Resource-rich Myanmar is emerging from decades of internal repression and international isolation through a gradual democratising process assisted by its South East Asian neighbours. As minerals investment interest builds, Julia Charlton examines the country’s delayed, but now legislated, mining law amendments in anticipation of implementing regulations this quarter:
ON 24 DECEMBER 2015 Myanmar’s parliament (the Pyidaungsu Hluttaw) passed Law No. 72
‘An Act Amending the Myanmar Mining Law’ (2015 Mines Law). The 2015 Mines Law
amends Myanmar’s outdated 1994 Mines Law. The Government first announced its
intention to amend the 1994 Mines Law in 2012.
The protracted delay in introducing amending
legislation has contributed to a stall in foreign direct investment (FDI) in
mining in Myanmar. Mining FDI was just US$6.26 million in the year ended 31
March 2015. By comparison US$3.22 billion was invested in Myanmar’s oil and gas
industry over the same period.1 The amendments bring Myanmar law
closer to, but not yet completely in line with, accepted international
standards.
In line with Myanmar parliamentary procedure the
Government now has 90 days to introduce rules to implement the 2015 Mines Law
(2016 Mines Rules). The 2016 Mines Rules should therefore be approved no later
than 24 March 2016. A more complete analysis of Myanmar’s new mining regime
will only be possible after the 2016 Mines Rules have been issued.
Foreign
Participation Permitted in Mineral Trading and Processing
The 2015 Mines Law allows for foreign participation
in previously restricted mining related activities namely the trading and
processing of minerals. Trading is defined to include the buying, selling,
transport and storage of metallic minerals. Processed ores can be exported
although a general prohibition on the export of raw ore remains in place.
By allowing foreign participation in trading and
processing, the Government hopes to attract much needed investment into
Myanmar’s under-developed ‘downstream’ mining sector.
The move will also encourage improved
upstream-downstream integration. Closer relationships between producers, and
purchasers as well as companies offering processing, transport and storage
services will benefit the sector as a whole.
The sharing of information between sector
participants as well as the transfer of knowledge, skills and technology helps
producers adapt to meet market demands and has been proved to lead to more
effective and efficient production practices. Similarly, improved upstream-downstream
linkages have been proven to reduce waste and benefit the environment.
Permit
Periods
The 2015 Mines Law provides for an increase in
permit periods for both large-scale and small-scale production. Large- scale
production permits, available for up to 25 years under the 1994 Mines Law, are
now available for up to 50 years. Small- scale production permits, available
for up to 5 years under the 1994 Mines Law, are now available for up to 10
years.
No changes have been made to the term of
prospecting permits which remains at 1 year. The period of exploration permits
remains at 3 years and subsistence production permits 1 year (with 4 x 1 year
extensions available). The permit terms for prospecting, exploration and
subsistence production were originally set out in the rules implementing the
1994 Mines Law and could therefore be amended in the 2016 Mines Rules.
The 2015 Mines Law introduces a new production
category of ‘Medium Level Production’ which is defined to mean medium-scale
production, meaning production from a mineral deposit, which is not a large
deposit and which can be carried out for moderate investment and cost or with
limited technical know-how and methods.
Royalty
Rates Government Participation
The 2015 Mines Law maintains Myanmar’s ad valorem
sales based royalty system. The 1994 Mines Law prescribed royalty rate ranges
applicable to different categories of minerals. The Ministry of Mines then
fixed the applicable rate per mineral within the rate-range. The 2015 Mines Law
prescribes set royalty rates.
The rate for certain minerals has been set at the
lower end of the royalty rate range contained in the 1994 Mines Law, e.g. the
rate for silver is now set at 4% rather than in the 4-5% range; iron, zinc,
lead, antimony, aluminium are now set at 3% rather than in the 3-4% range.
However, the rate for gold, platinum and uranium has been set at the higher end
of the royalty rate range contained in the 1994 Mines Law i.e. 5% rather than
in the 4-5% rate range. The royalty rate payable on gemstones has been reduced
from 5 -7.5% to 2%.
The 2015 Mines Law allows local operators to pay
tax or royalties in the form of mineral or cash. Foreign operators must
continue to pay in cash. Section 18 of the 2015 Mines Law states that the
royalty is to be calculated by reference to prevailing international mineral
prices based on the percentage of the relevant mineral content contained in the
minerals produced. As was the case under the 1994 Mines Law royalty rates do
not vary with mine size.
Pursuant to the 1994 Mines Law the Government
adopted a production sharing system. Whereby foreign mining companies were
responsible for meeting 100% of project costs but required to surrender up to
30% of output to the Government under the terms of Production Sharing
Agreements. This production sharing system was out of line with mining
jurisdictions globally and a deterrent to international investment.
