Many mark 2015 as the start of a period of long-term industry growth

Mining is expected to be a top driver of Myanmar’s economic development in the decades ahead thanks to the country’s unusually diverse and largely untapped geological resources. While the government has been reluctant to allow outsiders into the world’s richest jade and ruby mines, Myanmar appears poised to attract a flood of foreign investment into its underexplored potential to produce metals, ores and industrial minerals, especially copper, tin, nickel and gold.

There are numerous obstacles that could slow or limit investment. Despite strong government backing, local business groups in parliament have been slow to agree on needed legal reforms, which could be put off until after elections due in late 2015. Roads to most mining areas are extremely slow-going, and some areas are practically inaccessible up to half the year. Electricity supply is generally lacking as well. In some areas, past rough treatment of local populations has engendered popular opposition to mining, while in others ethnic rebel armies seek shares of mining revenues.

However, the scale of the opportunities is such that there are already dozens of international mining firms visiting Myanmar, studying its geology and applying or preparing to apply for exploration licences. International producers of mining equipment are likewise establishing a presence and anticipating a boom.

Unique Geology

Myanmar is sometimes described as sandwiched between India and China, and geologically speaking that couldn’t be more true. Myanmar actually sits on a tectonic splinter known as the Burma Platelet, which was broken off from the rest of Eurasia tens of millions of years ago by the same collision with India that created the Himalayan Mountains. Ever since, the Burma Platelet has been getting crushed from both sides, pushing up mountains on its western and eastern edges that form Myanmar’s borders.

One recent demonstration of the forces involved was the tsunami of December 2004, which was set off by the grinding of the Indian Plate into the Burma Platelet along the undersea part of their fault line. Over the ages, those same pressures have been compressing rock into other rock to create a great variety of minerals, from the rare translucent stones that adorn the world’s wealthiest people to the metals used to solder circuit boards. Some of Myanmar’s mineral resources have long histories of exploitation. The rubies of the Mogok valley northeast of Mandalay were a key source of power for Burmese kings from their earliest history. Tin has been mined for uncounted centuries in the far southern Tanintharyi Region, and the jade mines of the far northern Kachin State have been operating since the 18th century. There are also numerous well-known but unexploited deposits, especially of metal ores, many of which have been left undeveloped for decades due to lack of capital among local investors and legal restrictions on foreign investment.

However, what most excites the international mining industry about Myanmar is that so much of it is, quite literally, terra incognita. Very few areas have been systematically explored with modern technology, and much of the country has never been properly geologically surveyed. U Zay Htet, managing director of Geo-resources Group, a local mining services firm, told OBG, “Myanmar is something special for the mining industry. It’s one of the last truly unexplored frontiers.”

Undercounted Output

There are no published comprehensive estimates of the mining sector’s output, and estimation is complicated by obvious under-counting in official data. However, piecing together the best data available at the end of 2014 suggested that the mining sector’s annual gross output was at least $7bn, while gross value-added was approximately $5bn. Notably, these figures do not include revenues from oil and gas extraction. This is an improvement over past years. According to the latest official breakdown of GDP by sector, provided by Myanmar’s Central Statistical Office (CSO) to the Asian Development Bank, the mining and oil and gas extraction sectors produced a combined MMK3.2trn ($3.2bn) of gross value-added during the 2012 fiscal year, which ended March 2013.

Jadeite, the deep green variety of jade sometimes called “imperial jade”, is by far Myanmar’s most valuable mining product. Output in 2011 was estimated at $7.9bn in a study led by Harvard Kennedy School economist David Dapice. However, all estimates are highly uncertain and output is sometimes reduced by ethnic conflict in the far northern Kachin State, where all jade mining is located. Production of gemstones – mainly rubies, sapphires and spinels – is probably worth at least $400m a year, but data is scant.

The mining of metals and ores is in the midst of a major expansion and was worth at least $600m in 2013, judging from other countries’ reported imports from Myanmar and other data. Tin ore was the top product among metals in 2013, with about $250m of exports, but copper and ferronickel are set to become the main metals products in the near future. Output of industrial minerals is probably at least $120m a year, led by crushed limestone and natural sand, judging from US Geological Survey estimates and other countries’ reported imports. Coal output is growing rapidly and was worth about $40m in 2012, judging from a US Energy Information Agency estimate of volumes.

