William Dale Greenlee Jr
DFDL Myanmar, Yangon
william.greenlee@dfdl.com

Introduction

Mining remains the most untapped sector in Myanmar with vast deposits of copper, gold, lead, silver, zinc, tin and more. With the introduction of laws that more closely mirror international standards and a more generally investor-friendly regime and legal framework, the Myanmar mining sector is poised to swiftly enter the ranks of big resource producing nations.

Until recently, the antiquated mining-related and foreign investment laws of Myanmar discouraged quality international mining companies (IMCs) from investing in what is still the third-biggest industry (after oil and gas and energy) in Myanmar. Most of the previous and current operations have been local and smaller regional mining companies with comparatively less technical, environmental and socially conscious operations. A number of amended and new mining laws now make it possible for IMCs to invest and operate in Myanmar. In addition, the relevant Myanmar government ministries and government bodies (the ‘Government’) have recognised that to fully develop the nation’s natural resources, and to do so responsibly, it must fully commit to pursuing a policy of encouraging foreign investment participants. Myanmar is thus now open to large-scale international and responsibly conducted mining investment.

The primary legislation governing mining activities in Myanmar is the Myanmar Mines Law 1994 (the ‘Mining Law’), which was amended in 2015 by the passing of the Amendment to the Myanmar Mines Law, 2015 (the ‘Amended Law’). To support the Mining Law and the Amended Law, Myanmar has promulgated and has recently started enforcing new subordinate legislation – the Myanmar Mines Rules 2018 (the ‘Mining Rules’). The Amended Law coupled with the Mining Rules has completely revolutionised the investment paradigm and liberalised the mining market, opening it up to foreign investment. Pursuant to this new regime, 100 per cent foreign participation and investment in the large-scale production of minerals, including activities such as prospecting, exploration, processing or trading of minerals, is now allowed in Myanmar. 

Mining regulatory framework

The Ministry of Natural Resources and Environmental Conservation (MONREC) and the Department of Mines (DOM) under MONREC are charged with regulating and applying the aforementioned mining laws.

Although national mining laws allow 100 per cent foreign ownership and investment in large-scale production, small and medium-scale operations involving prospecting, surveying, performing feasibility studies, developing and refining minerals are still not open to foreign participation.

The distinction between large, medium and small scale production of minerals in Myanmar are:

• Large-scale production: mineral production permitted for 15 to 50 years of commercial operation and requiring substantial investment or special technical expertise.
• Medium-scale production: mineral production permitted for up to 15 years of commercial operation and involving the use of limited technical expertise.
• Small-scale production: mineral production permitted for up to ten years of commercial operation which does not require substantial investment and expenditure.

The Mining Rules outline application criteria for permits, duration of permits and the duties of permit holders. It also lists the requirements for environmental, safety and labour-related compliance for permit holders.

In addition to the Mining Rules, the other relevant laws that govern a mining business in Myanmar are the Myanmar Investment Law 2017 (MIL) and the Environmental Conservation Law 2012 (ECL).

A shift in the legal regime

A key change brought about by the new mining laws was the broadening of legal structure options available to the Government and IMCs seeking to invest in Myanmar. Previously, the only available option was to execute a product sharing contract (PSC) with the Government. The new regime, in addition to PSC arrangements, allows foreign investors to enter into a profit or equity sharing arrangement with the Government. This has largely eased contractual arrangements whereby investors may opt to pay royalties to the Government in exchange for mining rights.

Additionally, the new regime confers automatic rights on investors to move from one licence type to another covering all stages of a mining project. Thus, on completion of prospecting or exploration for a particular mineral and successfully conducting a feasibility study, an investor would be eligible to obtain a permit for production activities without having to undergo a new application process. Such an automatic elevation of rights was not allowed under the previous regime thereby leading to legal risks and unnecessary delays in mining activities.

Structuring a mining business in Myanmar

Permitted Business for IMCs

An IMC may operate a mining business in Myanmar under the following legal structures:

Structure I

The IMC may incorporate a company in Myanmar for the purposes of engaging in mining activities or enter into a joint venture in cooperation with a local individual or local company. Pursuant to the Myanmar Companies Law 2017 (MCL), a company incorporated in Myanmar with foreign shareholder equity not exceeding 35 per cent would be considered a local company. Because such an entity would not be considered foreign owned it would be eligible to conduct all types of mining activities ranging from small or medium to large-scale businesses. However, if the foreign shareholding in the newly incorporated company is above 35 per cent, then it would be considered a foreign company and thus be restricted exclusively to large-scale mining activities.

