Following the recent public availability of the revised draft of the Minerals Law, the air is thick with opinions and comments. Not all of these are well-informed or based on a correct perception, however. MMJ talks toD.Munkhtuya, head of the sub-working group on the draft, to find out the truth about a number of matters and issues pertaining to it.
Who were the members of the working group? And what was your individual specific role?
A working group was established at the Minerals Authority in 2010 to draft a new Minerals Law. This began by inviting opinions and suggestions from the public and I’ve been working on the draft ever since then.
In 2011, the President set up a working group at the President’s Office. This was led by P.Tsagaan and had two sub-groups: one in an advisory capacity and the other entrusted with preparing the actual draft. The first had nearly 20 members including MPs and ministers. I led the drafting sub-group which comprised 7 members, 3 of them professional experts and 4 lawyers.
When we began, P.Tsagaan told me to choose members of the drafting sub-group, making me responsible for the results of its work. I invited two mining sector professionals to join the group and I think both have proved to be good choices.One of themis D.Bat-Erdene, head of the Mongolian Industrial Geologists Association, who was in charge of matters concerning exploration. The other isTs.Davaatseren, director of Mining and Research at the Minerals Authority, who was responsible for the actual mining part. The last of the three in our sub-group is Javkhlanbold who currently works as director of the Mineral Division at the Ministry of Mining. These three have advised me on policy issues. They don’t represent any interest group, and I think our work has been solely focused on protecting and furthering the interests of the geological and mining sector.
It is the lawyers who wrote the actual draft. I am one myself and my fellow-lawyers in the sub-group are N.Taivan, B.Lkhamsuren and G.Surakhbayar, all well-known names. During our work, we once again realised the truth of the saying “Three lawyers generate four ideas”. To get things absolutely right on every issue, we often held long discussions and sometimes took a poll. The final responsibility for the text was mine, so I tried my best to make everything clear and unamuous, including the punctuation.
The draft amendments include changes in 30 different by-laws. We had two more lawyers work on these changes and invited experts to advise us on certain chapters. For instance, in determining the legal aspects of mine closure, we sought the valuable suggestions ofProfessor M.Dagva from the Mining Project and Research Centre of the University of Science and Technology. These are reflected in the draft.
What are the main amendments like and how has the spirit of the law been changed in the new draft?
There are contradictory opinions about the Minerals Laws passed in 1997 and 2006, some finding them bad while others think they were pretty good. I personally think they were useful in their time but have now become outdated, with changing circumstances. It is true they had some shortcomings but I don’t want to be overly critical of them. Our draft will also be seen as having both plus and minus points.
One question we are asked time and again is which country’s law we copied. Inour country it’s been common practice to copy laws. We did not copy anything mindlessly but did study many examples and models.For example, Australia doesn’t have just one federal Minerals Law. Every constituent state has its own law and we studied all of them. We also studied the laws of Canada and other countries.
Some people feel we should have paid more attention to laws in countries such as Algeria or Angola where conditions are similar to those in Mongolia. But that wasn’t our idea. We wanted to observe world standards for mining legislation, and so were more interested in how highly developed countries dealt with mining in their legislation. We made careful studies but didn’t copy anything downright. We adapted them to our own conditions and were guided by Mongolia’s experience over the years in matters concerning agreements, the environment and others. We have sought to eliminate loopholes that we faced. Of course, we adopted ideas and norms that we found valuable in other countries’ laws.
Regarding changes proposed in the draft, they are not restricted to just a few things. Their ambit is wide and several new concepts have been introduced.
As initiator of the draft, President Elbegdorj paid close attention to what we were doing and guided us on what the main concepts should be. The National Security Council has discussed the draft three times since 2011 and Parliament’s Standing Committee on Economy once. Both gave suggestions to us.
I have to explain a few things before talking about the main changes in the draft.
Let us first take the State’s involvement in mining. Mining is definitely a business like many others but it has its own unique characteristics. The business is based on minerals, which is State property. That sets the mining business apart from other businesses which are run by private funds and calls for a special regulatory framework, which must allow the State to play a role. Said differently, in mining, companies obtain permission to deal with State-owned objects, eventually transferring State property into private hands. This is not the case in any other business, and the State must be involved in some way and at some level in mining.
The Minerals Law adopted in 2006 determined the amount of the State’s share and its involvement in certain mines. The new draft restricts the State’s involvement in the business by way of owning shares. There will be no new deposits of strategic importance and no question of the State owning 34 per cent or 51 per cent. In other words, the State will ensure the main guidelines are followed and business activity conducted on proper lines. It will not be an active business partner any longer.
Then there is the issue of the 15 deposits already classified as strategically important by the State Great Khural. Even when the new law halts any new deposit from being listed as strategic, these 15 deposits will be left untouched. If our proposed suggestion on these is accepted, then not merely will there be no addition to the list of strategically important deposits, but their present number will be actually reduced. The draft envisages a total absence of strategically important deposits in the future, and the State will no longer have any share in the mineral deposits.
How will a deposit be taken off the list of strategically important deposits? Will the State Great Khural take the decision?
