A new amendment has the potential to fundamentally alter the economics of mining in Myanmar and draw a new round of foreign companies to the country. But with commodity prices dropping firms are searching for the most favourable fiscal regimes, and the outlook for Myanmar rests heavily on regulations now being drawn up.

A long-awaited draft amendment passed at the end of 2015 allows foreign firms to form joint ventures with small- and medium-scale mining firms to expand a project and extends tenure permits for large-scale projects to 50 years.

It also guarantees firms that conduct exploration according to the rules a mining permit, removing some of the uncertainty about how straightforward this would be for companies that had already spent capital on exploration work.

All of these are positive steps for foreign firms eyeing the Myanmar mining sector. But the key development is the potential for the government and foreign firms to form profit-sharing or equity participation agreements, according to Yangon-based mining services firm Valentis Resources, which thinks this could “vastly alter the economics” of the mining sector.

In the past, the only option for foreign miners was a production-sharing contract, specifying a minimum quantity of production to be delivered to the government on top of royalties. These contracts have been used successfully in Myanmar, but are an ill fit for an industry where different mines, minerals, deposits and firms suit different ownership structures.

Smaller capital-intensive firms, called juniors, typically make the bulk of mining discoveries. But the high cost of exploration and mining means that production-sharing agreements tend to only suit large-scale projects in which there is a high degree of confidence, said the chief executive of one foreign mining firm with permits in Myanmar, who asked to remain anonymous.

Equity-sharing agreements with the government are the norm in most emerging markets, he said, and would likely make a new set of Myanmar projects, where confidence is “less robust”, economically viable.

“The new clause that allows for production sharing, profit sharing or equity participation is why we think the economics of mining projects will change,” said Lachlan Foy, head of commercial affairs at Valentis Resources. “The interpretation of that clause will make or break the industry for foreign investors.”

According to parliamentary procedure, an amendment becomes law 90 days after it is approved. The Ministry of Mines is now drawing up regulations to accompany the amendment, which should provide more details on how the profit-sharing and equity participation models will work.

In an equity-sharing agreement for example, the government and an international firm each have a set percentage stake in the project. The government would operate in much the same way as a private partner.

Such arrangements typically have two forms – one in which the firm pays for the government’s share of the capital and is paid back out of profits from the mine, and another in which the firm is not paid back at all.

Details such as these are why the forthcoming regulations are so important.

“We don’t yet know how the specific regulations will be drafted,” said Mr Foy. “If they don’t lay out set percentages for the profit- or equity-sharing models for large-scale projects that may not be a bad thing. It would provide room for companies to negotiate an agreement that best suits the situation.”

Foreign interest in Myanmar’s mining sector has been building in the run- up to the new law and regulations. The Australian government’s Australian Trade Commission (Austrade) told The Myanmar Times it expects increased Australian interest following passage of the new law and the regulations.

An Austrade briefing session in Australia in October 2015 on the potential opportunities in Myanmar drew almost 50 firms – a record number for “a non-traditional export or investment market update”, said senior trade commissioner Ross Bray.

“The number of enquirers has picked up,” said Mr Foy. “There are even some interested companies that would normally form part of the final wave of foreign firms that only enter a country when everything is established and stable. That doesn’t mean they’re going to start operations in Myanmar tomorrow, but they are aware of the changes.”

The option to use profit, production or equity structures, however, is not enough to guarantee a new wave of foreign firms, particularly during the bottom of a commodity price cycle. Exploration costs are always high, and with commodity prices falling mining companies across the globe have to pay more to raise funding, said foreign mining sector officials.

The World Bank on January 26 downgraded its forecast on 37 of 46 commodity prices, and expects metals to drop 10 percent this year after falling 21pc in 2015.

Mining in Myanmar, meanwhile, remains a daunting prospect for many firms.

The country’s abundant natural resources range from gold and rubies to jade, coal, copper, tin and tungsten, but the sector is plagued by controversies around safety, land rights, resources sharing, armed conflict and lawlessness.

Foreign mining companies have often clashed with residents amid allegations of land dispossession and environmental damage, and mineral wealth has fuelled sporadic conflict between the military and armed ethnic groups.

Foreign interest in the country hit a peak back in 2012, said the foreign firm’s chief executive, “but then everyone saw how hard it was and ran away”. Although the equity and profit sharing agreements could make a new set of mining projects viable, permits remain difficult to procure, he said.

“It took us two-and-a-half years to get our first Myanmar permit,” he said. “I think the government is moving in the right direction, but that time needs to come way down. Ideally it would be three months, and maximum six.”

Exploration firms have a host of countries to choose from, and in most emerging markets the application time is far shorter than in Myanmar.

Data from Valentis Resources, sourced from the Ministry of Mines’ Department of Geological Survey and Mineral Exploration, lists just 21 foreign companies holding permits as of this month. This figure covers a range of separate activities including exploration, feasibility studies and production.

Peter Mullens, chief executive and director at London-listed Aurasian Minerals, which in September 2015 announced it had withdrawn exploration permit applications for Myanmar, told The Myanmar Times that the overriding factor in determining whether to invest in a foreign country was the “ease of doing business”.

“Mining is a very risky business and very hard to make a profit,” he said. “Anything that stops a project moving ahead will impact on our decision to explore there.”

Aurasian Mineral’s announcement on the London Stock Exchange in September last year said it had withdrawn the application “in view of the slow approvals process in Myanmar currently and the need for management to focus on opportunities with a nearer-term prospect of creating value”.

Mr Mullens did not comment on whether Aurasian Minerals was looking at Myanmar again.

Corporate tax of over 30pc and royalties over 5pc means Aurasian Minerals “will not invest in a country even if great opportunities exit”, he said.

If a foreign firm has to cover the government’s stake in an equity sharing agreement without being paid back, or a local partner requires more than a 20pc stake, “that also impacts on this decision”, he said.

Corporate tax for foreign mining companies is 25pc in Myanmar, and the highest royalty rates are 5pc. But allowable deductions and carried forward losses would need to be clarified for the prospective profit sharing and equity participation models, said Michael Phin, head of finance at Valentis Resources.

When forming partnerships with foreign firms, a local company must own at least 20pc of the joint venture for “large size mining projects” under the Foreign Investment Law. Foreign firms can conduct exploration without a local partner.

One issue in partnering with local firms already in possession of a deposit or a mine is agreeing on an appropriate valuation, said several people at Yangon based foreign advisory firms.

The lack of exploration and technical assessment of potential deposits means it is often difficult for local and foreign firms to agree on the value of a project, and therefore on how production sharing and investment should be split.

Link: http://www.mmtimes.com/index.php/business/19027-foreign-interest-in-myanmar-mining-grows.html