Again, what makes this particular structure unique is that if a foreign mining company can accept 35 per cent or less ownership of the Myanmar entity, it will be considered local, not foreign-owned and thus not subject to restrictions imposed on a foreign-owned company. The company so incorporated may apply for the relevant permits from the DOM and proceed with conducting mining activities.

Structure II

Mining activities by IMCs may also be conducted with a local licensee by executing an Operation and Maintenance Agreement (‘O&M Agreement’). In such arrangements, the IMC would not be required to obtain any licences or approvals from the relevant government and may piggyback on the local Myanmar licensee and business activities.

The arrangement between the IMC and the local licensee may be such that the IMC may sell their portion of the mining output (based on the O&M Agreement) to the local entity and in return accept cash amounts. A reverse mechanism may also be arranged whereby the local licensee receives a cash amount against its share while the IMC markets and sells the products.

Product sharing arrangements and royalties

The Government enjoys a participatory interest in all types of mining projects, including under both aforementioned structures. Such a participatory interest may be through a profit sharing arrangement executed between the licensee and the mining enterprises, which is a part of the Government. Generally the profit sharing arrangement between the Government and the licensee is at a ratio of 30:70, where 30 per cent  of the profits are due to the Government. The new regime allows the Government to execute a product sharing or equity sharing arrangement with the licensee.

The arrangement may be such that the Government, in exchange of the 30 per cent profit (raw material) may accept equivalent cash consideration. In general, the Government would claim a 30 per cent stake of the entire revenue generated from the mining activities. In the event that the mining business fails to generate any profit, there may be a clause embedded in the PSC where a compromise may be executed with the Government in relation to its 30 per cent participatory stake. However, this practical mechanism is somewhat of a grey area and will ultimately depend on negotiations between the IMC and the Government.

The royalty rate for precious metals such as gold, platinum and uranium is set at 5 per cent, while for metals such as silver, copper, tin, nickel and titanium this is 4 per cent. Royalties of 3 per cent are levied on minerals such as lead and iron, and for gemstones the royalty is fixed at 2 per cent.

Capital requirements

The capital requirement for a mining business will depend on the stage of mining activity. At the prospecting and exploration stage, the inflow of capital is generally limited as final output of the business activity is not guaranteed. The inflow of capital would increase as the project moves towards the prospecting and production stage.

A number of IMCs have applied for a licence to conduct mining activities in Myanmar and the DOM is in the process of issuing licenses for mining activities to international players. 

Approvals required for mining activities

Licences under the Mines Law

In large-scale mining business scenarios under Structure I above (IMC incorporates a company in Myanmar or enters into a joint venture with the relevant Myanmar company), the IMC would have to apply for a permit with the DOM under MONREC. For each stage of mining activity – prospecting, exploration, feasibility study and production - the DOM offers a separate permit. An application has to be made to the DOM along with the project documents which would include among others: details of land documents, plans, completion timeframe, expected output and other related documents. Based on these documents and feasibility of the project, a permit in respect of a particular mining activity would be granted. With proper legal support and communications with the relevant officials (meaning proper explanation of and garnering support for the project), the permit will be duly granted.

Permit from the Myanmar Investment Commission (MIC)

The MIL provides the criteria under which a project may require a permit from the Myanmar Investment Commission (‘MIC Permit’). In addition to any scenario where the IMC forms a Myanmar entity in which it owns more than 35 per cent, any project that causes significant impacts on the environment would require a MIC Permit. Accordingly, to pursue a large-scale mining project, an MIC Permit would be required.

The application process involves preparation of an MIC dossier that should include the project documents, plans, completion timeframe, projected output and other similar documents. Following submission of the investment proposal, a proposal assessment team meeting (PAT) is conducted whereby the application documents and supporting materials are analyzed by all the relevant ministries. Theoretically, the approval process must conclude within 90 days from submission of the MIC proposal. The process requires the relevant legal counsel and commercial executives to actively work with relevant Myanmar officials.