The Government will submit a proposal to the State Great Khural for its consideration. We did not indicate any criteria for such deletion from the list.
In my personal opinion, the concept of deposits of strategic importance adopted in 2006 is a very complicated thing and has also not been implemented effectively. For example, in these six years, we have not been able to determine the percentage of the State’s share in any deposit besides OyuTolgoi and TavanTolgoi. We keep saying the State has to own some percentage but in reality it doesn’t have any ownership. This also shows that the idea is not realistic enough to be continued.
What you say about eliminating State share in mining sounds strange, for a look at the draft gives exactly the opposite impression. There you assert that minerals found in the territory of Mongolia are the property of Mongolia and then you devote a whole chapter to the State’s involvement in mining activities. Also, the term “selection by tender” is found several times regarding issue of licences, and the draft specifically says that a State-owned company will be preferred when a selection is made.
First of all, we need to differentiate the concepts of the State being involved in mining business as a shareholder in companies and without owning shares. The draft does restrict the State’s right to own shares but that doesn’t mean that the State will have nothing to do with the sector. Minerals are State property, so the State has to be involved in their exploitation and disposal.
There are those who say that the minerals are not the State’s property but the people’s. I think this is a misinterpretation of the Constitution which says, “The land, its subsoil, forests, water, fauna and flora and other natural resources in Mongolia shall belong exclusively to the people and be under the State protection.”Let me explain why this does not make the minerals the people’s property.
Property is a complex legal concept. Something is legally defined as “property” only when the authorised holder is guaranteed the right to own, use and dispose of that particular thing. Thus, depending on who enjoys these rights, things are legally defined as State property, local property, organisation property or private property. That way, the “people” cannot have the legalentity of being owner of anything, nor have rights and duties as regards minerals.
Who do we refer to as “people” anyway? If it is you, me, or anyone whose nationality is Mongolian and we claim the minerals as property of the “people”, then anyone, not excluding you and me, can dig a hole, find some gold and claim to be its owner. That will legalise the operations of the “gold ninjas”, and everybody else also will have the right to own anything they dig.
In other countries, there is no concept of minerals being the people’s property. They are always the State’s or the monarch’s property. The term “people’s property” is an imaginative fiction. What the Constitution says is a statement of principle but not a legal authorisation. It is impossible to give legal ownership rights directly to “the people”. Any right they may have to own something can only be exercised through a designated organisation, which in this case is the State. It is a completely different issue how the State uses that authority and how Parliament or the Government protects the people’s rights.
There can be no question that the State is unequivocally and absolutely the owner of Mongolia’s minerals and as such has exclusive rights over them. When this right is transferred to another entity, the State is responsible for using the income accruing from that transfer to ensure the well-being of the people. This is what the draft says.
There is nothing sinister in minerals being termed “State property”. This refers to underground minerals as yet untouched by men. If someone is granted the permission to explore for them and then to mine them within the legal framework, paying tax and fulfilling all legal responsibilities, then what is mined is defined as the miner’s property. This is the underlying principle in the exploration and mining business.
And this is why the draft has a whole chapter on minerals being the State’s property.
Selection through tender is a well accepted principle and practice. There may be some confusion about our intention regarding State-owned companies being selected without going through any due process. This clause was added to the draft quite late, to meet certain eventualities. Take, for example, a time when the State owned Baganuur and Erdenet mines exhaust the reserves in areas under mining now. At present there is no provision to grant them fresh land for mining. There are lands around these mines that have not been licensed to anybody, but even then we can’t just give it to Baganuur. The law demands that a tender is floated. There is no guarantee that Baganuur will be the clear winner. However, as it is the mine that supplies coal to all of Ulaanbaatar city, the State will certainly prefer to give the free areas around the mine to Baganuur. Even if there is a tender, it will be an eyewash and Baganuur will be selected. Then what’s the use of such tenders? Our idea is that in such special cases the State should be allowed to grant free or unlicensed areas to State-owned companies without the process of tender. Nobody’s interests will be violated here because we’re not talking about taking away somebody’s licence and giving it to a State-owned company.
We find it good that the draft looks towards the future and respects international standards. However, is this possible in today’s Mongolia, where political compulsions and private interests take precedence?For example, an article in the draft allows the Government to establish, at its initiative, a Deposit Development Agreement in order to set up a special regime. The conditions for establishing such an agreement are not very clear. Would you please tell us about this?
That is another main concept in the draft: to regulate mining activities by the general law, not through bilateral agreements. Why should we need individual agreements if we can have a law governing the sector?The present law allows an agreement if the investment amount exceeds $50 million. Now, The Deposit Development Agreement pertains to only the 15 strategically important deposits. The draft also says that the agreement is not obligatory, but will be made only at the Government’s initiative. If no need is felt for such an agreement, everything will be regulated by the law.
A special regime means that these 15 deposits will follow slightly different norms from what is done at other deposits. The idea behind a Deposit Development Agreement is to allow a special regime for those 15 deposits.
