The new law seeks to give “a new direction” to mining

Ts.Davaatseren, Honoured Industrial Worker and Head of the Mining Department at the Minerals Authority, was advisor to the working group that prepared the draft mining law. He answers N.Ariuntuya’s questions on the draft and explains the thoughts behind several controversial provisions in it.

Why was it felt necessary to have a new mining law?

Given the situation in the minerals sector today, I’d say a revision was overdue. It is not so much a question of rectifying what may be seen as mistakes in the present law as of giving a new direction to the sector, mainly by installing a better regulatory system. We also expect mining companies to be more aware of their responsibility to society, under the law.

Today, there is much politics in mining. Instead of a balanced appraisal of what plagues the   sector, many are taking the easier way of branding it a villain and hoping to make political capital from this. Mining is the main driver of our economy and our daily life cannot be imagined without this sector. The power plants that provide electricity to the people cannot work without the coal mines. It is thus of crucial importance to establish order in mining activities and improve the legal environment. Events have outrun the utility of the existing Mining Law, and the current economic situation calls for a bold, new response.

What, then, is the general concept behind the revised draft and what principles do you advocate?

Two main concerns always dog mining. First is the dangers it poses for human health, as working in difficult conditions with heavy machinery is seen as especially hazardous. Second is the way it damages the environment. In order to ensure less harm to the environment, it is necessary to assess the impact accurately, plan proper rehabilitation, and to have enough money for this. Failure to address these issues will leave us with people with damaged health, and   environmental disaster. It is imperative to provide legal safeguards against both types of damage.

At present mining companies have to submit an environmental impact assessment, but nothing on the impact of their work on human health. Not that they do not care about people- they do. All mines have extensive labour safety provisions and follow detailed safety rules, but it is necessary to make the legal environment stricter. So the revised draft lays stress on health assessment practices.

Of the 800 entities holding 1,200 licences in the mining sector, 300 are currently active.  One of them has a rescue facility that was installed by the State, and only a few companies such as Oyu Tolgoi, Tavan Tolgoi and Bor-Undur (of Energy Resources) have their own rescue arrangements. Nobody knows how people will be rescued if there is an accident in an isolated mine. How can a rescue team located in Nalaikh district in Ulaanbaatar go to Bayan-Ulgii in a short time? The establishment of a central Mining Rescue Fund should be made legally mandatory. Accident victims will get help from the Fund. We have to think , beyond safety rules in individual mines.

Moving to the environment, regular reports of irresponsible mining practices have convinced many that mining is a destroyer. Only examples of successful rehabilitation can free the popular mind of this misconception. There is almost no land that is impossible to be rehabilitated. In developed countries, there are instances of a restored site becoming even better than in its original state.
Rehabilitation leads us to mine closure. Actually, one is part of the other.

If a mine is opened today, one day it will be closed. How can we at that point of time utilise the facilities and infrastructure constructed during the mine’s life for the benefit of society and people? How can we help the people who would then be without a job or the small suppliers or ancillaries that could be without business? And then there’s the issue of rehabilitation, and regular monitoring that risks do not recur. We need a law that would cover all these seemingly unrelated issues that come to the fore when a mine is closed down.

In many countries I can think of where the industry is highly developed, a mining licence is issued only after a mine closure plan is approved and the amount estimated to implement that plan deposited in an account. Our present practice is to issue a licence, and then to ask the company to prepare a Technical and Economic Study Report and a rehabilitation plan. In fact, the process should be reversed. We should first make sure that the land can be rehabilitated and only then grant the licence. The new draft does this.

The present law has too many details on licence issuance and licensed areas, leading to anomalies. For example, a part of a licence can be transferred, but a company with two separate licences on two pieces of land cannot get one licence to cover both.
I don’t think it’s a good thing to transfer any part of a licence. An explored reserve should be extracted according to a proper plan. If it gets divided, then we have small mines, which invariably means reduced social responsibility. The individual mines will also have less financial capacity for rehabilitation. That is why ger mines and ger industries are preferable in terms of both social responsibility and profitability.