Pursuant to
the 2015 Mines Law the scope for Government participation has been expanded.
The Government, represented by the Ministry of Mines now has three options when
exercising its participatory interest in foreign invested mining projects. In
addition to production sharing the 2015 Mines Law provides for equity sharing
and profit sharing.
Where the Government opts to take a share of
production it must share the costs of producing an Environmental Impact
Assessment. Where the Government opts to take equity, the equity share is free
‘carried- interest’ equity. The investor-Government split will be based on the
investment amount, the type of mineral, the size and quality of the reserve and
the cost of production.
Foreign
Investment Permitted in Medium and Small-scale Projects
The 1994 Mines Law, together with Myanmar’s Foreign
Investment Law, restricted foreign investment to large-scale mining projects.
Pursuant to Section 4(f) of the 2015 Mines Law foreign mining companies will be
permitted to form joint ventures with small and medium -scale permit holders
depending on the ‘quality and quantity’ of the mineral deposit in question.
This amendment only applies to metals and industrial raw materials. Foreign
participation in gemstone production remains prohibited.
The 2015 Mines Law fails to define what is meant by
the ‘quality and quantity of the mineral deposit’ but states a supporting
geological report is required. Pursuant to Section 11 of the 2015 Mines Law the
classification of production scale will be made taking into account operating
conditions, the size of the mine area, the amount of investment required and
equipment and machinery usage.
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Environmental
The 2015 Mines Law contains a number of provisions
relating to the obligation of foreign miners in respect of environmental
protection. Pursuant to Section 13(e)(1) of the 2015 Mines Law foreign miners
are obliged to establish and make annual contributions to a ‘Reserve Fund’ for
environmental conservation. Pursuant to Section 13(e)(2) miners are obliged to
prepare and carry out mine rehabilitation following mine closure.
Section 23 of the 2015 Mines Law amends Paragraph
26 of the 1994 Mines Law which sets out the “Duties of the Chief Inspector”.
The amendment expands the duties of the Chief Inspector’s to include inspection
of the systems/ controls operators put in place to limit the adverse social and
environmental impact of a project.
The 2015 Mines Law defines a ‘Feasibility Study’ as
a study ‘on the viability of a mineral project and includes descriptions of the
methods of exploration, extraction, and processing, together with a financial
analysis of the project incorporating information on the planned investment and
anticipated levels of commercial production, and to include an evaluation of
social, and environmental factors.’
Pursuant to the 1994 Mines Law the Ministry of
Mines had the authority to require the owner of a large-scale mineral
production or integrated permit to produce a study to assess the feasibility of
the proposed operation. It could also request that miners applying for a
large-scale production permit to produce a feasibility study to support the
granting of the permit. Making the production of feasibility studies an
activity for which a permit is required should give the Ministry of Mines an
extra element of oversight during the production of the feasibility study.
This additional clarity in the area of feasibility
studies is welcome. Typically sources of finance will start to present
themselves to mineral companies as they move towards the feasibility study
stage. This is particularly true where a company has a proven or partially
proven resource but bridging finance is needed to complete further exploration
and development work and to produce a “pre” or “bankable” feasibility study.
Decentralisation
Section 6 of the 2015 Mines Law provides for the
decentralisation of the application process in respect of local involvement in
prospecting, exploration, production of feasibility studies, processing and
trading and subsistence and small-scale production.
State and/or regional authorities are authorised to
process permit applications and issue other approvals to subsistence/
small-scale operators. The 1994 Mines Law restricted mining management at a
local and regional level. Decentralisation initiatives often form part of a
broader policy of ‘fomalisation’. It should be noted that this decentralised
application process does not apply to foreign investors who should still deal
directly with the Ministry of Mines. ‘Fomalisation’ is pursued by Governments
seeking to improve the regulation and management of subsistence and small-scale
mining in an attempt to make it a more profitable and economically beneficial
sub-sector of an economy.
Advocates of mining decentralisation argue that
regional rather than central Government should be responsible for ensuring
compliance with mining legislation, overseeing the demarcation of mining
rights, revenue collection, the processing of mining rights applications,
monitoring production, providing technical support to miners and combatting
illegal mining.
The distribution of mining revenues is often a
contentious issue between regional and central authorities. In this regard,
decentralisation as part of a broader policy of ‘formalisation’ could help the
Myanmar Government’s peace building efforts.
Guaranteed
Right to Production Permit
Pursuant to Section 11(a) of the 2015 Mines Law a
mining company who undertakes prospecting, exploration and conducts a
feasibility study in a permit area is entitled to receive a production permit
for that area.