There are several major differences between the proposed Deposit Development Agreement and the currently practiced investment agreements. First of all, this agreement is not just for regulating issues concerning investments. The current law covers just three things: investments, stabilisation of taxes and tax exemptions. Developing a deposit is a complex activity, and there is more to it than investment and taxation. The proposed agreement provides for regulating issues like exploration, environment, mine closure, public and local development.
The main principles behind an agreement will be the same but individual issues will have to be negotiated within the existing legal framework. The law is not to be changed to fit the agreement.
It also does not put any exact percentage as the State’s share.
We feel that the 10th chapter of the draft is devoted to freeing the OTIA from the present impasse. Is this right or would you say that your intention is to rectify the mistakes stemming from the way the project has been developed? Also, does the draft call for implementation of the “long-titled” law on the environment?
We have learnt a lot from the agreements made with OT and Boroo Gold, and we have made an effort to make sure such mistakes are not repeated. Of course, the new law won’t be able to change the OTIA, because in general a law should not be retroactive. We cannot do anything about agreements already in force but now it’s important to pre-empt future mistakes.
First, we have given a timeframe. An agreement will be valid for only as long as the investor needs to recoup the initial investment as determined by the Feasibility Study. This will be different for every deposit. If I remember right, it was 6 years for OT. The agreement can be extended, but different conditions can be put in.
Second, there are certain mandatory provisions regarding the terms and conditions of the agreement. During the first term of the agreement, the State will guarantee investors reimbursement of the amount of the initial investment, and will see to it that the tax system remains stable. Certain other provisions are optional. But once the initial investment is recouped, these provisions will not apply even if the agreement period is extended. The company will have to pay taxes as other companies do. In other words, the State guarantees coverage of the initial risk, but all for further business risks are the investor’s alone. I think this is a fair principle. We shouldn’t give out guarantees for 70 years as we did with OT.
Third, the present practice of allowing the agreement to grant exemption from taxes and fees payable under law has to end. Both levying and exempting of taxes and fees are to be as per law and no bilateral agreement can bypass them. The draft reinforces the primacy of the law of the land over any agreement.
Also, an agreement will not have the power to grant exemption from fees and payments. These have a purpose different from taxes and are usually charged for a service rendered or for using something. There should be no special favours in this as it is everybody’s duty to pay for any service received, or for, say, using water.
Fourth is the principle of renegotiating the conditions of an agreement. It is not right to have an agreement which is untouchable for 70 years. Generally, an agreement helps two sides to protect their interests. If either side feels after 5-10 years that its interests are no longer adequately protected, it should have the right to call for changes to the agreement. The draft seeks to legalise this right.
State policy needs to be strongly enforced in the mining sector especially because it deals with State property. That single fact is also why, as I have explained before, the State cannot but be involved in the management of the sector. The State rightly expects to earn as much as possible for as long as possible from mining industry. This gives the State the right to fix the maximum allowable production in a year. This can be part of an agreement. If a company wants to increase output when the product price is high, its request may be granted but then other articles of the agreement should also be allowed to be changed. Likewise, every article and clause in an agreement should abide by the right standard.
The present law says 10 per cent of the shares of a deposit of strategic importance have to be offered at the domestic stock exchange. This is widely believed to be very helpful in developing the securities market. Why has the draft dispensed with this requirement?
It is true that such a practice would have had a positive effect on developing the securities market but this misses one point. It is up to a business entity to decide what its ownership pattern would be, and when we grant a licence,we cannot impose the condition that the holder will have to make a public offering of a certain percentage on the stock exchange. It is 100 per cent up to a company to be individually owned, a partnership, or publicly owned. It would be legally untenable for the State to interfere in such business decisions. It would be more logical if the law were, instead,to say that licences will be granted to only public companies or to public companies which will offer 10 per cent of their shares on the stock exchange.
It is one thing to transfer to the State reserve land from a company that has just secured a licence, but quite another, as the draft does, to empower the State to halt ongoing mining activity and transfer the land to the State reserve after the company has invested a sizable amount of money. Will mining companies not be intimidated by this?
The draft does have one article about transferring a deposit to the State reserve, but it is wrong to take it as giving the State the right to transfer a deposit to its reserve after a company has spent money on exploration and is ready to begin mining.
The article is part of the wider attempt to extend State policy and planning to the mining sector. If a new coal deposit as as TavanTolgoi or a gold-copper deposit like OyuTolgoi is found in the Gobi region, the State should be allowed to reimburse the exploring company all relevant expenses and transfer the deposit to its reserve and then hold it for mining until after maybe 20 years. It is not profitable for Mongolia to mine all deposits at once and dig out all its underground wealth in only a few years. This will not serve the national interest. We’re not talking about the State taking away what you have for itself or to give it to somebody else. The State would reimburse you all that you’ve spent and only then include the deposit in the State reserve.
This is also not something totally new. There are cases in Russia where natural gas deposits were kept closed after being discovered, for mining later. This is strategic policy. Large deposits have been discovered in Khuvsgul aimag but it’s not decided yet whether to make Khuvsgul another mining hub. If the final decision is not to mine these deposits because of environmental concern, the State could compensate the companies that did the exploration and put the deposits in the State reserve. Later, when technology less harmful to the environment is available, we could decide to work these. This is the thinking behind the proposal.
