The draft Mongolian Minerals Law - An analysis. Scope of the Draft Law. New Licensing Regime. Types of Licenses

Transcription

1 MONGOLIA The draft Mongolian Minerals Law - An analysis Issue 1: February 2013 In this update we have set out our initial comments on aspects of the draft Mongolian Minerals Law (the Draft Law ), publicly released by the Office of the Mongolian President on 5 December The Draft Law seeks to replace the Mongolian Minerals Law of 2006 (the 2006 Minerals Law ), and is significantly more detailed than existing legislation 1. Given that the mining industry accounts for 22.5% of Mongolian GDP, and is the key driver in future Mongolian economic growth, the Draft Law is firmly in the radar of the Mongolian mining community and foreign investors, including those with exposure to Mongolia s new sovereign bond, the Chinggis bond 2. Timing The President s Office have stated that they are in no rush to implement the Draft Law, and intend to follow due process in developing the new framework so as to strike an appropriate balance between attracting foreign investment and maintaining social priorities. During the first formal consultation meeting on 18 January 2013, the President s Office indicated that it is continuing to welcome feedback on the Draft Law, which has attracted an animated response from stakeholders. 1 2 The Draft Law has 145 articles in contrast to the 66 articles under the 2006 Minerals Law. On 28 November 2012, Mongolia sold US$1.5 billion of Chinggis bonds over the Singapore Exchange. With a coupon of 4.125% for the 5 year tranche, the offer was reported to be 10 times oversubscribed. Scope of the Draft Law The Draft Law seeks to regulate a full range of activities through the mining lifecycle including geological reconnaissance, prospecting, exploration, mining and processing of minerals. The term minerals is given a broad legal definition and on its face effectively includes any metallic, industrial or construction minerals except natural gas, petroleum, radioactive minerals and water. Coal is regulated in Mongolia as a mineral, and accordingly falls within the scope of the Draft Law. New Licensing Regime The Draft Law proposes to change the licensing structure and process to be followed in order to explore, mine and process minerals in Mongolia. Types of Licenses The Draft Law contemplates four types of licences, as follows: a Prospecting License, which entitles the license holder to carry out mineral prospecting in the license area (Article 23); an Exploration License, which entitles the license holder to conduct prospecting and exploration work in the license area (Article 24); a Mining License, which entitles the license holder to conduct prospecting, exploration and mining activities in the license area, and construct buildings, roads and other infrastructure necessary to support such activities (Article 25); and a Processing License, which entitles the license holder to conduct processing activity, and construct buildings, roads and other infrastructure necessary to support such processing activities (Article 26). Mongolia Focus Partners For further information or to discuss this article please get in touch. Alistair Duffield Partner, Head of Singapore T: alistair.duffield@blplaw.com Marius Toime Partner, Projects T: marius.toime@blplaw.com Mining Law Firm of the Year

