Than Htun ( Myanmar Geosciences Society)
“Business people are like sharks, not just because we’re grey and slightly oily…but because we must move forward or die.”
Stanley Bing
American-business columnist
From explorers to producers in Myanmar I would like to introduce a valuable resource to help companies better understand, identify and obtain appropriate financing and the associated technical requirements of these funding options. Then I would like to share some comments by Bill on Amended Myanmar Mines Law (2015) for local companies to move forward and to avoid the alternative – as noted in Bing’s reference to the shark. Because nobody wants to go backwards.
The mining sector in Myanmar
The Union of Myanmar has a long history of mining in gemstones, gold, silver, antimony, cinnabar, copper sulphate and amber which could be traced back to the regimes of ancient Kings of Myanmar since the fifteenth century.
Myanmar has been known throughout for the high quality beautiful and rare rubies in Mogok and best quality jade in Phakant and Hkamti. In 1989 Myanmar introduced a policy for direct foreign investment in the country’s mineral sector. The economic enterprises of the Ministry of Mines seek foreign investors as joint venture partners to explore, develop and exploit mineral resources. During the period from 1995 to 2000 several joint ventures were established by bidding system up to fourth round bidding. The Department of Geological Survey and Mineral Exploration under Ministry of Mines (Now Ministry of Natural Resources and Environmental Conservation) initiated Foreign Joint Venture programme in mineral exploration and production in 1995. It was so serious and sensitive item before 1995 exploration and exploitation of mineral resources by foreign companies were prohibited.
• First Round Bidding has been held in 1995 and six
Companies won 14 Blocks for (Au, Cu) including Ivanhoe Myanmar Holdings, Ltd.
• Second Round Bidding was held in 1996 and six Companies won 9 Blocks (Au, Cu, Pb, Zn, Ag) including notorious Moedi Taung Prospect.
• Third Round Bidding in 1998 obtained three successful companies for 4 Blocks (Au, Cu, Pb, Zn).
• Fourth Round Bidding was unsuccessful due to unattractive Blocks.
According to 1994 Mines Law the foreign investors are expected to provide 100% of the exploration expenses until completion of feasibility study. After a positive feasibility study, the joint venture is structured 50% for the foreign investor, with a 35% working interest for the State Mining Enterprise, and a 15% carried interest for the government.
The raising of finance at the exploration stage of a mining project will invariably involve equity. Debt financing will usually not be available until such time as a project has been proved to be bankable. This will require extensive drilling and other exploration activity, which is traditionally an equity risk.
Mining companies have numerous equity platforms available to choose from such as the London Stock Exchange (LSE), Toronto Stock Exchange (TSX) or Australian Securities Exchange (ASX). Mining companies situated in developing countries will often list in a country other than the host country because (i) there is likely to be wider access to investors, and (ii) there may not be a viable stock market in their host country.
Discovering or acquiring valuable mineral deposit is, alas, only the first step in establishing a profitable mining operation. The process of technical and financial evaluation will examine the project in minute detail and from many different point of views.
The principle areas of risk to a potential investors may be categorized as follows:
1. Country
-consists of opportunity, political stability, domestic climate, economic climate, foreign relations, mining culture, mining regulations, labour force, infrastructure, ownership, creeping expropriation, nationalization, free currency exchange, remittance of capital and profits
2. Market
– includes commodity, structure, pricing, company role, impact, demand, synergy, strategic consideration, by/co-production, internal consumption or export
3. Technical
– involves geological environment, reserve base, expertise, experience, resources, competitive advantages
4. Environmental Protection
-consists of existing liabilities and potential pitfalls, the existing and growing lobbies,
-accreditation for green production practice, the base line study, Environmental impact, community disruption, closure and reclamation
5. Financial
Conventional project economics
Discounted Cash Flow (DCF), Internal Rate of Return (IRR), Payback period, Sensitivity Analysis, Competitive Analysis, Shortcomings of DCF/IRR
6. Recent Advances
-Option value Approach
-contains corporate structure, Corporate style, executive, method, the hidden factor
7. Implementation
-involves people, financial, equipment, planning and schedules, project management
Forecasting the level of future investment in mining is very difficult.
It assumes that one can examine past growth rates for mineral commodities and identify technological and economic factors affecting consumption in order to predict future commodity demand.
We are all familiar with cases where project capital costs have exceeded the initial capital estimates by 30-50 percent. Many of these increases are not primarily caused by inflation but occurred because the ultimate infrastructure requirements were not initially recognized or because sufficient engineering had not been completed prior to reaching a decision to undertake the project (John Hammes, 1991).
Today, as mining projects get larger and larger, and as depletion leads to the development of lower grade and more refractory ore bodies, the mining company often cannot economically start up a small mine and expend it with its own cash flow.
The mining industry is faced with an environment where the profitability of current operations is unsatisfactory, where the historical way in which new mines have been developed or in which mining companies have grown is often no longer feasible, and where the alternative of borrowing heavily in the money markets to finance new projects leads to risks for the borrower which are not always commensurate with rewards.
Banks and mining project
Banks lend to the mining industry in two main forms: corporate finance and limited resource project finance. In project finance the implication is that the borrowing will be repaid only from the cash flows generated by the project with no recourse or only limited recourse to the company as a whole. The bank is therefore exposed to the risks that grade, tonnage, recovery factors, costs, saleable production or sales price will not be as forecast. The bank therefore must be given all the information needed to assess these risks and forecast cash flows in order to decide if it will provide finance, in what amount and on what terms (F.D. Scott, 1991).