Since the passage of the Minerals Law in 1997, nearly 6,000 licences were issued. Now their number has been brought down to 3,000. While we have no intention to allow the State to arbitrarily take away anything for which it has issued a proper licence, national interests have to be protected by State policy. Those who obtained a licence cannot be free to act as they want. This article will be applicable only in some special conditions such as when there is a threat to the national interest. The State will not attempt to take every deposit to its reserve. Maybe this article requires some clarification.
The criteria for grant of a licence appear to be very vague. Will the company that pays most be the one to be selected? How will you choose between companies that apparently meet requirements in a similar manner?
One chapter of the draft details the tender selection process. A tender is a means to determine which company meets the requirements best. The regulatory principles and the conditions of the tender have been carefully mentioned in the draft.
If two applicants score equally well, the State has the exclusive and absolute right, as owner of the property,to choose between them. When you are renting your apartment, you have a similar right to choose one of two people, depending on their looks or something else.
But the companies would like to be clear on why the State would choose one and reject another. What do you think?
Of course there would be such criteria, but these may vary depending on the site and the type of the licence. Preparing a standard set of criteria for use at all times may not be a sensible idea. We thought it would be better to announce them each time a tender is floated.
I totally agree with you that the selection process has to be clear and transparent. Those whose bids are rejected have the right to know why. The draft accepts that. The State organization that makes the choice has an obligation to explain to the losers why they were not successful. If they then feel the selection process had been unfair, they can go to court.
As for being clear, the draft favours giving information to the public. This is most likely to be the first law to guarantee transparency, giving information to the public, enabling public oversight and participation, and apportioning responsibility for any failure.
The Law on Land talks about land for special use but why is it silent about reserve land?
It allows the State to acquire unlicensed land for local special use. The draft deals with the issue of acquiring licensed land for local or State special use in a better way than the current law by restricting the rights of a local authority to utilise such land for local special use. We found this necessary as such acquisitions have tended to violate licence holders’ interests, put illegal pressure on them, and bred corruption. If there is a necessity to take the land,the local authority will submit a proposal to the Government and if the latteragrees, it will have to decide the compensation issue as well. Let me give you an example. Say, an archaeological site is found during exploration. The local authority can submit a request to the Government for banning mining there, and if the Government agrees, it will have to pay compensation to the exploring company. Such distribution and division of rights between a local authority and the executive authority can be effected only when some changes are made in the Law on Land and some other laws and we have plans to do this.
The draft says that the reimbursement will cover only the legitimate expenses incurred, thereby making its ambit narrower than that of the current law which provides for compensation for future loss of income as well. Is this fair?
Well, it all depends on how you look at it. It can always be claimed that if a deposit was further explored, the explorer could have earned a certain amount of profit. We decided that we shall compensate a company for all legitimate expenses incurred until work is halted but shall entertain no claim for any future profit likely to have been earned.
In simple terms, what will henceforth be the process of obtaining a licence?
The draft does away with the practice of applying for a licence any time and for any site. Instead, every year the Ministry of Mining will publish a list of prospecting areas for which licences will be issued. The rationale is that the State will decide where exploration is to be done and where licences will be issued.
Let’s say 250 hectares in Adaatsag soum of Dundgovi aimag are identified as a prospecting area. A public announcement will be made only after an official letter is sent to the Adaatsag soum authority asking it to seek local opinion on allowing prospecting in that area. The Soum Citizens’ Representatives will meet and decide, in support of or against the proposal. In case it doesnot favour work in that particular area, the proposal will be dropped and can be resubmitted only after four years. This process may be repeated. Companies do not have to approach the local authorities with a request for a licence, as the Government would get in touch with them in first place.
If the local authority supports exploration, a public announcement of the area offered will be made and companies invited to apply for a prospecting licence. The selected company will be allowed to work there for four years. After this, an exploration licence will be given for further work, and when that is done, a mining licence will be issued but there will be no further role for the locals. The initial permission must come from the local authority, and companies that are granted a licence will sign an agreement with it.
Doesn’t that requirement make it likely that the local authority will make diverse and difficult demands, impairing the company’s progress? And what if local people choose to stop the company’s operation?
As things are now, local people do not get much benefit from mining activities in their area, despite companies making considerable contributions to the budget or variously supporting the Governor’s office. This has led to a general antipathy to mining among residents who have on several occasions demanded suspension of all mining licences in their aimags. How can we convince locals that if mining develops fairly and properly, it can benefit them in many ways and ensure a better future for them? The mining companies have to be proactive in this task of convincing locals. The mining sector’s reputation has been marred by its own way of working.