Mining Laws

Foreign investment is actively recruited for the mining of metals, ores, industrial minerals and coal, and a reform drive is under way aimed at unleashing foreign exploration. Up to 80% foreign ownership of larger projects had been permitted since the 1990s, and an August 2014 reform permitted up to 100% foreign ownership of all private mining businesses regardless of size, except precious stone mines.

However, this does not include the state’s stake – usually 20-30% – which is allocated through a mandatory joint venture with one of three Ministry of Mines (MoM) companies: No. 1 Mining Enterprise for lead, zinc, silver and copper; No. 2 Mining Enterprise for gold, tin and tungsten; and No. 3 Mining Enterprise for iron, coal and industrial minerals. Larger projects have traditionally been licensed for up to 15 years extendable to 25, and a government-sponsored bill that was being debated in parliament as of November 2014 would lengthen the maximum term to 35 years extendable to 50.

Precious stone mining is managed very differently. Foreign ownership of precious stone mining businesses is not allowed, and there are no plans to lift restrictions on this segment. Most of the nation’s mines are licensed out to local private businesses through joint venture agreements with the Myanmar Gems Enterprise (MGE), another MoM company, but most mining areas are divvied up into plots as small as an acre and licensed out for as little as a year at a time, which greatly limits investment. All private mines are required to deliver their output to MGE to be sold by auction at its regular gem fairs, but according to Dapice’s investigation around half of output is sold informally. MoM also regulates small cultured pearl and sea salt industries, including three foreign-operated pearl farms.

Big Chinese Projects

In the near term, growth in the mining sector is likely to be dominated by two large Chinese-backed projects: the $1bn Monywa copper project, backed by Wanbao Mining, itself a division of the Chinese state military-industrial conglomerate, Norinco, and the $800m Tagaung Taung ferronickel project, backed by two more state-owned industrial giants, China Nonferrous Metal Mining Company (CNMC) and Taiyuan Iron & Steel Company (TISCO).

The Monywa project dates back to 1992, when the Canadian firm Ivanhoe Mines began negotiating with MoM to take over a working mine in the Sagaing region west of Mandalay. Ivanhoe’s project included developing other nearby copper deposits and building a refinery near the mines to produce pure cathode copper. Ivanhoe completed a first phase by 1998, which included the cluster of mines at Sabetaung and Kyisintaung (S&K) and a refinery with an annual capacity of 25,000 tonnes. That was gradually increased by 2004 to 39,000 tonnes. However, Ivanhoe was forced by international sanctions to announce in 2007 that it was quitting the project. Wanbao stepped in to take over in 2011 in a 50:50 joint venture with a Myanmar military company, Union of Myanmar Economic Holdings (UMEHL).

Wanbao’s planned $1bn investment is going towards the second phase of the project, initially planned by Ivanhoe, which includes developing another, larger mine and refinery at nearby Letpadaung with an annual capacity of 100,000 tonnes. Wanbao has set up separate companies to manage the two parts of the Monywa project: Myanmar Wanbao Copper for the new Letpadaung mine and refinery, and Myanmar Yang Tse Copper for the working S&K mines and refinery.

If both parts of the Monywa project were to produce at their total planned annual capacity of 139,000 tonnes of pure cathode copper, that would be worth some $930m a year at November 2014 prices. However, completion of the Letpadaung mine has been repeatedly delayed by local protests, mainly over claims that relocated villages had been inadequately compensated and that area residents would see too little benefit from the mine. China’s involvement also triggered resentment over perceptions that Myanmar was being taken advantage of by its stronger northern neighbour.

Local Unrest

Myanmar Yang Tse appears to have been producing well below capacity in recent years. Judging from other countries’ reported imports from Myanmar, compiled by the International Trade Centre (ITC), the company produced only about 10,000 tonnes of cathode copper and 32,000 tonnes of copper ore in 2013, worth a total of $99m. In 2012 Wanbao and the Myanmar government responded to the protests by announcing a renegotiation of the licence for the Letpadaung mine. The new terms set Wanbao’s share of the mine’s profits at 30%, UMEHL’s at 19% and the government’s at 51%, well above the government’s usual profit share from mines of 20-30%. Myanmar Wanbao committed to set aside 2% of income for corporate social responsibility projects. President U Thein Sein also asked opposition leader Daw Aung San Suu Kyi to lead a parliamentary review of the project, and she came out in 2013 in favour of completing it.

