially where anti-dilution mechanisms are put in place.
Lastly, the Mines Law Amendments have tightened up the royalty rate ranges, and provides for the calculation of royalty payment amounts based on mineral content rather than on net sales proceeds. Together with the state participation right, the foregoing amendments will have considerable bearing on the potential returns on investment.
While the Mines Law Amendments are viewed as a step in the right direction, it is generally believed that further changes will be required in order to create the necessary legal and regulatory environment conducive to foreign investment in the mining industry. It is hoped that the implementing rules (due within 90 days of the enactment of the new legislation) will provide further guidance and help address some of the additional changes required – but ultimately further measures are likely to be necessary if the Myanmar Government desires to attract investment by significant western mining investors” to read “if the Myanmar Government is serious about attracting investment from medium and large scale western mining companies.
While the temptation to rush into the Myanmar market may be high, it is critical to take time to avoid making hasty arrangements and to carefully evaluate the risks and returns of the potential investment. Mistakes made early on in the process can have significant and sometimes costly consequences down the road once significant time and money have been invested.
Almost equally important is engaging experienced counsel with a firm grasp on the laws and on-the-ground realities of doing business in Myanmar. The more established counsel can help a foreign investor to successfully navigate the labyrinth of complex laws and processes and manage complications that might otherwise go unnoticed until they have metastasized into unmanageable problems. An “ounce of prevention is worth a pound of cure”, and nowhere is this clichéd axiom truer than in assessing investment opportunities in Myanmar.
Annex
Major amendments introduced by the Mines Law Amendments are summarized in the following table:
| 1 | Large Scale Extraction/ Production (Section 2(k)) |
– | Permit term is now 15 to a maximum of 50 years |
| 2 | Foreign Investment (Section 4(a)) |
– | Specifically allowed for any of: (a) prospecting (b) exploration & testing (c) feasibility study (d) Large Scale Extraction/Production only (e) processing (f) trading and selling |
| 3 | Joint Ventures (Section 4(f)) |
– | Joint ventures with foreign investment are allowed for large scale extraction/production by way of conversion or upgrading of existing locally owned small or medium sized projects depending upon: (a) survey reports (b) quality and volume of deposits |
| 4 | Permits (Section 7(a) & (c)) |
– | Ministry of Mines with consent of Union Government authorized to grant permits for: (a) all permitted mining projects with foreign investment (b) conversion/upgrade of locally owned small/medium scale projects to large scale extraction/production projects operated as joint ventures with foreign investment (Section 11(a)) – All permits for other non-foreign investment projects to be granted by newly formed Regional or State Permitting Boards. |
| 5 | Classification of Production (Section 11) | – | Classification of production scale will be made taking into account: (a) operating conditions/area (b) distances (c) amount of investment required (d) equipment and machinery usage |
| 6 | Right to Extraction/ Production Permit (Section 11(a)) |
– | A guaranteed right to extraction/production permit for those who have successfully carried out prospecting and exploration and completed a feasibility study. |
| 7 | Availability of Buying/Selling Permits (Section 11(b)) |
– | Non-producers wanting to carry out purchasing and processing of minerals may obtain buying/selling permits |
| 8 | Royalty Payment Currency (Section 12(g)) |
– | Foreign investors must pay royalties: (a) in Myanmar currency (b) calculated using exchange rate published by central bank |
| 9 | Royalty Rates (Section 18) |
– | Applicable rates changes as follows: (a) gold, platinum, uranium etc. – now 5%, previously 4% to 5% (b) silver, copper, tungsten etc. – now 4%, previously 3% to 4% (c) iron ore, zinc, lead, aluminum, manganese etc. – now 3%, previously 3% to 4% (d) industrial minerals and stone – now 2%, previously 1% to 3% |
| 10 |
Calculation of Royalty Amount (Section 19) |
– | Royalty amount to be calculated based on: (a) percentage of pure metallic mineral content (b) using prevailing international prices |
| 11 | Environmental Obligations (Section 13(e)(1)) |
– | Obligation to establish to reserve fund for environmental conservation |
| 12 | Reclamation Obligations (Section 13(e)(2)) |
– | Obligation to prepare and carry out mine exit/reclamation plan re post mining period |
| 13 | Exclusion of Gemstones (Sections 2(b), 19 and 21) |
– | Gemstones and gemstone mining are no longer part of Mines Law and will, presumably, be separately regulated |
| 14 | Offences and Penalties (Sections 30(a) and 32-A) |
– | Large increases in prison terms and fines for Mines Law offences |
| 15 | State Participation (Section 35(A)) |
– | Ministry may carry out mineral extraction/production with permit holders jointly/in joint venture Ministry production joint ventures shall be in the form of: (a) production sharing with allowance for certain expenses (b) equity sharing (c) profit sharing based on parties’ respective contributions |
For further information, please contact:
Tom Platts, Partner, Stephenson Harwood
tom.platts@shlegal.com