Offences and
Penalties
The 2015 Mines Law amends a number of provisions
set out in Chapter XI “Offences and Penalties” of the 1994 Mines law.
Section 24 of the 2015 Mines Law amends Paragraph
28(b) of the 1994 Mines law. Formerly a permit holder found to be in breach of
the conditions of a permit could continue to operate on the payment of a fine.
Pursuant to the amended provision the fine should not be less than the
Performance Bank Guarantee. The Performance Bank Guarantee can be anywhere from
US$50,000 – US$100,000.
The new legislation increases the maximum prison
term for engaging in prospecting, exploration or processing without a permit
from 7 to 10 years and a fine of up to Kyat 50 Lakh2 or
approximately US$3850.3
The fine for illegal prospecting, exploring or
production of gemstones has been increased from Kyats 50,000 (or approximately
US$45) to between a minimum of Kyat 10 Lakhs – and maximum of Kyat 50 Lakhs (or
approximately US$ 770 - US$3850).4 The maximum prison term is also
increased from 7 to 10 years.
The penalty for illegally trading in minerals has
been increased from a fine of Kyats 20,000 to Kyat 2 Lakhs (or from
approximately US$20 - US $154). The maximum prison term for the offence remains
at 3 years.5
The 2015 Mines Law introduces new penalties for
operating without a subsistence permit. Illegal operators face prison terms of
1 – 3 months and a fine of up to Kyats 1 Lakh (or approximately US$77).6
The 1994 Mines Law did not differentiate between
subsistence and large-scale operators in respect of the penalties to be imposed
for operating without a licence.
Offence of trespassing on a Mineral Reserve Area is
now punishable by a fine of up to Kyats 500,000 and a prison term of up to 6
months. The maximum fine for the offence under the 1994 Mines Law was Kyats
5,000.7
The maximum fine for violation of the terms and
conditions of a mining permit has been increased from a maximum fine of Kyats
10,000 to a fine of between Kyat 2 - 10 Lakhs (or approximately US$154 -
US$770).8 The offence is subject to a term of imprisonment of up to
1 year. Repeat offenders there is a mandatory term of imprisonment of up to 1
year.9
Conclusion
While certainly representing progress on the
previous legislative regime, the 2015 Mines Law fails to deliver the legal
changes desired by international mining companies. The revised royalty rates
are still uncompetitive, so too is the royalty calculation method based on
mineral content. Miners would prefer to see royalty payments based on net sales
proceeds as this would help offset price volatility.
Although the 2015 Mines Law provides a guarantee to
explorers in respect of exploration permits, it otherwise fails to incentivise
exploration stage companies. It remains to be seen whether or not the 2016
Mines Rules or the fiscal terms on offer in future production and joint venture
agreements - such as the signature bonus and Performance Bank Guarantee - will
be amended to attract the participation of foreign miners.
Julia Charlton is the Senior and Managing Partner and Principal of Charltons Solicitors. Charltons is a
leading boutique corporate finance law firm headquartered in Hong Kong. Through its dedicated natural resources
practice Charltons advises natural resources companies, their professional
advisers and other industry participants.
Charltons established a Myanmar arm in 2012 and works in close
cooperation with Myanmar legal professionals to advise a wide range of clients,
including natural resources companies,
on the establishment of operations in Myanmar. This article was originally
published on 2 February 2016 by www.charltonsmyanmar.com
- Source www.oxfordbusinessgroup.com
- 1 Lakh is equal to 100,000 Kyats
- Section 26 of the 2015 Mines Law amending Paragraph 30 of the 1994 Mines Law
- Section 26 of the 2015 Mines Law amending Paragraph 30(a) of the 1994 Mines Law
- Section 27 of the 2015 Mines Law amending Paragraph 31 of the 1994 Mines Law which outlines the penalties for a breach of Para graph 29 i.e. prohibition on non-permitted trading
- Section 25(b) of the 2015 Mines Law– introducing a new Para graph 30 (b) into the 1994 Mines Law
- Section 31 of the 2015 Mines Law amending Paragraph 33 of the 1994 Mines Law
- Section 29 of the 2015 Mines Law amending Paragraph 32 of the 1994 Mines Law which relates to breach of Paragraph 13 (Duties of Permit Holder)
- Section 30 of the 2015 Mines Law introducing a new Paragraph 32 (a) into the 1994 Mines Law
See also: Myanmar attracts potential investors to mining meeting (30 July 2012);
Myanmar government encourages private sector mining (5 January 2010).
