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Mongolia – Note On The “Amendment To The Law Of Mongolia On Minerals” Dated 1 July 2014.

27 August, 2014

 

Legal News & Analysis – Asia Pacific – Mongolia

 

On 18 August 2014, the Government of Mongolia brought to a close its campaign for 100 days of reform in order to kick-start the domestic economy and reverse the sharp decline in foreign direct investment. During that time, the government looked to reverse certain legislative enactments that had dampened foreign investor activity. The centrepiece of this campaign, naturally, was the mining sector.


To this end, the Parliament of Mongolia passed the Law of Mongolia on Amending the Minerals Law (the “Amendment“) on 1 July 2014, amending the 2006 Law of Mongolia on Minerals (the “Minerals Law“). The Amendment introduces 13 new provisions and alters a number of existing provisions of the Minerals Law with the aim of improving the existing legal framework relating to mining. The Amendment became effective on 1 July 2014.


Simultaneously with the Amendment, the Parliament of Mongolia enacted the long-anticipated Law of Mongolia on the Repeal of the Law on Prohibition of Granting Exploration Licences (the “Prohibition Repeal Law“). The Law on Prohibition of Granting Exploration Licences (the “Prohibition Law“), which had been in effect since 12 January 2012, imposed a moratorium on the issuance of exploration licences. The Prohibition Law itself was the last in a long series of interim moratoria that the Parliament of Mongolia had been issuing since 17 June 2010. The Prohibition Repeal Law sent a welcome message to the business community that the Government of Mongolia had begun to adopt progressive measures to use the country’s latent natural resources to reverse the troubled economy.


The Amendment and the resulting revised Minerals Law are expected to bring certain changes in the minerals sector of Mongolia. We highlight below the principal amendments to the Minerals Law:

 

  • The exploration and mining of common (which includes gravel, sand and clay) minerals are no longer regulated by the Minerals Law.
  • New stakeholders are brought into the licence regime such as the National Geological Office, an ad hoc policy council, and accredited technical experts and specialists.
  • The preparation of exploration reports and feasibility studies and the independent evaluation of the same are to be carried out by accredited technical experts and specialists.
  • The Mineral Council under the Minerals Resources Authority of Mongolia (“MRAM“) is to review and issue recommendations on feasibility studies relating to mining and concentrating plants.
  • The Amendment provides for the establishment of an integrated national database on geological studies and mineral resources.
  • Licence holders should give preference to domestic suppliers and service providers in the procurement of goods and services and in the supply of their products to Mongolian entities.

New Terminology


The Amendment introduces the following new terms:

 

  • “mineral resource wealth” means an accumulation of a mineral – the size, form, content, composition or economic importance of which has not been fully assessed;
  • “mineral deposit reserve” means a mineral resource – the size, form, content and mineral composition of which has been determined by exploration work, and which is technically and economically viable to extract; and
  • “technical expert and specialist” means a nationally and internationally-recognised individual who has been accredited by mining and geological non-government organisations.

Previously, a mineral deposit that was deemed to have a potential impact on the economic and social development of Mongolia or one of its regions could have been determined as a “mineral deposit of strategic importance”. Such classification in theory allowed the state to claim various levels of ownership in the deposit. However, the Amendment reduced the scope of those mineral deposits of strategic importance by removing from this definition those deposits which are regionally significant, leaving only those deposits with national significance.


Finally, concentration of minerals is now deemed to be mining work.


New Agency And Expanded Powers Of The Government


The Amendment creates a new government agency – the National Geological Office – which will be responsible for conducting various geological cartographic surveys, researching patterns of distribution and occurrence of mineral resources and providing an assessment of such resources, maintaining a national database on geological, mining and mineral resources and recording changes in minerals reserves. These responsibilities formerly belonged to MRAM.

 

MRAM’s powers have been expanded by the Amendment as follows:

 

  • maintaining a separate register of those licence holders which are listed on a stock exchange;
  • determining the areas for which exploration licences may be issued; and
  • making determinations on the allocation of land for small- scale mining and common minerals purposes.

