The over whelming burden of compensation

23th of 12, 2013

By S.Bold-Erdene

A prospecting company denied a mining licence under the ‘long-titled’ law is preparing to claim nearly $500 million from the State in court. It obtained the prospecting licence before the law was passed in 2009 and thereafter spent more than $10 million on the prospecting work. After the Professional Mineral Council had approved the estimated reserve amount, the company was told it would not get a mining licence as its name was included in the list in the long-titled law. Interestingly, the company had never before been notified of this crucial fact and the Government had also been regularly approving their annual prospecting work plan even after the passage of the law. If the situation does not change, the company will claim compensation for the loss of the mineral reserve discovered after prospecting over four years.

Almost 100 more such companies holding legitimate prospecting licences find themselves in the same unenviable situation. Many of them have had estimated reserves approved while others are very near that stage. They want the State to pay them the value of the reserves determined at current market rates after deducting the exploration costs. The amounts claimed could vary from $50 million to $1 billion. In every case, the companies would be justified in asserting that they continued with their prospecting work because the State never clarified the specifics of the law.

The recent special session of the State Great Khural did take up for discussion the draft on the amendment to the Regulatory Law to Prohibit Mineral Exploration and Mining Operations at Headwaters of Rivers, Protected Zones of Water Reservoirs and Forested Areas, but then postponed further debate until the Fall session. It was clear from the limited discussion that there was no consensus among MPs and that the issue was being politicised, with its economic sides underplayed.

MP L.Enkh-Emgalan: There was a very good reason why we began discussing the draft amendment in the special session only to postpone it to a fuller debate in the Fall session. We wanted to combine consideration of the amendment to the long named law with those to the Law on the Transparency in the Gold Trade and to the Minerals Law. This can be done only when the State Policy on the Minerals Sector is adopted. It also seems that the DP members in Parliament are divided on what to do with the long named law, which was initiated by them in the first place.

Now, why in the first place does the Ministry of Environment and Green Development want to amend the law?
It has many good points and all political parties, the Government and even companies have agreed that such restrictions are indeed called for. It is the implementation that has stumped everybody for the past four years, with no easy answer to the issue of reimbursing with interest the expenses incurred by legitimate licence holders. The amendments are expected to find a way out of the vexed question.

It had long ago been decided that operation of all valid licences would be suspended and prospecting companies reimbursed their expenses until the time of this suspension. However, it took two years to determine the line beyond which operations would be prohibited. Then disputes began on the demarcation. Local authorities of soums and bags did not accept the course of rivers as shown on the map drawn to identify the prohibited areas. The ministry decided to use satellite images to prepare a more accurate map. This uncertainty over the border of prohibition was why no one could be sure which licences would come under the axe. At some places, companies surrendered their licences on their own on realizing that their area of work would surely fall in a prohibited zone, and this misled some MPs to claim that implementation was proceeding well.

The law to execute Decree No.194 of the Government mentioned 427 mining and 909 prospecting licences, of which 346 and 789 respectively had been granted before July 16, 2009 when the law was passed. Holders of some 100 of these prospecting licences have since completed their work and either got their estimated reserves approved or submitted them for approval.

Companies that spent over a certain amount of money for the prospecting work and whose submission of reserve is approved will be entitled to compensation and reimbursement but it is clear the State cannot meet this legal obligation. The total amount spent on prospecting in areas falling under the law stands at MNT451.8 billion. Also to be reimbursed are prospecting and mining licence fees totalling $105 million and $35.2 million respectively, bringing up the State’s dues to MNT647.3 billion.To this has to be added reimbursement of the market value of the approved reserve and then the State’s obligation will skyrocket to nobody knows how many trillions. This is to be seen against the total revenue of MNT500 billion accruing to the State budget in the first nine months of the year.

O.Chuluunbat, Deputy Minister for Economic Development: The initial idea behind the long named law was to protect the environment by stopping digging everywhere. Its ambit was widened by the time it was passed. Mongolia used to sell 25 tons of gold a year and now it’s down to 2-3 tons. This is directly related to this law, just like what happened with the law on 68 per cent windfall profits tax. Such laws have negative effects on not just gold mining. Incomes and tax receipts have decreased, many who work in the mining sector have been hit, and the environment is also being harmed in some ways. The main goal of the amendment is to ensure that exploration for gold does not continue in the present ways that harm the environment.  We need the gold but not at a cost to the environment and proper rehabilitation is a must. I don’t know what the decision of Parliament would be.

This is what will be due to just those who hold prospecting licences. If the 346 mining licences held on the day the law was passed were to be suspended as well, new reimbursement claims would amount to MNT hundreds of billions. Knowing that it cannot pay such an amount, the Government decided to let mining continue until the approved reserves were exhausted. But Parliament cried foul, suspecting that the move was meant to help gold companies. Apparently, our politicians did not much care for the accounting bottom line.

Initially, the Ministry of Mining had wanted holders of all licences issued before the law to carry on with their prospecting or mining work, reasoning that the former would end after five years at the most. Only prospecting too close to headwaters and to forests or at a riverside was to be stopped. If a deposit was found, there would be strict criteria for registering it, with claims for economically inefficient units and for those failing to deposit rehabilitation costs to be dismissed. This, the Ministry argued, would mean the State would not have to pay a cent. The law allows companies to claim reimbursement for a deposit containing even 50 kg of gold. Similarly, insisting on full-scale rehabilitation would discourage mining licence holders from claiming reimbursement for operating in each and every deposit.
It’s up to Parliament now to make the right decision.

Comment ...
Do you agree with increasing state participation in the Draft New Mining Law?
  • 1. Agree
  • 2. Disagree



1 month
Copyright © 2014 Mongolian Mining Journal