Such transfer in parts makes for several different licences and that may create some problem. What if most of the reserve is in just one of those licensed areas and the others do not have much? The operations on them will be small-scale and the profits would not pay for proper rehabilitation.

The law now is silent on issues regarding estimation and distribution of reserves. Let’s say a company does the exploration work, estimates the reserve amount and does an initial feasibility study. Then it divides the land and sells one part it. The buyer company will have to do a fresh study of the land now under it and also of the reserves it has come to control. This is a complicated process. We have cases where companies holding separate licences on three neighbouring areas have to make three separate reports. It would be easier and also make more sense to prepare just one consolidated report. We considered these issues and the draft law disallows partial transfer of a licence.

But it should be possible to unite neighbouring licensed areas. Currently, the Minerals Authority or even the Government lacks the legal power to allow four different parts of a minefield owned by one individual to be registered as one entity. The State should have no say on how an individual or company wants a mine to be. Mining becomes more profitable if neighbouring small areas are brought together. The draft seeks to regulate this kind of cadastral issues.

Then there’s the issue of processing plants. The State policy is to support production of value-added final products from raw minerals. This would mean more money for Mongolia, and will create more jobs, and encourage national industries to grow. So far we have not been able to make this legally mandatory, though we increased royalty rates. All that we could do was to keep taxes on processed products low and on raw minerals high. There has been little to show for this, however.

The draft changes all this. We propose separate licences for mining and processing. The State will support processing companies in several areas, including health impact assessment, working according to the Technical and Economic Study, and adopting advanced technology so that, among other benefits, less waste is produced. The State needs to monitor that processing companies do not import outdated, or even widely banned, technology. Tax incentives will also be there for companies making value-added final products. These are the main things in the draft on processing.

What about the changes proposed on deposits of strategic importance?

“A mineral deposit that produces or that is capable of producing a minimum of 5 per cent of the GDP of Mongolia”: This is part of the very controversial definition of the term in the present law. Any percentage of the GDP is a variable figure. Besides, even if a deposit doesn’t account for 5 per cent of GDP, its role in the development of the national and the local economy can be strategic. All mines help the local economy to grow by creating jobs and strengthening the business environment, and they also pay taxes. So are they all to be listed as strategic?

Our idea is to restrict the number of deposits of strategic importance to the 15 named in Resolution No.27 of the State Great Khural. No more deposit will be added to the list. The State would levy taxes on strategically important deposits but will keep itself away from their work and management. Determining the State’s share in a strategic deposit makes matters difficult for the management and creates misunderstanding among the public. The State will also have to bear expenses and pay tax in proportion to its shareholding percentage. What’s the use of inviting such complications?
The State should demand several things from a company that operates a deposit of strategic importance, such as building infrastructure, including roads and power transmission lines, providing facilities to employees, building housing or even a township like Erdenet. It should also pay tax at a little higher rate than other companies.

The draft says the Government may ask for a Deposit Development Agreement with a strategic mine. In what situations will the Governmentinitiate such an agreement? Also, what exactly will such an agreement achieve?

We do not envisage every entity being asked to sign the agreement. There will be specific criteria for those chosen.
The State has to be involved in a long-term project.  The agreement is not about the State’s share in the project but will require the entities to build infrastructure, minimise harm to the environment, create jobs and hire local residents, and support small businesses. Without legal compulsion, a company will not spend as much as it should on protecting either people’s health or the environment.

A company builds road and high voltage lines with its own funds, but its expenses are recouped by sale of what we call the people’s property -- mineral resources.  Its payment for the infrastructure comes from the mineral resources which are the people’s property. This is what gives the State the right to demand that a mining company builds the infrastructure needed to operate a mine. The basic idea is that the State follows a policy to increase the reserve amount of a strategic mine and operate it for the longest period possible.

Whatever the justification offered, isn’t this just a way to give the State a legal sanction to meddlein the private sector’s work?

The terms of the agreement will be related to the feasibility study. This should include information like the terms for recouping the initial investment, time period, profit, and the kind of construction that will take place. If the work term is eight years in the feasibility study, the agreement cannot be for 10 years. The two should comply with each other.