2 Additional information on each type of license are summarised in the table below: Prospecting Exploration Mining Processing License Term Up to 4 years Up to 5 years Up to 20 years Extension No extensions permitted No extensions permitted May be extended twice, up to 20 years each time Subject to feasibility report Subject to feasibility report License Area ,000 ha 25-12,000 ha Not specified Not specified Number of licenses permitted to be held by Maximum 5 Unlimited Maximum 5 Unlimited each legal entity 1 Note: 1 It is not clear whether multiple subsidiaries of a legal entity will be considered as separate legal entities or one legal entity. License Application Process The Draft Law contemplates that Prospecting Licenses will be issued through a competitive tender process. Other licenses may be issued through a competitive tender process or upon direct application by a holder of a Prospecting License (in the case of an application for an Exploration License), a holder of an Exploration License (in the case of an application for a Mining License) or an interested legal entity (in the case of a Processing License). The process of granting a license through a competitive tender selection process is outlined in Chapter Four (Articles 38-52), and the process of granting a license through direct application is outlined in Chapter Five (Articles 53-65). In granting a license, the State Administration is to assess the proposed work plan, source of financing and applicant s experience. Applicants must also satisfy local equity participation requirements (see Foreign Ownership Restrictions below). State owned entities may avoid the competitive tender process in respect to areas not already licensed or which have been taken into state reserve. License Fees The Draft Law requires that license holders pay, on an annual basis, a license fee based on the amount and percentage specified in the Law on Stamp Duties. The size of the area registered in the license registration database shall be used to determine the license fee, and in the case of processing license holders, the capacity of the industrial unit for processing shall be used to determine the license fee. Transfer Restrictions Under the Draft Law, license holders are prohibited from transferring: Prospecting Licenses; and Exploration Licenses within one year of issuance. Transfers of other licenses are permitted, but only by way of an assignment of rights agreement in accordance with the Draft Law. All license transfers are required to be registered in the license registration database. Any transfer will still require adherence to local equity participation requirements (see Foreign Ownership Restrictions below). Licenses may be pledged and such pledges must be registered in the license registration database. However, if the pledgee enforces the pledge, and the applicable transferee does not fully meet the requirements and conditions under the Draft Law, the State Administration has the right to refuse the request to transfer the license. Revocation Licenses may be revoked in the circumstances provided under Article 36 of the Draft Law. These include, amongst others, the failure by the license holder to maintain the required local equity participation and the failure of the license holder to commence exploration or mining activities within specified timeframes. Foreign Ownership Restrictions Arguably, the local equity participation requirements of license holders set out in Article 66 of the Draft Law, is creating the most controversy among foreign investors. This provision distinguishes between two types of license holders - a company founded by a Mongolian citizen and a foreign invested company. In the case of a company founded by a Mongolian citizen, not less than 75% of its share capital is to be owned by a Mongolian citizen and in the case of a foreign invested company not less than 34% of its share capital shall be owned by a Mongolian citizen. The percentage of local equity participation increases to not less than 51% for license holders entitled to mine in areas in which the reserves have been determined by state budget financing, as well as prospecting, exploration, mining and processing license holders in areas inside the national border zone 3. 3 The existing provisions in the Draft Law are unclear and need to be clarified.

3 Deposit Development Agreements, Cooperation Agreements and Local Development Agreements The concept of an investment agreement (such as the Rio Tinto Investment Agreement) does not exist in the Draft Law. Instead, the Draft Law provides for the following agreements: Deposit Development Agreements ( DDA ): These agreements apply only to deposits of strategic importance, as listed in Appendix 1 of the Parliamentary Decree No. 27 of 2007 (and includes Oyu Tolgoi, Tavan Tolgoi, Baganuur, Shivee Ovoo, Boroo and Tsagaan Suvarga). The Government may establish, at its initiative a DDA with license holders in order to manage mining, processing and marketing activities of minerals extracted from such deposits of strategic importance. Under the DDA, the State is entitled to possess free of charge a certain percentage of the shares in the license holder. The initial term of the DDA will be subject to the term defined in an approved feasibility report necessary to earn the return on initial investment, and may be extended once for up to ten years. However, tax and duties currently imposed by tax laws of Mongolia will only be stabilised during the initial term. Cooperation Agreements ( CA ): These agreements apply to prospecting and exploration license holders, and shall be established with the self-governing authority of the soum or district within 3 months from the date of issuance and registration of the license. The Draft Law does not provide any guidance on the scope of the CA, except that it should follow a template approved by the State. Local Development Agreements ( LDA ): These agreements apply to mining and processing license holders, and shall be established with the self governing authority of the aimag or city within three months from the date on which the decision is made by the State Administration as specified in the Draft Law. The LDA may cover issues relating to employment of locals, improvement of local public infrastructure and social services, and environmental matters. Royalties The Draft Law is unclear as to what extent Mongolia s royalty framework, as summarised below, will change. For example, Article 84.2 of the Draft Law states that the amount of royalty and procedures will be regulated by a separate law - without specifying whether this law exists yet. However, the Draft Law does outline certain principles relating to royalty calculations such as: (a) a Mining Licence holder shall pay royalties estimated on the reserve estimates set out in the holder s annual mining report; and (b) a Processing Licence holder shall pay royalties estimated from the amount of product specified in the raw material purchase contract. This raises an issue of double taxation for coal mining companies with standard coal crushing and washing facilities that may be construed as processing facilities. Current Royalty Regime Under the existing 2006 Minerals Law, Mongolia imposes a standard royalty as well as a special surtax royalty. For coal and other mineral exports, the standard royalty is generally 5%, with a reduced rate of 2.5% for domestic coal sales. This royalty is calculated by reference to the total sales value of the product (depending on the average monthly price, or relevant revenue). The royalty is deductible for tax purposes. The surtax royalty, on the other hand, depends on the type of mineral, market price and degree of processing. The surtax royalty generally ranges from 0% to 5%, but can increase up to 30% for unprocessed copper ore. Mining companies should be also aware of corporate tax and value added tax in respect of which there are no mining related exemptions. Note, however, that the current legislation provides an option of entering into a stability arrangement in order to stabilise tax conditions for a fixed period. Other Obligations The Draft Law imposes a range of other obligations on license holders, number of which are highlighted below. Prohibition on High Grade Mining Pursuant to Article 69.1, a license holder is under an obligation to mine the mineral resources at full extent and is prohibited from engaging in high grade mining. This may mean that mining companies may have to engage in the mining of lower grade ores, which could be unprofitable or uneconomical. Domestic Procurement Obligation Pursuant to Article 72.1, a license holder is under an obligation to subcontract domestic companies to execute more than 60% of its operations of prospecting, exploration, mining and processing. This goes further than the Law on the Regulation of Foreign Investment in Entities Operating in Strategic Sectors, which gives priority treatment to national entities of Mongolia in procuring goods, works and services.