The powers of the Ministry of Mining of Mongolia were also broadened as follows:

 

  • approving the procedure for acceptance of mines and mining/concentrating plants into operation;
  • approving the requirements and operational procedures of concentrating plants;
  • establishing an ad hoc policy council (in addition to the National Geological Office mentioned above) mandated to provide recommendations and support the implementation of state policy in relation to the mineral sector;
  • approving the restoration and closing procedures of mines and mining/concentration plants in cooperation with the Ministry of Environment and Green Development;
  • approving the regulations governing the geological, mining and mineral resources information database maintained by MRAM;
  • approving the regulations for the accrediting of geology and mining sector technical experts and specialists by non-governmental organisations;
  • approving the classifications of mineral resources and deposit reserves;
  • approving the procedures governing the public disclosure of mineral resources, deposit reserves and the results of prospecting work; and
  • approving the budget for state-funded geological studies and reviewing the results of the same.

New powers have also been afforded to the Government of Mongolia (“GOM“):

 

  • establishing the National Geological Office;
  • approving the form of contracts to be concluded between licence holders and local administrative bodies in respect of environmental protection, mineral extraction, infrastructure development and job creation;
  • approving those areas for which exploration licences may be granted and informing the public of the same;
  • determining the geographic extent of mineral deposits of strategic importance; and
  • granting a licence (with the agreement of the licence holder) for an area which has been explored or mined using state funds as compensation for the confiscation of another licensed area, where such was necessary for national security reasons, for the implementation of large- scale government projects or other state purposes.

New Obligations Of Licence Holders


The Amendment makes a number of changes in respect of the obligations of mining and exploration licence holders. Some of the key changes include:

 

  • appointing a full time employee responsible for reporting on environmental, restoration and mine closure matters;
  • giving priority to business entities registered in Mongolia when procuring goods or services and hiring sub- contractors;
  • giving priority to Mongolian concentrator plants when selling its extracted, concentrated or semi-processed products;
  • informing MRAM in the event of the suspension or closure of mine infrastructure or concentrating plants;
  • submitting reports on deposit reserves and prospecting and exploration work findings together with the conclusion of an accredited technical expert;
  • submitting a feasibility study on the development of the deposit prepared by an accredited technical expert within one year of obtaining the mining licence;
  • ensuring that feasibility studies include detailed information on the transportation of mining products, development of infrastructure and funds required for mine restoration and closure work;
  • submitting an exploration work plan by 15 April each year and annual exploration work report by 15 February of the following year;
  • submitting a mining plan with production estimates by 1 December of each year; and
  • notifying the Petroleum Authority of Mongolia if methane is discovered during coal mining.

In terms of new rights, up to ten per cent of the employees of the subcontractors of licence holders may now be foreign citizens. Previously this dispensation only applied to licence holders themselves.

 

Licence Term, Area And Fees


The maximum area which may be licensed under a single exploration licence has been reduced from 400k to 150k hectares.


An exploration licence (save for those licences for radioactive minerals) may now be extended 3 times (up from twice), meaning that exploration licences may now have a total duration of 12 years.


In return for this 3 year extension, a licence holder will become subject to the following obligations:

 

  • in terms of exploration costs, not less than USD 10 per hectare of licence area must be spent in licence years 10 – 12; and
  • the exploration licence holder shall pay a fee of USD 5 per hectare of licence area in licence years 10 – 12.

Related to the extension of exploration licence term, the Amendment abolished the notion of pre-mining operations (and thereby pre-mining agreements). These had been granted for a period of up to 3 years post-exploration to allow licence holders to have sufficient time to adequately prepare for their full-scale mining operations. The agreements obliged licence holders to develop drawings and plans, finalise feasibility studies, prepare the infrastructure for mining operations, test mining technologies and obtain the relevant permissions for mining operations. Licence holders were also required to provide MRAM with performance reports on certain milestone dates.


The Amendment provides that licence holders are obliged to pay a daily late fee equal to 0.3 per cent of the original licence fee in the event that they fail to pay licence fees on time. The authorities will be entitled to revoke a licence if licence holders are more than 30 days late with payment.


A licence holder whose licensed area has been confiscated as a result of the establishment of a special purpose territory must now be compensated by the relevant authority who issued the confiscation decision within one year of the approval of such decision. The Minerals Law specifically provides that in the event compensation is not paid within the prescribed period, the licence holder may continue operating.


Previously, fines for violations of the Minerals Law had been in the range of MNT 100k to 2m (approximately USD 50 – 1k). However, the Amendment expresses these in terms of the minimum monthly wage, allowing for indexation. Based on the current minimum monthly wage, the fines are now between MNT 960k to 9.6m (approximately USD 500 – 5k).