The amount of minerals to be mined and its cut-off grade are determined by its global price. All investors want to recoup their investment as early as they can. That is only natural.

The State has the right to monitor and impose terms as it is allowing the companies to mine the people’s property. The terms will include basic things like the health of the people and environmental protection. There is nothing wrong in getting a company mining here to contribute to the development of the country. These are terms the State should impose. Once the resources are already mined, the State cannot do anything even if a company did not contribute to economic growth or damaged the environment.  It is thus important to set the terms before work can start and to monitor implementation from the beginning.

Mongolia is not alone in setting such terms for mining companies. This is now standard practice in mining countries. Indeed, our terms are far less demanding than those set in highly developed countries. Mongolia cannot be more stringent as we cannot develop the minerals sector on our own, and our country’s economy is very much dependent on the mining industry. However, this does not in any way mean we shall go easy on the mining companies and let people’s health and the environment be damaged.

Popular response to the draft is likely to be favourable but how do you expect those in the sector to react, particularly to provisions that give the State a role?

Our mineral wealth may very well become a curse if we fail to have a good policy and to work according to a well-devised and prudent plan. That is why we want miners to work sensibly and responsibly. They must remember that they are digging the land and mining minerals that belong to the people and the whole nation. It’s not just an industry and gives them a special responsibility to, among other things, protect the people’s health and the environment. Owning a licence does not give anyone the licence to do whatever he wants.

Keeping the list of strategic deposits at its present strength is a step to restrict State participation in the sector to these 15 deposits and no other. The State will not get actively involved in the management of companies working in this sector but will be alertly monitoring and overseeing their progress.

Failure to act responsibility, and thereby bringing harm to people’s health and the environment, will only stoke the public distrust of the mineral sector. Mongolia will not develop without the mining industry but in its turn, mining itself must develop in a right manner. We are setting the standards high and people will not forgive mining companies if they fail to live up to them, nor us if our flawed monitoring encourages corporate irresponsibility.

We have no animus against business and are merely asking them to do business with a sense of responsibility. I am sure they know how much harsher some other countries have been or, even now, are to mining companies.

Companies are unhappy with the proposal allowing the Government to take over any deposit, fearing they would lose their licensed area after they have spent a considerable amount on exploration and other activities. It also seems that the terms for the takeover are very unclear. What is the idea behind this regulation?

At present, a licence is issued to the first party to submit an application, without any survey of the land. What if, for example, a historic item is discovered in that field or something happens that would impact the national interest?
The draft negates such risks because it proposes selection by tender. The tender will be announced only after a careful study of the land. Afterwards, opinions of the local residents will be considered. Given all this, in my view, such cases, when a mine field is taken over for the state reserve, will be rare. This may happen if something special turns up but even then, the licensee will not suffer any loss.

The State has the same right under the present law also and has been exercising it quite regularly, sometimes for political reasons.

There have been many cases when the cadastral registration for the licence we issued and the field taken over for State special use overlap. Nearly 60-70 per cent of the licences we issued are overlapping. In such cases one of the companies ultimately loses their land with no reimbursement for any money they might have spent. This is not a happy state of affairs and needed to be resolved.

Now if the State includes a licensed area into its reserve, it often does not reimburse the company its expenses. And both the State decision and the company’s licence remain valid. The licence is invalidated only when the State organisation that put the place into the state reserve pays reimbursement. So any local authority can take over a land for local special use without reimbursement. The draft restricts such practice and makes reimbursement mandatory. Besides, only the Government will have the right to take an area into the State reserve, which makes for more fairness.

Every country has a policy to use its mineral resources systematically. We cannot use up everything at the same time. That is why some resources should remain under State ownership giving the State the right to decide what to do with that resource, and also when and how. The current law does not allow the Government to interfere when a licence is issued, though it still does so at times. If the Minerals Authority protests, strictly according to the law, people mistakenly think it is beingbull-headed. The new law lifts the restrictions on the Government, allowing it to take decisions.

You said the new law restricts active State participation but gives it stricter monitoring powers. Will State monitoring be transparent?

