A welcome revision: The industry’s legal framework is evolving

Mining investors’ sentiment has ebbed and flowed in line with Mongolia’s regulatory framework, with near-yearly attempts for either wholesale revisions to the Minerals Law or proposals for new legislation covering environmental standards, governance or foreign investment. Conscious of the need for a coherent and consistent regulatory approach, the incoming government proposed a cover-all policy document to parliament in November 2013 meant to form the basis for future laws and rules. The document will prompt revisions to the existing 2006 Minerals Law, rather than a new one as proposed in December 2012. Frictions over the 2009 Oyu Tolgoi Investment Agreement (OTIA) will also need to be resolved to reassure investors about Mongolia’s commitment to contract sanctity.

Fits & Starts

With World Bank assistance the 1997 Minerals Law was Mongolia’s first landmark legislation covering all aspects of the mining industry, which was at the time still in its nascent stage. It helped to set up the Mineral Resources Authority of Mongolia (MRAM), the sector’s technical regulator. Providing a liberal regime with three-year exploration licences renewable twice and 30-year mining licences with two possible ten-year extensions, the law set royalties at 2.5% for all minerals, established a 5% export tax and required 90% of a mine’s workforce to be Mongolian. Although the total nine-year exploration windows provided are relatively short for categorising larger tier-1 deposits, the timeframe of licences is still in place. “A maximum life of nine years for exploration licences is very short, especially given the seven-month window for drilling in Mongolia, which essentially means you have five years of effective exploration,” Graeme Hancock, Anglo American’s president and chief representative in Mongolia, told OBG. “This makes it very difficult for any major mining company to identify and define a tier-1 resource within the timeframe provided.”

A replacement law enacted in 2006 tightened rules by doubling mineral royalties to 5% and introduced the strategic deposit concept. The categorisation of such deposits is dynamic, given two key yardsticks of a deposit’s potential to contribute 5% of GDP (which changes with economic growth) or having “potential impact on national security, economic and social development of the country at the national and regional levels”. Open to interpretation, the number of strategic deposits has swelled from 15 in 2007 to 22 by 2013.

The 2009 Uranium Law effectively extended the concept to all uranium projects. The government would be given a 50% stake in such deposits if it co-financed exploration and at least 34% if not, for which it would pay the equivalent of money invested rather than market value. Concurrently, a Windfall Profit Tax passed in 2006 set a 68% tax on un-smelted gold and copper sales when international prices exceeded $850 per ounce and $2600 per tonne, respectively, in a bid to prompt downstream integration in-country. Although the tax was repealed in 2009 as part of the OTIA negotiations ( effective from 2011) it halted all formal small-medium gold and copper production given the absence of smelting capacity domestically.

Long- Name Law

Amidst stricter royalty and tax treatment, miners also faced much-stricter environmental requirements from 2009 with passage of the Law on the Prohibition of Minerals Exploration in Water Basins and Forested Areas (known as the long-name law), which banned mining from areas within 200 metres of forests and water sources. Key to all of these rules was the absence of grandfather clauses, which exposed existing investors to higher degrees of political risk.

The 2009 Law allowed government to cancel over 200 existing exploration and mining licences, mainly in alluvial gold, with compensation for investors a pending issue. The immediate effect was to drive mid-sized operations to informality, while strategic deposits in which the government participated were exempt from the law – creating concerns over perceived double standards.

As the largest recipient of foreign direct investment (FDI), the sector has also been affected by changes in FDI rules. The 66-paragraph Strategic Entities Foreign Investment Law (SEFIL) – rushed through the Great Khural in May 2012, in the run-up to parliamentary elections and in response to the attempted acquisition of 58% in coalminer SouthGobi Resources by China’s Aluminium Corporation from Ivanhoe Mines – had an immediate impact on the industry, already suffering from falling commodity prices from the second quarter of 2012. Covering majority (over 49%) investments over $75m and those from foreign state-owned firms in strategic sectors of mining, finance, telecoms and media, SEFIL required government approval for the deals. With many concepts only vaguely defined – such as the basis for calculating a 49% stake, whether on invested, fair market or book-value – and the process open to politicisation, the law halted mergers and acquisitions.

Licensing

While the long-name law cancelled many existing licences, it also spurred a presidential moratorium on any new exploration licences from 2010. Extended yearly since then, with an indefinite extension since December 2012, the government’s aim was to hold new licensing until a new Minerals Law was formulated. “In any amendments to the Minerals Law the timeframes need to be extended in order for efficient exploration to take place,” Hancock told OBG. “Due to the moratorium on the grant of exploration licences we are currently unable to make any significant investments in exploration, as there are very few licences now current with sufficient life remaining to justify any expenditures.” The 2006 Law set two processes for awarding exploration licences: in areas where no previous exploration had been conducted, the first-come-first-serve model would continue; on previously explored acreage, it planned for a competitive tendering process, similar to that conducted in oil block bidding, where pricing would be only one criterion. Yet a 2009 attempt to introduce implementing regulations for licence tendering proved unsuccessful. “No tendering has taken place because of the lack of guidelines for these tenders,” N. Algaa, the executive director of Mongolian National Mining Association (MNMA), told OBG.

Meanwhile, although the country has been a fully compliant member of the Extractive Industries Transparency Initiative since 2007, allegations of corruption have continued around the industry. Although a public cadastre has been established with World Bank technical assistance, it is only due to be posted online for public consultation in 2014. Following the January 2013 conviction of former MRAM chairman and top officials, the authority revoked 106 exploration licences, on areas six-times larger than those in active mining, with the issue of compensation still pending a civil class action suit by previous licence holders. According to the 2006 Law cancelled licences should be retendered once the moratorium on exploration licensing is lifted.

While MRAM retains regulatory powers, elaboration of new rules has increasingly been the prerogative of the cabinet and the National Security Council. In December 2012 the president’s office released a draft of a new 143-article Minerals Law, which sought to incorporate all aspects of mining regulated by the 2006 and 2009 laws. Reintroducing the principle of competitive bidding for exploration licences and raising tax rates on strategic deposits above 50%, the draft also required “Mongolian citizens” to hold 34% equity in all mining projects. The bill also introduced environmental rules linked to closing and rehabilitating mines, raised local content requirements and devolved the initial approval of licences and projects to local authorities.

The private sector’s response was highly critical following public consultations in January 2013. As local investment bank Mongolia International Capital Corporation noted in March 2013, “Mongolian officials seem to think that they have more leverage now than they had in 2006”. President Ts. Elbegdorj then withdrew the draft from debate in September 2013.

Notwithstanding, on January 16, 2014, the Mongolian parliament adopted a new minerals policy, which is expected to guide future amendments to the existing Minerals Law and other laws relating to the mining sector. Some of the proposed reforms to the 2006 law under review include clarifying defined geological exploration boundaries and strategic deposits, among others. Most significantly, however, is the potential for the government to lift the current ban on exploration licences, which has been in place since 2010.

Way Forward

The administration has made encouraging moves to address investor concerns. A new Investment Law passed in October 2013 replaces both the 1993 FDI Law and SEFIL, clarifying provisions of both and levelling the playing field between foreign and local investors. Crucially, it also introduces tax stabilisation certificates meant to insulate investors from fiscal changes in four key taxes, including mining charges (see Trade & Investment chapter). It also waives any local content requirements both for sourcing and staffing.

Meanwhile, a 2012 directive for the 5% export tax on coal to be calculated based on much-higher Australian free on board prices, which imposed an effective 20% tax on coal exports, was revised to be based on actual contract price from early 2013 in a bid to restart production at most coking coal coalmines.