4 Minimum Expenditure Requirements The Draft Law substantially increases the minimum annual expenditure requirements of license holders, as compared to the 2006 Minerals Law. The minimum annual expenditure requirements for Prospecting and Exploration License holders are as follows: License Period Prospecting (MNT per hectare) Exploration (MNT per hectare) 1st year 5, ,000 2nd year 5, ,000 3rd year 10, ,000 4th year 10, ,000 5th year ,000 Transitional Provisions The Draft Law, as currently drafted, does not contain any transitional provisions. The President s Office will need to clarify if any provisions of the Draft Law will apply retroactively to existing projects. Dispute Resolution The Draft Law currently lacks any clear guidance on dispute resolution. This is in contrast to the 2006 Minerals Law. Penalties A breach of the Draft Law can result in various sanctions, including fines, revocation of licence and restrictions on holding licences. Note: 1 Prospecting Licenses have a term of up to 4 years. Public Consultations License holders are obliged to consult with local citizens on activities that may affect them. The Draft Law does not however provide any guidance on the form, manner or frequency of such public consultations. Rehabilitation Activity License holders must undertake rehabilitation activities in accordance with an approved rehabilitation work plan, and set aside expenditure to be spent for rehabilitation for a year in a special bank account established by the State within 14 days after approval of the rehabilitation plan. Mine or Plant Closure In order to close a mine or plant, license holders are required to undertake certain actions prior and during the mine or plant closure period. A license holder must, for example, have an approved closure plan, place the necessary expenditure deposit for the mine or plant closure into a special account prior to commencing work, and take certain measures in relation to environmental protection and reclamation during the closure of the mine or plant. This issue of BLP s Mongolia Update is for general information purposes only and does not constitute advice on Mongolian law or any other jurisdiction.

5 Getting in touch Please get in touch if you would like to discuss your projects in Mongolia. Alistair Duffield Tel: Marius Toime Tel: About BLP Today s world demands clear, pragmatic legal advice that is grounded in commercial objectives. Our clients benefit not just from our excellence in technical quality, but also from our close understanding of the business realities and imperatives that they face. Our people are prized for their legal talent and renowned for being personally committed to helping clients succeed. It s a distinct BLP quality. This award winning approach is redefining the way legal services are delivered. With experience stretching across more than 20 industry sectors and over 100 countries worldwide, you will get the expertise and business insight you need, wherever you need it. Expertise Commercial, Outsourcing, Technology, Media and Telecoms Competition, EU and Trade Corporate Finance Dispute Resolution Employment, Pensions and Incentives Finance Funds and Financial Services Intellectual Property Projects Real Estate Regulatory and Compliance Restructuring and Insolvency Tax Clients and work in 130 countries, delivered via offices in: Abu Dhabi, Berlin, Brussels, Dubai, Frankfurt, Hong Kong, London, Moscow, Paris and Singapore.