Environmental clearances and social impact assessment

In addition to the permits obtained from the DOM and MIC, an approval from MONREC would be required for investment in mining activities by foreign entities in Myanmar.^[1]

Depending on the nature of the mining activities, an Initial Environmental Examination (IEE) or Environmental Impact Assessment (EIA) may need to be conducted.^[2] For example, the extraction and refining of industrial minerals in an area of land over 200 acres would require an EIA, while such activity in land under 200 acres would require an IEE. A project that involves the refining of metal mineral ore and the output is more than 50,000 tons per acre of land would require an IEE, while a similar project with output less than 50,000 tons per acre would require an EIA.^[3] 

The rules and regulations relating to emissions, noise, vibrations and liquid discharge to prevent pollution and protect human health and the ecosystem must also be complied with before conducting mining activities in Myanmar. There are no mining industry specific guidelines; however, there are general guidelines for emissions in respect of air, wastewater, noise levels and odours. These guidelines must be complied with at the time of conducting project activities.^[4]

Although under the ECL or any other relevant Myanmar law, there is no specific requirement to produce a  Social Impact Assessment (SIA) when applying for an MIC Permit, in practice the MIC will require one to be included in the application dossier (to form the relevant Myanmar entity). The specific requirements of the SIA are not stipulated under the ECL; however, an MIC application dossier will more quickly and readily be approved with an SIA demonstrating that the project will have a positive impact on the local community, the region and Myanmar in general. Any risk of potential negative effects of the operation with risk mitigation plans should also be presented.

Licences will not be required for O&M Arrangements

In the event that the IMC enters into an O&M Arrangement with a local licensee (Structure III), then such a company would not have to procure a licence from the DOM or an MIC Permit (because the licensee should already have the same). Depending on the nature of mining activities, there may be a requirement to conduct an IEE or EIA, if the necessary protocols have not been complied with by the local licensee. Furthermore, if the projected output of the new business operation is more than the existing output or if the new business involves mining activity over a larger plot of land, environmental assessments must be conducted.^[5] 

Land rights and concession agreements

For the purposes of mining activities, it is important to lease the land on which the mining activity is to be conducted from the Government. An important point to note is that due to the Transfer of Property (Restrictions) Act (TIPRA), foreign individuals or entities cannot own or lease land for more than one year. However, with the approval of the MIC and the related MIC Permit, a foreign company may lease land for a period of up to 50 years with the possibility of two ten-year extensions. Since the IMC would necessarily be an MIC approved company (assuming foreign equity above 35 per cent), a long-term lease may be executed with the Government. The IMC may also enter into any form of concession agreement – in the form of a memorandum of understanding or land use rights with the Government to pursue mining activities.

Financing of mining activities

An IMC can finance its mining operations in Myanmar via equity, debt or a blend of both. Debt financing would include loans obtained from either (or a combination of) Myanmar or offshore financial institutions. Approval from the Central Bank of Myanmar (CBM) is required to procure offshore loans. The IMC can also fund a portion of its business through the company’s share capital. There may also be creative funding options such as sliding debt-to-equity arrangements.

Types of debt financing

The most common forms of debt financing available in Myanmar are term loans and working capital loans. The laws of Myanmar allow such loans to be procured from domestic authorised dealer banks or foreign international banks outside the country.

In the case of Structure I, the loan would be directly secured by the IMC. For Structure II, the arrangement of loans may be such that both the IMC and local licensee are the borrowers – the IMC being the primary borrower while the local licensee may be the co-borrower. It is also possible for the IMC to apply and procure a loan for which the entire repayment liability rests with the IMC.

Regulatory compliance

To obtain an offshore loan for a mining project in Myanmar, prior approval has to be obtained from the CBM. The CBM has set the maximum interest rate for collateralised loans at 10 percent and the rate for unsecured loans is 14.5 per cent.

In addition to offshore loans, the IMC may apply for a loan from a local Myanmar bank and  CBM approval is not required for such loans. However, approval from the Financial Regulatory Department (FRD) will nonetheless be required. The maximum interest rates prescribed by the CBM also apply to any borrowings from local banks.

Collateral package    

As per the laws of Myanmar, a security may be created over both movable and immovable property of the company by way of a mortgage, charge, pledge, hypothec or assignment.

Some of the specific security mechanisms provided under Myanmar law include:

• hypothecation or charge over the moveable assets;
• equitable mortgage combined with share pledge of the company;
• assignment of concession agreements, revenue-generating contracts, insurance and bank accounts; and
• amortisation of the mining lease agreement (if applicable).

The most common forms of security in the case of Structure I would be the assignment of the PSC entered into with the Government. A hypothecation or charge may be created over the machinery used to conduct the mining activities. To secure the facility arrangement, an assignment may be created over the bank accounts or insurance obtained for the purposes of the mining activity. Another form of security would include the creation of a charge over the receivables obtained as a result of the relevant mining activity. This form of security would only be applicable in the case of mineral producing mining activities.

In the case of Structure II, an O&M contract executed between the IMC and local licensee may be assigned with a bank to secure a loan. This is the most viable form of security available to mining projects. The IMC may also choose to assign the concession agreement entered into with the government (in the form of a memorandum of understanding or land rights) as collateral.

