Molly Corso in Tbilisi -

Long before it was famous for roses, revolution and reform, Georgia was known for its gold. But today the country's antiquated laws could be pushing potential investors away - to Armenia.

Tbilisi maintains its efforts have been focused on modernising the mining legislation, although industry specialists say the country could be wasting its chance to prosper from riches laying just beneath the surface.

While reformed legislation has helped bolster the mining industry in nearby Armenia, pushing gold production up 30% to 1,266 kilograms of gold in 2011, issues with the Georgian law have already nearly cost the country one investor, the mining exploration company Lydian International.

Lydian discovered a large gold mine in Armenia five years ago and started to investigate Georgia's potential after determining that an "arc" of volcanic ash led from Turkey straight through Georgia and Armenia and into Iran - a find that signalled there could be gold, according to Tim Coughlin, president and CEO of Lydian.

While the company moved into Armenia in 2005 - discovering Amulsar Gold Mine just one year later - development in Georgia has taken a lot longer.

With a more modern legislation for exploration mining, Coughlin says Armenia has become an easier sell for companies searching for gold. Lydian first sent an exploratory team, just specialists "in boots on the ground" to Georgia in 2010, but it was a full year before they could obtain a license to explore the site they discovered in the southern region of Adjara. "I've spent my career in just about every country in South America, worked in Eastern Europe, Turkey, Russia, Armenia, Africa - now in Georgia. The Georgian mining law has got to be pretty close to the bottom of the list," Coughlin tells bne in a phone interview from London.

The biggest issue, Coughlin notes, is that the Georgian law couples exploration and development - two different parts of mining. While the Armenian law looks at the two processes separately, the Georgian legislation considers them part of the same license agreement.

Another major obstacle is that once a team discovers something, the Georgian law does not give them any priority when it issues mining rights. In practice, that makes it too expensive to explore for new gold deposit sites, notes Professor Alexander Tvalchrelidze, the deputy general director of Georgian Minerals. "If you want a dramatic increase in investors, you should design a new mining code," he says. "It is the hugest obstacle because... no one will invest in exploration if he or she has no guarantee that he or she will ultimately acquire the license. That is why only little dots are licensed now and nobody is performing huge, country wide exploration."

Other issues with the law include a formula that allows the government to reassess the cost of a mining license if a serious fine is discovered. "So the hugest difficulty comes from the business risk," Tvalchrelidze says. "You have no guarantee that you will discover something. You have the right to [look geologically] without a license, but if you find something, you have no guarantees you will receive a license."

Work to be done

Coughlin believes that many investors have been frustrated by the shortcomings in the Georgian law. "There are plenty of people who have looked at Georgia," he says. "In Turkey there are copper ore deposits and they extend right into Georgia... [but] the mining law just doesn't work for exploration. That has closed the door for a lot of people."

Giorgi Tatishvili, deputy head of the Agency of Natural Resources at the Ministry of Energy and National Resources in Georgia, maintains that the sector is gaining interest from investors even as the government works on reforms. He notes that, in addition to the Lydian investment, the government sold two other gold mining licenses in 2011 - including one for GEL93m (€43.5m).

However, Paul-Henri Forestier, director of the European Bank of Reconstruction and Development (EBRD) in the Caucasus, Moldova and Belarus, says the "inadequacies" in the law are definitely stifling development for the sector in Georgia. EBRD, an investor in Lydian's exploration project, has been working with the company and the government on the licensing issue. "What is extremely important to induce exploration investments is that if and when you find something, you must know exactly the conditions that will apply to the development phase. If the odds of hitting a commercially viable deposit are one in 10, then you want to make sure that your investment to achieve this is commensurate with the expected find," he says.

The EBRD is working with the Ministry of Energy and National Resources in Georgia to reform the law, he notes. "There is nothing wrong and dubious [with the Georgian law] - it is just inadequacy. But in the case of the Georgian government that is looking for foreign direct investment in such a potentially promising sector, inadequacy must be urgently dealt with."