Dissecting the draft Law on Minerals

20th of 12, 2012

ll speculation on what the new Law on Minerals would contain is finally over with the draft – in both Mongolian and English – now posted on a website. It has 15 chapters and many new concepts. It also does not appear that much from last spring’s two discussions on it has been incorporated in the draft.

Z.Enkhbold, Speaker of Parliament, used to say when he was a member of the previous parliament that there was no particular reason why mining companies’ views should be sought on the proposed revisions to the Mineral Law. Indeed, even though the working group from the President’s Office prepared the draft quite a while ago, it has not been offered for any public discussion until now. It appears it will be on the website until the beginning of the new year, and will most likely be presented to the Citizen’s Chamber just before the holidays and to the State Great Khural before the end of the Autumn session.

It will be no surprise if the Presidentuses the new law to boost his prospects in the coming presidential election. He can also be expected to refer to the draft when he speaks at the event to mark the anniversary of the National Freedom Day on December 29. His address at the same event last year did include references toit. He had said that the new law proposed tolegalise Mongolia’s ownership of all mineral deposits to be no less than 51 per cent. He had then emphasised that this ownership could be in the hands of the State or of national companies, but, as we see the draft, it favours Government ownership more than it supports the cause of national companies.

The draft says that the deposits mentioned in Appendix 1to Resolution No.27 of the State Great Khural in 2007 will be regarded as strategic deposits, and that beyond these 15, there would be no more deposits registered as strategically important.  The Government retains the right to delete a deposit from the list of 15, but that none is to be added means that the 39 deposits included in Appendix 2 will not be counted as strategic. The draft, however, recommends that all deposits in Mongolia will be regarded as being “of importance”.

Is the Government seeking more control?

The draft devotes a whole chapter on how these 15 deposits will be operated. At present, the Government has signed stability agreements in respect of three of the 15 deposits --NariinSukhait, Boroo and Tumurtei mines, and, of course, the OyuTolgoi mine already has an investment agreement. There is no indication if the proposed law will have retrospective effect as far as these agreements(save that relating to the Boroo gold mine) are concerned. The draft seeks to create a legal environment where the Government will work “face to face” with the companies in operating deposits of strategic importance, without going into more detail. The Government may also demand a Deposit Development Agreement with the holders of licences, the draft says. Beyond the name, nothing more is said by way of elucidating what the new term, Deposit Development Agreement, means.

The relevant paragraph in the draft says: “The Government may establish, at its initiative, a Deposit Development Agreement with holders of licences in order to set up a special regime for mining, processing and marketing activities of minerals extracted from deposits of strategic importance.” There is no mention of taxes, nor is it clear what circumstances will lead the Government to take the initiative. The idea behind the agreement seems to ensure total Government control overlicence holders of strategic deposits.

Altogether, the provision is vague and could lead to much arbitrariness in its use. Given the current Parliament’s keenness tohave more say over businesses in the private sector, this article might become a tool for the Government to act irresponsibly and unilaterally. Running a deposit of strategic importance is always a risky venture, given the huge financial outlay needed. Companies usually access this money through different kinds of long-term loans, and any fresh agreement with the Government may jeopardise repayment. There may very well bea Deposit Development Agreement but this must be a mutually beneficial move, not one forced by the Government.

The current and previous Minerals Laws clearly state the percentage of shares the State will hold. The new draft does not go into specifics, merely saying: “The State shall be entitled to possess free of charge a certain percentage of shares of any legal entity which holds alicence for mining and processing of a deposit with strategic importance. The percentage of the shares to which the state shall be entitled to possess free of charge shall be determined by Deposit Development Agreement that is to be established in line with this law.” This gives the State the authority to insist on any percentage of shares, raising fears that this will affect the right of the licence holder to pursue his business operations in a way legitimately profitable to him.

The draft is silent about any compulsion to offer 10 per cent of the shares of a deposit of strategic importance at the Mongolian Stock Exchange for sale to the general public. All in all, the draft has more articles proposing State ownership and Government control. For example, the preamble itself says, “Any usable mineral concentration naturally formed on the surface or in the subsoil of Mongolia is the property of the State.”That sets the tone for all subsequent emphasis on the State’s involvement in mining activities. On the other hand, there is no provision allowing citizens to oversee the State’s actions. 

Clearing the way for fresh talks on OTIA?

The draft devotes a whole chapter to the OTIA, and the lasting impression is that it seeks to correct the mistakes in the present agreement. Take, for example, its assertion that“The initial term of a Deposit Development Agreement shall be equal to the term defined in an approved Technical and Financial Feasibility Report necessary to earn the returns on initial investments.”This means the draft allows re-negotiation of the OTIA terms once the Mongolian Government repays its share of the initial investment amount of $4.6 billion estimated in that report. That  amount has now become $7 billion and the draft obligingly allows a review of the Feasibility Report in the event of such increase.

There are several other such articles that will allow fresh negotiations with the investors in OyuTolgoi. Another,of even more concern to them, reads: “If certain conditions or circumstances which could not have been foreseen at the time of signing a Deposit Development Agreement arise and if any or some of clauses of the agreement cease to further the interests of Mongolia or become detrimental to the rights and interests of Mongolia they were initially meant to protect, the arising of these new prospects, conditions or circumstances shall serve as the ground for making changes and amendments to the agreement.”