Creative funding options to limit international companies’ initial financial exposure

Generally speaking, it is preferable to most IMCs that they only bring in limited equity until there is a high probability that the mining project will yield minerals and ultimately generate profits. To hedge against this risk, the IMC may consider certain creative funding options. 

Structure I

In Structure I, the IMC is required to obtain the MIC Permit in addition to the mining licences. A financial projection of five to ten years is required to be submitted to the MIC during the application stage. This financial projection outlines the IMC’s proposed debt-to- equity ratio, estimated costs and proposed profit structures. The MIC generally prefers a debt-to-equity ratio of 7:3 for small to medium scale projects, and 4:1 or lower for large-scale ones. However, the approval stipulations vary from case-to-case depending on the feasibility of the project.

Since sponsors would initially like to bring in limited funds or equity, the IMC may approach the MIC to accommodate lower equity and a higher debt commitment. This may be done during the application stage itself when the IMC submits its financial projections. The IMC may submit to the MIC an option of convertible loans. Such loans may be converted to equity over a period or upon achieving specified milestones (such as specified levels of mineral production). This would also allow the IMC to be in compliance with the preferred debt-to-equity ratio in the future when the conversion from debt into equity is duly achieved.

The IMC may make certain other types of financial commitments to the MIC. Such commitments may include conducting training, seminars and workshops for local mining companies. These workshops may address technological and technical improvements, better know-how and valued skill improvement techniques. Also, as part of its corporate social responsibility, the IMC may construct schools and hospitals and provide other benefits as part of its financial commitments. In consideration of these strategic improvements to the MIC application, the MIC may make certain exceptions and allow higher debt commitments.

The CBM generally stipulates a debt-to-equity ratio of 4:1 for offshore financing of all MIC approved companies. However, as discussed, if the MIC permits lower equity and a higher debt commitment for a project, the CBM may permit a higher debt-to-equity threshold. 

Structure II

In the case of Structure II, an IMC does not require an MIC Permit. Accordingly, the debt-to-equity threshold unofficially expected by the MIC would not be triggered. The IMC would only have to comply with the stipulations prescribed by the CBM to secure an offshore loan.

The CBM prescribes a minimum capital requirement of US$50,000 and a maximum debt-to-equity ratio of 3:1 to obtain an offshore loan for non-MIC companies, though there may be occasional case-by-case exceptions. There have been instances where the CBM has deviated from this requirement and allowed offshore financing at higher debt percentages. Nonetheless, such exceptions would depend on sufficiently convincing financial reasoning offered by the borrower to the CBM.

The IMC may apply for relief from the CBM in relation to the debt-to-equity requirement. The reasoning could be in the form of procuring a convertible offshore loan whereby it may be converted into equity upon reaching certain commercial milestones. Given the uncertain nature of the mining business, the CBM may carve out an exception and permit an offshore loan based on lower equity and higher debt.

Stamping and registration

Pursuant to the requirements specified under the Myanmar Stamp Act 1899, it is compulsory to have a loan agreement affixed with stamp duty by the Internal Revenue Department before the execution of such a loan agreement. In the event that the loan agreement is executed outside Myanmar, it must be affixed with duty within three months after being brought into Myanmar.

If a security in the form of a mortgage or charge is created over the property of a company incorporated under the MCL, then such security documents must be registered with the Directorate of Investment and Company Administration (DICA), which is the registrar of companies in Myanmar (or the Myanmar government body that directly regulates Myanmar companies).^[6] In the event the loan is secured by using the movable or immovable property of the local licensee company as security, then such security documents must be registered with DICA.

Conclusion

For IMCs, the ‘Land of Rubies’ is finally an attractive minerals market (though unfortunately not for actual rubies and other precious and semi-precious stones as these are still off limits to foreigners). Myanmar possesses large reserves of numerous minerals, all of which have yet to be thoroughly explored and quantified. The Amended Law and the Mining Rules now lay out the legal framework to allow foreign investment.

Many challenges remain, however. For example, the royalty rates applicable to minerals are still high and uncompetitive when compared with international standards and especially when coupled with the profit sharing ratio. Another significant problem faced by mining companies is the delay in procuring requisite permits for mining activities. The absence of a standard rate prescribing the exact level of production sharing leads to the setting of arbitrary rates, investment uncertainty and allegations being raised of unfair or discriminatory practices. Still, with some patience and proper structuring, mining in Myanmar now offers the world an attractive new frontier gold mine.