But that is not all. Inadequate oversight and weak laws have also played their part. What has been happening is that a State organisation issues a number of licences and the companies go to the mining area with their equipment only to find locals blocking their way.It is incumbent on the State, which granted the licence on payment of fees, to make sure the companies can operate normally. However, the organisation that granted the licence refuses to accept any responsibility and says it will not be involved in the affairs of private companies. What happens is that the companies hire their own security service and the fight with the locals goes on intermittently.
The best way to stop this is to give the local residents the absolute right to make the initial decision on whether they want mining in their area. This is the way we’ve proposed.Maybe it will take a few years for people to accept this quite new concept but there should be no alternative to entrusting local residents with both the right and responsibility to themselves decide on what they want to be done in their territory.
The situation will certainly improve after a few years. Emotional and uninformed opposition will gradually melt away once people see how life in a neighbouring soum improves after mining activity is allowed there,and when the proposal is resubmitted after four years, there could very well be a positive response. If the licence holding companies are seen acting in a socially responsible way, doing proper rehabilitation and generally abiding by the agreement made with the locals, people initially opposed will eventually agree to let mining activities take place in their territory.
As for your other concern, no, local authorities will not be able to act in an arbitrary fashion when negotiating an agreement with the licence holder. The Ministry of Finance will prepare a template agreement based on some standard guidelines. The companies and the local authority will discuss priority areas of work in the area and how and where revenue from mining will be spent. There will be no more purchases of four-wheel drives for governors.
There will be several safeguards against unfair pressure on companies once they have begun operating. For instance, they will not in any way be asked to go beyond the agreement. This includes any sort of support, financial or otherwise, for any event or programme outside the agreement. The local authority will also not be allowed to exert any pressure on how a company works in its licensed area.
A company with a prospecting licence is unlikely to spend much in the four years of its work. How, then, would it meet the expectation of locals and make visible changes in their life or in the area?
That is why there will be two types of agreements. A cooperation agreement will cover the years of prospecting. Prospecting does require a lot of money, but because the norms are still to be properly developed, it is not yet the practice to do so. There will be another cooperation agreement with the local authority. The template for this will also be approved by the Ministry of Finance so no one will be able to act crazy and demand what they want.
However, it will be different once exploration begins.Then comes the Deposit Developing Agreement which will call for more funds to be spent. We have suggested that the company’s expenses under the agreement should be deducted from the taxable income. Investment in local development is also a kind of tax and companies should not be burdened with paying double taxes. This incentive should also make a company more enthusiastic about contributing to local development. However, this is beyond the purview of the Minerals Law and actually calls for amendments to the Tax Law, and in particular to the Law on Entities’ Income Tax, and we cannot say how or when this will be done.
There have been instances of irregularity in other countries. One country built a giant ring for bullfighting with funds paid by an exploring company, even though it is used only once a year. Mining companies find it easier to do everything the local authorities ask for, even when they know that not all of this will actually contribute to local development. That is why the Ministry of Finance will prepare a template so that the agreement directs expenses in the proper beneficial channel.
Isn’t four years too long for a prospecting licence?
It’s four years for prospecting and five for exploration, making altogether nine years. This is the same as the current term; we have only formally divided it into two.
The draft suggests establishment of a minerals exchange and setting the price. However, the price of some minerals follows market trends while that of others is fixed after negotiations. How realistic can the price determined by a minerals exchange in Mongolia be? And where are the legal guidelines for such an exchange to be set up?
Mongolia is a major mining country now and is expected to have its own price regulation policy. Currently, China sets the prices for our minerals. As our main buyer and our neighbour, it should have a role but we, too, must have a say. This article in the draft is a way to give us a voice in determining the price policy.
About the minerals exchange, such talk is not a new thing. We need one to facilitate export to countries other than China. In any case, this is not a subject falling under the Minerals Law. There has to be a separate law and the draft merely seeks to prepare the legal base for an exchange. We have told the Ministry of Mining that more study of other countries’ laws is needed to determine how we can have the most effective minerals exchange and I hope this is being made. There will have to be laws and regulations and as I’m not an economist, I don’t know what these should be. But we have understood this much that we need an exchange at least to determine domestic prices. The reasoning is similar to that governing the agricultural raw material exchange now being established.
Are any contradictions likely between this draft and the Law on the Regulation of Foreign Investment in Entities operating in Strategic Sectors? For example, according to that law, if the State Great Khural approves, there could be more than 49 per cent foreign investment in an entity but the draft says, “A shareholding company shall be entitled to hold a licence to mine at deposits that have been explored and the reserves have been determined by state budget financing when it has been founded by a citizen of Mongolia and not less than 75% of its share capital and in case of foreign invested company not less than 51% of capital share is owned by a citizen of Mongolia and when it has been established and has been operating in conformity with the legislation of Mongolia and when it has been paying tax”. Are the provisions not contradictory?
The current law sets the State’s ownership at 34 per cent and 51 per cent. The draft has legalised the right of national companies to own shares with the State owning no shares but involved as a business partner. This is the principal difference. Citizen Dorj can establish a company and own that 34 per cent, not the State. Mineral is a limited resource. Sooner or later it will run out. It is important to consider what we shall have left then. Given our mineral riches and our future as a mining country, we need to train personnel and develop companies capable of working inmining anywhere in the world. That will be more beneficial to Mongolia than the State owning 70 per cent of a deposit. We have tried to encourage national companies with that goal.
