High in the mountains of Myanmar’s northern Shan state, a remote and volatile corner of this remote and volatile country, sits one of the most intriguing mineral projects in the hands of an Australian company.
The Bawdwin base metals project, first mined by the Chinese in the 15th century and the biggest mine in the British empire a century ago, is re-emerging as one of the richest pre-development mines of its type in the world.
Whereas resource projects at the junior end of the mining sector are typically subject to vagaries of geology and metallurgy, where a single set of drilling results can make or break a project, Bawdwin — now 51 per cent-owned by the Mark Creasy-backed Myanmar Metals — carries relatively little geological risk. The mineralisation is visible in the walls of the project’s China pit, site of the last attempt to resurrect the operation in the 1970s, and Myanmar Metals’ own exploration efforts have already identified potentially substantial new deposits elsewhere within the concession.
The starter pit proposed by Myanmar Metals is based on just a sliver of the resources identified to date, but will represent one of the biggest mines of its kind. At full production, the starter pit would rank as the world’s fifth-biggest source of lead, the eighth-biggest silver producer, and the world’s 15th-biggest zinc mine. That starter pit supports 13 years of production, but Myanmar Metals is confident that it will be mining at Bawdwin for 40 to 50 years.
“The orebody has fantastic financials. The economics are crazy,” Myanmar Metals chief executive John Lamb told The Weekend Australian during a visit to Bawdwin last month.
The resource identified at Bawdwin to date is already bigger than that defined at the Hermosa project in Arizona, bought by Australia’s South32 last year for $US1.4 billion, and is growing. The company last week announced a 50 per cent increase in the size of the resource, making it the world’s largest primary lead resource and the ninth-largest silver resource.
But there is, of course, a catch.
In order to unlock the riches of Bawdwin, the company and its backers must navigate the complex world of Myanmar itself.
Cut off from the world for decades under a military junta, Myanmar in 2011 started on a path towards liberalisation, triggering a wave of foreign investment as investors bet on a boom ahead of its first democratic elections in 2015.
Since then, however, the country’s progress has stalled.
The crisis in its northwestern Rakhine province, where the UN High Commissioner for Human Rights has accused the military of driving hundreds of thousands of Rohingyas from Myanmar through “repeated acts of humiliation and violence”, has severely damaged the international standing of the country and its leader Aung San Suu Kyi. The arrest and jailing on espionage charges of two Reuters journalists who say they were framed has also drawn international condemnation.
And the country remains in the grip of several ongoing internal conflicts, including in Shan state.
While the group of analysts and investors who visited Bawdwin alongside The Weekend Australian last month felt safe, the military checkpoint on the road from Lashio, Shan’s main centre, out to Bawdwin is a reminder of the conflict in the region, as is the army base on a ridge overlooking the mine. The surrounding airspace is classified as a no-fly zone.
The military and insurgents have been fighting in Shan state for years over control of the region’s drug trade. The International Crisis Group says the drug trade in Shan, describing the region as a crystal methamphetamine hub where drug production and profits dwarf the state’s formal economy.
Arguably the most pressing issue facing Myanmar Metals is Myanmar bureaucracy.
Stories of years-long delays for foreign companies trying to secure permits and approvals are common. Many of those in the country’s first post-junta ministry are former political prisoners and academics with little experience of business and government.
Departments such as the Ministry of Mines are overwhelmed with applications and paperwork as they try to modernise bureaucracies stuck decades in the past.
And the military continues to control important functions of government, including defence and immigration, officially (and often uneasily) working alongside many of the individuals it was responsible for jailing in the past.
The government has cracked down on corruption among its ministers and MPs, but Myanmar continues to rank among the most corrupt countries on earth. The country ranked 171 out of 190 nations in the World Bank’s latest ease of doing business index, ranking behind Iraq and Afghanistan.
However, companies like Woodside Petroleum, which has navigated the country’s bureaucracy so far, have shown that progress is possible.
Lamb is well aware of the regulatory challenges ahead but is confident the company will meet its goal of having its necessary approvals in place before the next election, late next year.
Approving Bawdwin would achieve two government goals: opening up a new source of revenue and showing its ability to develop new industries and ventures with international companies.
“It’s a mine of national importance for Myanmar,” he says. “It is justified to call the mine the flagship of this new industry because it’s internationally important in terms of scale, and it’s got the grade so it will be profitable.”
Myanmar Metals holds Bawdwin in joint venture with two significant local conglomerates, National Infrastructure and East Asia Power, who between them hold 49 per cent of the project. The structure ensures strong local representation in the project, as well as bringing Myanmar Metals significant local expertise.
Both have interests in major Myanmar business ventures with heavyweights including Royal Dutch Shell and Unilever and EAP partnered with Creasy in the development of the Longh Keng zinc mine and the Lashio zinc refinery elsewhere in Shan state.
Lamb is also philosophical about the fiscal terms governing the project. Mining projects in Myanmar are governed by onerous production sharing contracts, which when coupled with corporate taxes, equate to an effective tax rate of about 51 per cent.
Myanmar Metals and others have been advocating the benefits of shifting to a profit-sharing arrangement, which they say would sustain bigger and longer-life mines than would otherwise be viable under the current system, but the company is also prepared to move ahead with the development of Bawdwin under the existing fiscal regime.
The idea, Lamb says, is to get Bawdwin up and running, demonstrate their credentials and generate revenue for the venture and the government, and then work on convincing the government of the merits of an alternative tax structure.
Funding the mine’s $US191 million ($269m) construction cost shapes as the other key challenge for Bawdwin.
Myanmar’s reputation automatically narrows the pool of willing lenders, although Lamb says there are plenty of institutions, both Asian and Western, that have flagged interest in supporting the project. China-owned miner Perilya, which bought a 19.9 per cent stake in Myanmar Metals last year for $14.9m, has flagged its willingness to arrange $US150m of debt for the venture.
Like most Myanmar businesses, National Infrastructure and EAP do not take on debt, meaning Myanmar Metals will have to devise a way to secure debt and equity for the venture without unnecessarily diluting its own shareholders or forcing them to subsidise the partners.
So the final funding package is likely to involve some sort of alternative structure, such as a streaming or royalty deal over one of Bawdwin’s commodities.
“We will have no trouble dealing the offtake and I’ve got no doubt we will have no problem financing it, because it is the best polymetallic project in the world,” Lamb says. “There’s daylight between the others and this one.”
The potential ahead of the company is obvious. The challenge for the company will be proving that it can unlock it.
The reporter travelled to Bawdwin as a guest of Myanmar Metals
RESOURCES REPORTER
Paul Garvey has been writing about the resources industry for more than 14 years. Prior to joining The Australian's Perth bureau, he spent two years writing for the paper out of Hong Kong. He has also been a mi...
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