Monitoring is not just inspection and physical supervision. It is also seen when theState sets the standards for certain activity, say, a closure plan or a health impact assessment.  But, yes, much monitoring will be done through inspection, and the way the inspection agency does its job certainly needs to be transparent.

Given human nature, is a State inspector not likely to act in an arbitrary fashion if he has the exclusive authority to suspend a licence?

The reputation of the mining sector has suffered grievously as companies have got away with various acts of blatant omission and commission. We have identified eight principles of responsible mining, but these have to be enforced, if not voluntarily observed. Harmful substances and technology are being allowed to be used in mining, and the prohibitory mechanism is kept ineffective. We cannot do without strict and impartial inspection to apportion blame and to penalise the offender. An inspector must have some power and we do have a mechanism that allows a company to go to court if an inspector demands any kind of bribe.
The Law on Regulating Foreign Investment shocked entities and it seems the draft has alarmed them even more…
There is nothing to be shocked or alarmed about as the draft does not restrict investments.

What about the requirement that a certain percentage of a licence-seeking company’s shares must be owned by a Mongolian citizen?

Any country follows a policy to protect its national business interests. In China, for example, a mining company cannot directly export or import and has to use companies which only are authorised to do such work. Our goal is not to restrict foreign investment but to allow as many companies as possible to thrive, help small businesses, and create a system that encourages social responsibility.

Any of its citizen’s ownership is in the interest of Mongolia. No foreign company can work in all the ‘Stan’ countries without a national company or citizen as partner. Since the resources foreign investors wish to mine belong to Mongolia, we have to see how granting them the right will at the same time serve the interests of our people. There is no attempt to limit investors’opportunities. If you look around, you will see how the idea of “nationalism” is affecting the legal environment in so many mining countries.

What provision is there to protect investments?

This should not be a matter of worry for investors when the draft becomes law. Today, local residents and many different civil movements pose severe problems for legitimate licence holders. Such unjustified but strong protests have stopped companies from operating. Business entities suffer loss because of the conflict between the local and State authorities.

To avoid such risks, we have proposed that the first and initial permission is to come from the local self-governing authority. This will nullify the present complaint by locals that their opinion is not heard when granting a mining sector licence.The draft makes it mandatory for a licence holder to have a cooperation agreement with the local authority. The present legislation does not clearly identify the actual local authority, with the result that a soum governors and an aimag governor contradict each other, and a Soum Citizens’ Representatives’ Assembly and its Aimag counterpart act at cross purposes. The draft has tried to resolve this anomaly.

The draft proposal is that at least 34 per cent of the shares of a foreign invested company would be in the hands of a Mongolian citizen or company. Let alone individuals, only a hand ful of national companies have that kind of money. Does this mean that the few national companies will get ger?

That is a too simplistic way of looking at the proposal. The Mongolian buyer does not have to pay cash for the shares. His dues can be adjusted against the mine’s future profit, as we did in the case of Oyu Tolgoi. There are other methods. Paying in cash for the shares doesn’t really serve our national interests. Since the mineral resources are Mongolian wealth, their exploitation must help Mongolian businesses to grow and help Mongolians lead a better life.The gains of mining are not only in increased tax revenue, but also in the impetus given to small businesses.

Who will regulate these many methods of shareholding you mention -- the Stock Exchange?

Yes, but there will be other regulatory authorities, too. For example, the Foreign Investment Law and the Company Law. Fresh regulations may be made after the law is passed and even a separate legislation is not unlikely. We just gave a general idea, and I don’t know how it will be received at the State Great Khural.

Why do you want to change the existing royalties system?

Current practices need be streamlined. For example, there is widespread suspicion that gold miners submit only a small percentage of their output to the Mongol Bank, selling the rest to illegal traders. This can be avoided by imposing royalty on the estimated reserve. We know these estimates can prove inaccurate either way. It will be the miner’s work to convince us of any such change. They will also have to prove that only a part of the reserve is actually extractable if they don’t want to pay royalty on the whole amount of the reserve as registered in the State Minerals Fund. The onus must be on the miner to show that there is a legitimate ground for him not to pay royalty on the amount of deposit registered in the State Minerals Fund.