Some people say that this particular article will put off foreign investors or discriminate against them. This may be true. At the moment there does seem to be no national companies to make really large investments or with good management and human resources. However, if we do not push national companies to go into mining, how will they compete with foreign companies that have been operating globally for 50 years, often more? Our goal should be to have Mongolian companies that can take on Rio Tinto or other vastly experienced Canadian, Australian or Norwegian companies.
But the problem is that citizen Dorj doesn’t have such money, isn’t it?
The reason why we cannot compete with foreign companies is not that Mongolian companies are bad. It is because until recently, our political, social, legal and economic system did not provide any opportunity for national companies to be established and operate under market principles.
Not having money is not Dorj’s fault. It’s because the system and the policy did not allow him to make money legally. Foreign companies do the mining here because they have the financial resources that we lack. Instead of telling Mongolian companies to back off because they don’t have money, the draft is demanding that foreign companies share their financial, managerial and technical expertise with our companies. If they don’t agree to do that, they will not get any licence. This may be seen as unfair but it would be more appropriate to call it forcible development of national companies. We are giving them certain legal advantages in order to raise them up. This should be obvious to everyone.
It may turn out to be that foreign investors give a Mongolian national some money and establish their company here, no?
It could be so. We have discussed the possibility. One can give money to somebody and operate as a national company. This is known as “transformative negotiation” and has no legal sanction. If such an agreement is indeed made, there would be risks for both sides and we do not believe there will be many such successful deceptions.
Any company currently mining here will have to sign a Deposit Developing Agreement once the draft becomes law, no?
That is indeed the case. This does not violate the non-retroactivity of laws. We shall most likely have a law on compliance to set out the process through which companies that already have a mining licencewill have to go to the next level of acquiring a processing licencein a certain time frame.
An exploration licence is issued for nine years. I think companies in the last stage of exploration will keep their exploration licences. As there hasn’t been any freshlicence issued for the last two years, they will all be transferred to X licence (exploration licence). However those who obtained a licence just before two years might get prospecting licences. It’s hard to tell now. It will all be regulated by the compliance.
Mining companies will obtain mining licences and companies that do processing will be required to get processing licences.
Depositing 100 per cent of the expected rehabilitation costs before beginning to mine is not easy, so why do you want it?
Please understand that what is to be deposited is the cost of that year’s rehabilitation work only, and not of the project’s total rehabilitation. Companies have to prepare a rehabilitation work plan for every year and also follow it. It is a misunderstanding that rehabilitation work begins only when all mining is over. Actually rehabilitation should run parallel to mining and both activities should end more or less simultaneously. It should be no burden on a company to put the amount of money that is equal to that year’s rehabilitation work costs in a separate bank account.When the mine declares closure, its rehabilitation work should be 100 per cent complete as well. Of course, it will have to submit a report every year.
We already have four types of licence, so was it necessary to propose three types of activity licence?
True, there are four types of licences, but let me clarify what the three types of activity licenceare about.
When a company is granted a mining licence it is also given a certain amount of time to fulfilallied legal obligations such as getting approved its mining feasibility study report, mining and rehabilitation work plan, construction plan, signing the Deposit Development Agreement, arranging for all necessary insurance and so on. No company is authorised to begin mining until these are in order.This is what is meant by “work permission” in the draft.
At present companies that have had their resourc eapproved are not issued alicence directly. They make a pre-operation agreement for two years, during which period it is expected to build the deposit and complete the feasibility study, all this without holding a formal licence.
Now, a licence is not just a certificate. It isan authority to exercise a right. In order to retain that right, a company is required by law to invest in exploration and mining work. Thus it can be seen as a right guaranteed by funds. No country that allows private investment in mining bans transferring or surrendering such licences, because spending capacity is a fundamental part of that right. Even our country couldn’t ban it. Transferring a licence is just an act of selling the rights. The draft proposes allowing licence transfer only through formal contracts that mention the amount for which the rights were sold and makes it easier to determine the amount of tax payable on the sale. In this we have followed the practice in Australia and Canada where a licence holder has to make some designated investments and fulfil certain requirements within a particular timeframe after the issue of the licence. The principle is that there should be a certain guarantee that a licence is taken as a valuable asset.
The Ministry of Mining suggested that we should issue the mining licence after the company does everything. We discussed the matter thoroughly and decided that a mining licence will be issued once a company had its resource amount approved and met the requirements detailed above. If the licence holder has financial problems during the construction of the deposit, it can borrow money with the licence as collateral. If it finds it impossible to continue the mining work, it can transfer the licence to someone else. Once the company is ready to start mining, it has to submit its request for work permission.
The work permission in a way guarantees proper use of the licence. It could be suspended if the holder doesn’t submit reports in time or fails to do the rehabilitation work. It isn’t that we are itching to penalise a company for infractions. Any suspension can be lifted if the company makes amends for the violation within six months. Failure to do so could, however, lead to cancellation. Such a possibility makes a company take its mandatory requirements seriously.