Even so, protests flared again, and three Chinese employees of a contractor were briefly kidnapped in May 2014. Since then, protests appear to have calmed as Wanbao paid additional compensation to relocated villagers and stepped up community relations spending. Wanbao was targeting a late 2015 completion date for the Letpadaung mine and refinery.

Meanwhile, the large ferronickel project at Tagaung, north of Mandalay, has generated little controversy. Under development since 2004, the project includes a mine, smelter and pelletiser. It is targeted to produce 85,000 tonnes a year of roughly 75-25% iron-nickel alloy, used in stainless steel. That would be worth more than $350m a year at October 2014 prices. The project began limited operations in 2013 and produced $11.5m of ferronickel that year, according to the ITC. Both the Monywa and Tagaung Taung projects depend on hydropower and will face power shortfalls during dry seasons, until more thermal power plants are built.

Indonesia's Ban, Myanmar's Gain

Growth is also being driven by a number of smaller projects in other metals and by a boom in tin ore output from existing mines. In July 2013, Indonesia banned exports of many kinds of metal ores, aiming to support domestic processing. Crucially for Myanmar, that included tin ore, of which Indonesia is the world’s main producer and China the main processor. China’s processors, left in the lurch, have thus been clamouring for tin ore supplies from elsewhere. China reported a significant spike in tin ore imports from Myanmar, rising from $65m in 2012 to $232m in 2013, according to ITC data.

U Ding Ying, chairman of Delco, one of Myanmar’s larger tin miners, told OBG his company previously sold its output of 75% tin-tungsten ore concentrate to Thailand and Malaysia, but China has been making the highest offers recently. He said his company was investing in an expansion that would more than triple annual output from 100,000 tonnes of concentrate to 300, 000-400,000 tonnes by 2016. Like most tin mines, Delco’s mine is located in the far southern Tanintharyi region. Another of the larger tin miners in that region, Myanmar Pongpipat, is a Thai-led joint venture.

Coal output has also been growing rapidly, thanks mainly to growing output from the Kalewa basin, in the Sagaing region west of Mandalay. The biggest project is a plan by Singapore’s ISDN Holdings, a publicly listed engineering firm, to buy into the basin’s Paluzawa surface mine and develop it to increase production capacity. Moreover, ISDN signed agreements in 2013 to form two joint ventures with the mine’s operator, Tun Thwin Mining – one to develop the mine and another to build a 540-MW coal-fired power plant, which will supply into the national grid.

U So Lin, executive director of Tun Thwin Mining, told OBG that the mine and power plant would cost up to $1.2bn to build. As of the end of 2014 Tun Thwin and ISDN were still negotiating with the government with respect to how much the power plant would be paid for feeding the national grid.

Other Metals

Lead ore output will be boosted by a $29m Chinese-backed project in eastern Shan State. The recently licensed project is a joint venture of China’s Sichuan Henglu Industrial and Myanmar’s Good Plus Star Mining. Lead ore exports came to $18m in 2013, according to ITC data. Iron ore is another important and relatively stable product, worth roughly $120m in 2013, including $96m of exports, according to ITC data and some supplies to local smelters. Manganese ore exports have dropped to $33m in 2013 from $67m in 2010, according to ITC data, mainly due to lack of investment. Zinc is a minor but relatively stable product with $13m of exports in 2013, according to ITC data, including from a small Australian-run mine in Shan State. Gold output is likely around $50m a year including illegal mining in remote areas. Like Indonesia, the Myanmar government seeks to promote domestic processing by requiring that new production licensees for metal ore mines commit to produce at least ore concentrate. Older mines are allowed to continue selling raw ore.

Growth has long been held back in most types of metals and industrial minerals by a lack of access to capital in addition to limited technology, which has restricted both the quality and reliability of output.

U Zay Htet, managing director of Georesources Group, told OBG that many miners have not achieved sufficiently stable output volumes to be able to sell output with long-term contracts, and so must sell for significantly lower prices on spot markets.

As a result, many of Myanmar’s smaller miners remain trapped in a cycle of low investment, volatile output and low earnings, he said. The opening up of large-scale mines to foreign investment should help address that problem, although foreign companies will still need to obtain multiple permissions before they can invest.

Unleashing Exploration

In addition to the liberalisation of foreign ownership, the government and parliament were working on a thorough overhaul of the main law governing the industry, called the Mining Law and last revised in 1994. Adoption of the law, which was expected in 2015 but at risk of being delayed until 2016, was expected to unleash a wave of exploration by international mining companies. Local and foreign mining companies have put in some 200 applications for exploration blocks since the government initially proposed overhauling the law back in 2012, and the MoM is expected to start rapidly issuing licences soon after the new law is adopted (see analysis).