In broad terms what a bank wants to see before financing a mining project are:
Bankable Documents
-Final Feasibility Report
-Information Memorandum
-The Project Site
Bankable Documents
Final Feasibility report
In the mining industry it would be normal for a Final Feasibility Report to have been prepared, and if it demonstrates an acceptable rate of return which meets the company’s target, for Board approval to have been given to go ahead with the project and to seek bank finance.
The Final Feasibility Report which triggers Board approval is the first essential bankable document
Global Mine Financing
The raising of finance at the exploration stage of a mining project will invariably involve equity. Debt financing will usually not be available until such time as a project has been proved to be bankable. This will require extensive drilling and other exploration activity, which is traditionally an equity risk. One can consider below some of the alternative global platforms for the raising of equity in the public markets.
Equity
Mining companies have numerous equity platforms available to choose from such as the London Stock Exchange (LSE), Toronto Stock Exchange (TSX) or Australian Securities Exchange (ASX).
Mining companies situated in developing countries will often list in a country other than the host country because (i) there is likely to be wider access to investors, and (ii) there may not be a viable stock market in their host country.
Canada:
The Canadian TSX and TSX Venture Exchange (TSX-V) have a reputation as the leading global mining exchanges. The TSX-V is suitable for early-stage mining companies which are looking to raise smaller amounts of capital to finance ongoing exploration. Certain disclosure is required, including audited financial statements and some (minimum) exploration work must have been undertaken.
The TSX-V enables multiple financing rounds and provides a logical progression to a TSX listing. TSX is the main market for senior equities and is better suited to producing mining companies wishing to raise greater capital.
Australia:
Listed mining companies make up about one-third of all ASX-listed companies. The Joint Ore Reserves Committee (JORC) code, also known as the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, is a code of practice that sets minimum standards for public reporting of minerals exploration results, resources and ore reserves, which is recognised internationally and has become a blueprint for similar initiatives worldwide.
JORC and the Canadian equivalent, NI 43-101, use the same resource and reserve categories (proven, probable, measured, indicated and inferred) and are in most cases interchangeable..
The LSE is home to some of the world’s largest mining companies.
There were 37 mining companies admitted to trading on the LSE’s Main Market with a combined market capitalisation of more than £206 billion. AIM, the LSE’s growth market (for smaller and growing companies), had a further 141 mining companies admitted to trading as at August 31, 2013, with a combined market capitalisation of approximately £4.9 billion. Under the United Kingdom (UK) listing regime, depending on whether a company is seeking to have its shares admitted to a regulated market governed by the EU Prospectus Directive, such as the Main Market, or to AIM, which has a more flexible regulatory structure, different admission criteria and listing rules will apply.
INVESTMENT POLICY FOR MINING SECTOR
• Allow 100% foreign owned companies
• Allow joint ventures with local companies
• PSC 30-70 split MOM-private party
• Does not allow mining companies to export raw ore
• Must make value added or mineral processing
• Require processing plants with the latest technology
COMMENTS on the law amending Myanmar Mines Law by Bill.
(2015, Pyidaungsu Hluttaw Law No.72)
The 2015 Myanmar Mines Law Amendments represent something of a lost opportunity to create a legal and regulatory environment conducive to world class foreign investment in the Myanmar mining industry.
Many important issues remain outstanding and much further work is required before world class mining.
The term “JV” and “PSC” should be clarified to agree with Myanmar Foreign Investment Law and Rules.
The power and resource sharing between Region/State and Union is unavoidable and has to be harmonized with constitution and Mines law and rules.
Type of production should be clearly mentioned since the exploration stage to avoid argument in development stage.
Whatever the case may be the negotiation between investors and Governmental Institutions, out of law and rules, is unacceptable.
Companies will look seriously at large scale investment in Myanmar.
It is possible the new Mines Rules may help to address some of the outstanding issues.
Accordingly, the 2015 MML Amendments should really be seen as the intended starting point rather than as the intended finishing point for the reform process in respect of the 1994 Myanmar Mines Law (Bill,2016).
Many foreign investors will be disappointed but probably not unduly surprised by the relative lack of progress, in later 2015, in reforming the 1994 Myanmar Mines Law.
Due to lack of adequate knowledge of mineral exploration and mining bottom up approach for making Mines Law may not reach the point for the time being in Myanmar.
Therefore, to educate all levels of citizens who are involving in mining business is strongly recommended, otherwise, nothing will be changed.
MINERAL POLICY
Mineral policy is the source of Mines Law and rules and minerals resource are being the vital raw material for infrastructure, capital goods and basic industries. As a major resource for development the extraction and management of minerals has to be integrated into the overall strategy of the country’s economic development.
The exploitation of minerals has to be guided by long-term national goals and perspectives. Just as these goals and perspectives are dynamic and responsive to the changing global economic scenario so also the national mineral policy has to be dynamic taking into consideration the changing needs of industry in the context of the domestic and global economic environment. It is, therefore, necessary to establish the National Mineral Policy, including elements newly evolved, for the development of the mineral resources of the country.
The policy provides conducive, stable, predictable, legal and fiscal environments to attract foreign and local investment for exploration and mine development. It also encourages local entrepreneurs to develop small-scale mines so as to gradually build-up capacity to offer employment and alleviate poverty among the rural population. It is envisaged that with this strategy, the mineral sector will increase substantially its contribution to serve as an engine of growth towards industrial development, employment creation, infrastructure development, increased revenue and foreign exchange earnings as well as socio-economic development. The draft Mineral Policy of Myanmar is under processing and expected to come out end of this year.