Will this apply to coal and other minerals as well?

Certainly to coal. The coal reserve in a mine canchange as work progresses. It is possible to confirm or revise the geologically estimated resource amount as mining progresses, but miners don’t do this. The draft proposes to make this legally binding. It will be in their own financial interest to make sure they do not pay royalty on resource that does not exist. If there is more, the State will be fully justified in asking for more tax. Any conflicting claims can be handled by the Minerals Council. It will also be interesting to find out if the initial geological exploration work was incorrect, and if so, how the error happened.

You propose to turn two licences into four, mainly by breaking up an exploration licence  into separate prospecting and exploration licences? How will this be done? Will the law consider the time spent, or the expenses incurred, or the exploration results?
Geological exploration has different stages such as prospecting, cartography and exploration. No company starts to drill as soon as it obtains an exploration licence. Again, the resource determination part of any geological exploration work can be done by many different methods such as magnetic exploration and geophysical exploration. 

Is it fair to let a State-owned company claim free land next to its licensed area without any competition?
It is not like taking somebody’s property. As I said before, the State cannot let laws interfere with its broader policy. Recently, there was a case like this at the Baganuur deposit, which is a strategic one. It was decided that free land beyond its present boundary would be transferred to Baganuur for the project’s future expansion. Considering the long-term future of a strategically important deposit and the people’s interests, it was very much the right decision. 
 
Will private mines be granted the same privilege under the same logic?
No. Every mining company will claim its neighbouring land if it is not licensed and there will be chaos. A competitive tender will be the basis for selection there.

The State should be free to decide a few things unilaterally for the sake of the people. In case of need to expand a State project, a selection by tender will be dispensed with. But these will be exceptions, never the rule. Returning to what happened at Baganuur, remember that Ulaanbaatar’s electricity supply is 100 per cent dependent on that coal mine. Its sustainability and expansion will be for the good of the people and is also a factor in national security. There is no way the decision can be called unfair. The State’s job is to help people.

The initial permission for any mining work is proposed to be granted by the respective local authority. How will the sector develop ifmost local authorities become obstructive, especially when anti-mining sentiments are running high?

We should not think the local authorities will act so unreasonably. Their main concern is local development and they will certainly realise that growth of mining will help build roads and other infrastructure. Employment will increase. These are things that appeal to the local residents. Of course, they will not have mines mushrooming as they want to retain their pastureland. When they are convinced that after restoration today’s mine site can tomorrow become pastureland again, they will not hesitate to give today’s pastureland to build a mine tomorrow. They would also be right in rejecting applications that violate their interests. Nothing is gained by brushing aside either side’s legitimate fears and interests.Amicable talks will find a common ground where exploration and/or mining will begin without any conflict with locals.

The draft allows anybody to protest successfully against a tender. Do you not feel that, just as now, opportunistic movements will be active for primarily political reasons to oppose mining?

I am surprised how people in Ulaanbaatar get so excited over a proposed mine in Bayan-Ulgii aimag even though they have never been there. This is just politics. The main thing is to hear the local residents’ opinions, to understand why they feel threatened, and give due consideration to their feelings. We need to get rid of the other kind of movement which practises the politics of protest.  

Do you think there will be too much mining in Mongolia?

Exploration work should never stop, but it has to be done methodically and systematically. Besides the exploration work done with private funds, the State should do initial exploration, prospecting and cartography work. The State should at least have a map of the whole country giving a rough idea of which minerals are where in what amount, if not the exact estimation. We already have such a map, but only on a 1:200,000 scale. Our 1:50,000 scale maps cover some 30 per cent of the land. We need more detailed maps. Private funds are rarely available for such work, but State funds will be well spent on such work. It will be very good to get private companies collaborating with us on such projects.

You referred to a likely law on regulatory compliance. Would it not be better to pass it together with the new mining law?

Only the Great State Khural can pass a law. It is no good to talk about regulatory compliance when it is uncertain when the present draft mining law will actually be submitted to the State Great Khural. The Working Group cannot presume to take it for granted that our draft will be approved soon and thus go ahead with drafting a law onregulatory compliance. Let us not look too much into the future.