What about insurance requirements?
Any commercial activity should be covered by professional liability insurance. Lawyers have it and I think journalists also should have it. What if someone makes a professional mistake and causes harm to others?
Such insurance is absolutely necessary in mining. Let’s say a company has an accident during its exploration work and spills a amount of fuel and causes harm to the environment. Its insurance cover will pay for compensation and soil cleansing work. If a company, domestic or foreign, cannot get insurance, it shouldn’t even go into mining. Seen that way, insisting on insurance is another way of ensuring the financial soundness of a company.
People have said this article of the draft will favour foreign investors because Mongolian companies cannot afford to take out insurance. This could be true of small miners who have one or two tractors and who dig holes anywhere to get some gold. My personal opinion is that supporting small and medium enterprises does little to develop the mining industry. Only those with technical capacity, appropriate equipment, adequate funds or the capacity to raise such funds, and ability to bear the responsibilities should work in the sector. However, it would be all right if state policy supports small mining companies to come together.
What are the draft proposals regarding prospecting and exploration licence fees, minimum amount of exploration work and the resource royalty fund?
A geological and mining expert would answer your question better but let me try to explain things in a simple way. Prospecting covers a area and doesn’t touch the subsoil. It studies the location of minerals through geological and geophysical methods. If the results indicate the presence of enough resource, exploration through further drilling will follow. The prospecting area islarger than the exploration field, but needs less investment per hectare and this fact has been underscored in the draft.
As for licence fees, the principle is somewhat different. Currently, land fee is charged per hectare in a licenced area. Minimum exploration fees are also calculated per hectare and resource usage fee per ton. Legally speaking, the licence fee is one kind of stamp duty, which is what the State charges for granting a right. The fee is the same for some one who gets one hectare and anotherwho gets 200 hectares. The draft proposes the same licence fee for everybody and will be determined by the Law on Stamp Duty and based on the licence type. We thought this would be fair but this would also mean less income for the State, so we don’t know what reaction to expect.
We also thought it would be wrong to relate the resource usage fee to the Minerals Law. Any kind of fee and payment is actually a kind of tax and so it would make more sense to determine the amount by applying the Tax Law. The draft also uses principles different from those in the current law when issuing resource usage fees.
The current law levies resource usage fee per ton of both minerals sold and loaded to be sold. What is left at the site is considered pure waste. For example, coals with calorie content higher than 4200 are sold to China and those with less than 3500 calories are left at the open pit. If that coal is brought to Ulaanbaatar, it is no problem using it in our power stations. This is well known. But this means loss of usage fee as the miner shows that he didn’t sell that coal or load it for sale. On the one hand, the criteria are misleading and, on the other hand , the miner should pay fees for whatever it mines. The State should get its due and after that, it is the company’s business to sell it, give it away or leave it to be burnt.
When preparing the initial Feasibility Study Report, a company makes an estimate of its mineable resource. This figure is really important as the basis for the mining licence, rehabilitation and mine closure. The State, too, will determine the fees it will charge based on that amount. Tying resource usage fee to the resource amount helps State oversight on mining activities.
Considering our avowed emphasis on processing minerals like iron ore and coal before exporting them, would it not be better to issue processing licences directly?
To be honest, it will not be easy to legally enforce export of processed mineral. Many things have to be considered, including how much of the resource there is, whether it is commercially profitable for the miner to go for processing, and the environmental effects. Other countries do not bring processing under their Minerals Law, which actually should regulate only prospecting, exploration, mining, mine closure and rehabilitation. As a matter of fact, processing is a part of the industrial sector. All matters relating to it, such as licences and oversight,are different from what they are in mining. We did not wish to have anything on processing in the draft, but had to include it as we don’t have any legislation or regulation for processing.
The current law covers operation licences for all stages of mining, including processing and selling. Various amuities and uncertainties and absence of clarity have meant that processing plants are now operating without any kind of licence and regulation. To put an end to this, we have proposed the mandatory requirement to have processing licences. Conditions for its grant will depend on the type and amount of the mineral to be processed. We couldn’t be very detailed as we were all relatively unfamiliar with the nature and needs of processing plants. Until such time that we get thoroughly conversant with world standards on the issue, it would be sensible to include processing plants under the Minerals Law. Later, we could bring it under the Law on Heavy Industry when we finally have one.
According to The Law on Regulating Foreign Investment on Entities Operating in Strategic Sectors,a parent company has to pay tax when it sells most of its shares. How does the draft see this issue?
The draft proposes that if a licence issued in Bat’s name is to be transferred to Dorj, it has to be registered at the Minerals Authority, and the agreement and negotiation costs and tax receipt submitted. We propose another change. As of now, the database records details of a licence and the company in whose name it is issued, but the draft suggests that the name of members of the Board and those wielding executive authority are also recorded. This is to ensure that responsibility is shared by all. This will keep the company’s name in the database even when it is sold to new people.
How about regulating the way the parent company can sell its shares?