Copper, gold, nickel, tin, tungsten and coal are expected to be the main targets, and a wide variety of other metals and minerals will also be sought, including iron, zinc, lead, manganese, chromite, antimony, marble, limestone, gypsum, barites, feldspar, quartzite and sand. The crucial next step needed to get the exploration ball rolling is passage of the revised mining law by parliament, which was still being awaited as of November 2014. Meanwhile, many mining firms were at work trying to win support from local authorities – who have the power to veto licences – and local populations.

Shining Light On Jade

It may seem illogical that Myanmar is not seeking investment into jadeite, its most valuable mining product. However, the government’s reluctance to open up access might make sense from a longer historical perspective. Since Myanmar’s earliest history, political power in the country has been linked to control over sources of precious stones, initially the rubies of Mogok valley. During the first decades of military rule in the 1960s-1980s, the army directly ran the jade and ruby business. Even with the privatisation of the 1990s, the most valuable aspects of the business were kept in the hands of close friends of Myanmar’s rulers. Not only are those business groups still in control and reluctant to share their mining incomes, former military leaders still dominate the government and are reluctant to let anyone other than trusted allies gain control of such a powerful source of wealth. “Both small-scale and large-scale mining activity exist in Myanmar,” U Khin Maung Han, the chairman of Future Engineering & Gold Mining, told OBG, “However, not many companies have the funding or technological expertise to participate in large-scale mining because the sector was only privatised in 1997.”

Most of the value is in top-quality stones. Jewels created from Myanmar jadeite and ruby are often the highest-priced items at Sotheby’s and Christie’s luxury jewellery auctions in Hong Kong, where just a single jade bangle can fetch more than $5m. But the ban on foreign investment also affects lower-value gems. For example, there are likely substantial deposits of mass-market-quality gems that could be mined with more up-front investment. A surge in production of mass-market gems in the late 1990s fell off after the early 2000s as easy-to-reach stones were depleted.

International Recognition

Precious stones are expected to remain off-limits to foreigners, but transparency may well improve. In July 2014, Myanmar was accepted as a candidate member of the Extractive Industries Transparency Initiative (EITI), an international organisation that promotes open accounting of public revenues from natural resources. The EITI will focus on public revenues and not directly answer key questions about the industry, such as how much Myanmar’s jade and gemstone industries are producing, or how much resources are still in the ground. Other levers in favour of transparency are likely to also come into play.

Further to this, the government is seeking foreign investment to develop a domestic jewellery industry to increase value added. This could clarify the value of stones per carat. Larger jade and ruby miners might become more transparent to raise investment on capital markets, and the US may lift its ban on imports of jade and rubies from Myanmar, the last remaining industry-wide sanction, which would reduce incentives to disguise the origin of Myanmar rubies.

Much will also depend on China’s progress in bringing its domestic jade and gem businesses out from the shadows. Because of their high value relative to size, jade and gems are prized in China as covert wealth, not easily tracked by authorities. The majority of jade and gems brought into China from Myanmar are smuggled over the border without being recorded in either country’s trade data, including stones bought legally at Myanmar’s official auctions. For example, Myanmar Gems Enterprise reported $2.4bn of jade and gems sales at its largest gem auction in 2013, where more than 90% of buyers were Chinese, but China recorded only $1.2bn of such imports from Myanmar in 2013, and Myanmar recorded only $1.1bn of jade exports.

One indication of the nature of China’s jade-trading business was a story reported in Hong Kong media in August 2014 about a con artist from Yunnan, a Chinese city near Myanmar where much of Myanmar’s jade output is carved and traded. He reportedly managed to abscond with up to $160m worth of jade by posing as a jet-set jade dealer and exploiting his victims’ desire for secrecy. In the short term, the industry’s performance will depend mainly on the government’s success in resolving its conflict with ethnic Kachin rebels, which is to a great extent a battle over income from jade mining. Sporadic fighting was continuing in fall 2014.

Outlook

Output of metals and minerals will grow as major projects come on line, and there will also be growing recognition of the contribution of jade and gemstone mining to the economy. While the exploration expected as a result of reforms will take time to convert into production, the mining industry appears to be in the early stages of a long-lasting expansion.