The tone is carried over into the next article, which is also undeniably related to OyuTolgoi. This reads: “A holder of a licence who has signed a Deposit Development Agreement shall be obliged to provide to the Government upon request any information related to its activities permitted by the licence, its investments and proprietary nature at the period of the agreement.”This is without doubt an effort to examine allinformation related to the purchase of equipment and services during development of the OyuTolgoi mine to find out why the estimated amount of the initial investment has been overshot.

The stability agreement with OT regarding taxes and duties has been found inconvenient, and it appears there will no such agreements in future that tie the Government’s hands. All will be regulated by the Deposit Development Agreement which will have no preconditions on tax. Such articles may appear to be specially “designated” for foreign investors but could very well hinder the operation of national companies as well. If the policy is to offer no protection to massive investments and risks, the future may very well see only the Government and the gold ninjas remaining in the mining industry.

More local authority may be misused

The increased powers and authority of aimag governors and heads of local citizens’ assemblies have brought new players into the mining sector. Local budgets have grown bigger and aimag governors now have a bigger say in granting mining licences. There will now be four different types of licences, for prospecting, exploring, mining and processing respectively. Mining and processing licence holders will first sign an agreement with the Central State Administration, but this has to be followed by a “local development agreement” with Citizens’ Assemblies. The pressure will be on them to invest more money and for a longer term. A mining licence is usually valid for 20 years which can be extended for another 20.Thus mining companies will deal with local residents for nearly half a century. The term of a processing licence is usually open and is extended by The Minerals Authority.

Those planning to explore and prospect will similarly have to sign a “cooperation agreement”with the head of the citizens’ representatives that will govern their relationship with the governors and authorities. The draft states the terms of the agreement will be prepared by the Ministry of Mining, but it is certain that people in mining areas,keen on getting the most from mining companies, will insist on plucking diverse benefits from these terms.

The most powerful prerogative the draft gives to the Central State Administration is the absolute right to grant the initial permission to begin any mining activity in an area. Every February, the Minister of Mining will publicly identify areas where mining licences are to be issued. But thereafter it is for the local residents to decide whether a licence holder can operate in that area. Decentralisation and local empowerment are, of course, positive developments. However, in the absence of any formal training in national economic imperatives and the economics of mining for the citizens’ representatives, they may well turn out to be local bosses, politicized and working only for narrow regional interests. The recently held local election showed how party politics can trump the long-term interest of people.

The draft gives the local authorities another privilege when it says: “If the local self-governing authority has made a proposal to take the land granted by licence for any special local use, the local Governor shall submit the proposal to the Government.”The draft has several articles about transferring a deposit to the State reserve. It is even possible to halt on going mining and processing activities and transfer the deposit to the State’s reserve or for special local use. A decision to this effect can be taken by both the local authority and the Government. This adds to the risks a mining entrepreneur faces if a situation becomes too politicized. Deposits taken into the state reserve can be offered for sale after a five-year hiatus.

The draft proposes to put an end to the licence trading business. Each of the four types of licences will be issued for its own term and no one person will be allowed to hold more than five licences in total. While these provisions may indeed bring order to the business of trade in licences,State-owned companies will have an advantage when the licenses will be sold through competitive tender.

The draft proposes regulations determining the eligibility to hold licences. The criteria are different for different types of licence. One article specifically enjoins Mongolian ownership to be no less than 75 per cent. Such restrictions discourage investment, and without freedom to invest, the mining sector cannot progress. They may also create the opportunity for a foreign company to come in under a Mongolian name.

It is commendable that the draft suggests establishment of three professional councils to assess the Technical and Economic Feasibility Reports. However these will comprise experts from the geology and mining sectors only. Surely, financial experts will play an important role.

Good intentions could go awry

The text of the draft Minerals Law runs to 115 pages. That is understandable as it seeks to be final regulating document in the geology and mining sector. We have alluded to some parts only in trying to emphasise that the expectation from the new law is that it would support the sector and reduce political pressure on national business development.

Many provisions in the draft are good and deserve to be supported. These include the legal enforcement of guidelines relating to mine closure, proper use of guaranteed rehabilitation funds, compulsory purchase of products from national suppliers, setting up a minerals exchange and abiding by its rates when selling mineral products. Many issues so far left unregulated have been put in order, such as making it obligatory for a company to notify the Government before offering fresh shares on the Stock Exchange and also before selling or transferring shares, etc. The draft also, for the first time, clarifies what the term “mineral of strategic importance” actually means, and identifies water, oil, natural gas, radioactive minerals and rare earth elements as being of strategic importance in Mongolia. Russia has already indicated that its rare earth elements are as strategically important as petroleum, natural gas, nickel, cobalt and tantalum, and this is the first time that Mongolia is ready to list minerals it considers strategic.

As we congratulate the team that has worked on such a big draft, we would like to remind them that it is of crucial importance to listen to companies working in the sector. Only a participatory effort will succeed in imposing international standards of legal regulations onthe mining sector in Mongolia.
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