This is not an issue for the Minerals Law, and is more relevant to the Law on Regulating Foreign Investment on Entities Operating in Strategic Sectors, the Company Law or the Tax Law. Not everything related to the licence holder has to be regulated by the Minerals Law.
The draft appears to have covered the legal aspects well, but how does it tackle the economic side of mining?
I cannot make a judgement on this as I’m not an economist. All I can say is that Mongolia values the economic results of the expansion of its mining industry. Even today Mongolia is mostly uncharted territory as far as comprehensive geological studies are concerned, with potential for huge new discoveries always there. As for the present, with our main consumer next to us, the mining sector has a great future and investors are being drawn to us.
It has been less than 20 years since commercial exploitation of the mining sector began and we are still in the initial stage of development. Despite all our mineral riches, I don’t think our country can or should rely on income from the mining sector forever. More important is to ensure that this income is spent wisely and in a way that best helps the country to develop.
As lawyers, our job is to study the laws of countries witha developed mining industry and bring our laws to their standard. For the past 20 years, we have experimented a lot with our Minerals Law and have had both successes and failures. It is unfortunate that there has been almost no monitoring of mining companies’ activities. Accordingly, this draft seeks to install and effective and viable monitoring mechanism. The State will grant rights but will also expect responsible behaviour. Every time there is a transgression, the source and culpability have to be ascertained. Some people have expressed concern that we seek more involvement of the State and favour more State oversight. It’s not just Mongolia that is doing this. For example, Australia’s Law on Minerals makes it clear that the State is in charge of its property.
Does the draft tackle the issue of “ninja” miners at all?
Yes, it does. There is a concept of certificate of origin for mined products, which will record where the mining and processing took place and from whom the mined products were bought.
Two years ago there was an incident in which some Koreans smuggling gold were caught by our customs officers. Some goldsmith had melted that gold into such a shape that they could be inserted into the smugglers’ rectums. He could not be traced as we do not have a law tracing all our gold through a certificate of origin. No goldsmith should touch any gold that does not have this certificate. Mining, processing, selling, buying, keeping, transferring or transporting minerals that don’t have a certificate of origin will be a criminal offence.
Gold ninjas keep prospering because there are buyers for their output. These people have money, and move around in land cruisers, paying ready cash for whatever they buy. They don’t pay taxes nor are they registered as traders. The draft requires the police and legal organisations to go after the few people who buy and sell the products not the ninjas. We are confident that if the buyers are eliminated, the illegal mining will end as well.
Are there any other points in the draft that you would like to mention?
We have proposed changes in issues concerning licence registration and cadastre map. According to studies, 70-80 per cent of all disputes related to minerals have to do with cadastral activities. We reviewed the nature of the complaints and have accordingly sought to bring some order to registration and cadastre issues.
When do you expect the draft to be submitted?
The President as the law initiator is the one who will decide when to submit the draft to the State Great Khural. He gave us strict instructions to thoroughly research the contents of the draft and to consider suggestions from as many people as possible. The Minerals Law is related to many other laws and cannot be seen separately. A long time has been spent on preparing the draft and finally it is ready for public discussion. I don’t think the President wants to rush it through Parliament. The draft has been posted on the website of the President’s Office and has been translated into English for the benefit of foreign investors.
The President’s Office directed the Working Group to hold the first discussion on the draft by 20 January, 2013. This gives the public enough time to read and study the draft. The President’s Office has actually planned several discussions and expects many suggestions to come up from there. We shall consider every suggestion carefully and on its merit and shall explain our grounds for all rejections. Suggestions are reaching the President’s Office daily.
The new Government was established in October 2012, and we submitted the draft to the Minister of Mining as soon as he took office. It came back after a month with 36 suggestions. We studied each of them carefully and included 18 of them in the draft. Of the others, 10 were already there and 8 were not found useful. We explained our decision on each article to the working group of the Ministry. Everyone was satisfied and we hope something similar will be achieved when suggestions from the public are now considered.
In April, 2011, the President’s Office held a two-day discussion on minerals. All ideas discussed there were taken note of and 80 per cent of them were included in the draft proposal.
I would like to say something here. Few in the mining industry have come forward with suggestions, almost 80 per cent of which have come from the general public, members of the civil society and environmental organisations. I think the investors and miners need to speak up more. The Mongolian National Mining Association initially didn’t submit any suggestion at all, saying that they were against the basic idea of revising the law. Finally, it changed its mind but was the last organisation to send in suggestions to the Office of the President. However, most of their ideas have been included in the draft.
What about the suggestions from the Ministry of Mining and the Mongolian National Mining Association that you rejected?
We are ready to explain our assessment of all ideas we received. I want professional organisations to actively participate in the upcoming discussions. We made honest attempts to do our best but might have made mistakes, so it will be very good if the public or the miner stell us what we missed. We shall keep an open mind until the proposal is submitted. I don’t know of any law that has gone through this process.
Are you saying this draft sets a new standard?
It could be. It would be good if it does. Our attempts to work in a new way will be vindicated if our example is followed in the future.