Regulation On Tendering Of 106 Licences


Following the approval of the Amendment, the GOM adopted the Regulation on Tendering of 106 Exploration and Mining Areas for which Licences were Annulled by Court Decision dated 4 July 2014 (“Regulation”). In 2013, 106 licences were revoked by a decision of the lower Mongolian courts which found the former head of MRAM guilty of bribery and crimes relating to abuse of power. This decision was later upheld by the Supreme Court of Mongolia.


Under the Regulation, the 106 licences will be re-issued by a competitive tender process, whereas the general position under the Minerals Law is that licences are issued on a non-competitive, first-come, first-served basis. The list of areas to be tendered will be approved by the Ministry of Mining and the tender will be organised by MRAM. More detailed tender documents will be developed by a tender committee to be established by MRAM.


The Regulation provides that the threshold value shall be determined based on the cost of geological and exploration work conducted and other expenses incurred in respect of each area by the previous licence holder. Legal entities interested in participating in the tender must have financial capacity to pay the threshold value, as well as possess equipment and professional staff to conduct geological surveys and undertake mining work. Legal entities participating in the tender must place a deposit equal to at least 30 per cent of the threshold value in a designated account in order to participate in the tender.


The Regulation does not stipulate how the cost of geological and exploration work conducted and other expenses incurred by the previous licence holder will be determined nor does it provide any mechanism for redress or compensation to the previous licence holders, nor grant them any preferential treatment in the tender process. As such, previous licence holders will need to compete against other parties interested in obtaining the licences. Some government officials have been quoted in the Mongolian press as saying that previous licence holders would not be required to make the deposit referred to in the previous paragraph and would be fully compensated if not selected, but this is not supported by any published legislation or regulation.


As of the date of this note, the threshold value has been calculated and MRAM has announced tenders in respect of 14 of the 106 licences.


Conclusion


Mongolia has recently effected several important changes to its minerals regime, such as the adoption of the State Policy on Minerals, the enactment of the Law of Mongolia on Common Minerals and the Amendment to the Minerals Law, all in an effort to resuscitate the mining sector and ensure continued economic growth.


There is no doubt that the Amendment brings certain positive changes. The repeal of the moratorium on granting exploration licences and the extension of the exploration licence period are expected to encourage foreign and domestic investment. The Amendment (to some extent) also clarifies certain issues such as the roles and responsibilities of government agencies and licence holders.

 

However, the Amendment does not fully achieve the widely-held hope for a radical improvement of the legal framework for Mongolia’s mining sector. Without detailed regulations, it is unclear how certain provisions of the Amendment will be implemented in practice.


For example, the provisions requiring licence holders to engage with business entities registered in Mongolia and to supply its products to entities operating in Mongolia on a priority basis lacks clarity and may prevent licence holders from entering into contracts with non-Mongolian entities that provide a better and more rational economic basis for a transaction. Further, it is not clear whether foreign-invested Mongolian companies and concentrator plants might be regarded as Mongolian entities that would qualify for such preferential treatment.


It is also unclear whether the reduction of exploration areas from 400k hectares to 150k hectares will affect existing licences.


In addition, the re-tendering of the 106 licences has initially been unfavourably received by businesses that made substantial investment in these areas, and may further discourage investors with less appetite for risk to enter the Mongolian market.


The Amendment leaves many important implementing regulations and rules to be approved and issued by the Ministry of Mining at a later date. It would be even more encouraging to investors if sector participants were able to enter into a dialogue with the regulators in their adoption of these implementing regulations, but this may be unrealistic.


Accordingly, at this stage, it remains to be seen to what extent the new regulatory environment will reinvigorate the Mongolian mining industry. Certainly, the business community would welcome a vigorous and expedient implementation of the Amendment.

 

Hogan Lovells

 

For further information, please contact:

 

Chris Melville, Partner, Hogan Lovells
chris.melville@hoganlovells.com


Michael Aldrich, Partner, Hogan Lovells
michael.aldrich@hoganlovells.com

 

Anthony Woolley, Hogan Lovells
anthony.woolley@hoganlovells.com


Bolormaa Gulguu, Hogan Lovells
bolormaa.gulguu@hoganlovells.com

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