Mongolia investors unimpressed by new mining legislation

By bne IntelliNews August 21, 2014

Terrence Edwards in Ulaanbaatar -


Mongolia's lawmakers were betting investors would rejoice at new watershed legislation for the country's mining sector. However, investors are more concerned with the problems of today than promises for the future.

Mongolia's parliament passed legislation crucial to its mining sector on July 1, the last day before lawmakers headed off for their summer break. Those following Mongolia's copper and coal mining investments had their focus squarely on an amendment to the Minerals Law, and reactions have been mixed, with miners complaining that the legislation does not fix corrupt licencing practices.

That's not the feedback the government was hoping to hear. Foreign investment sank to a new low in the first half of 2014 - 70% less than the same period last year - thanks to what investors say is a hostile business environment. Political instability, aggravated by tides of resource nationalism, are also an issue. A soft market for the key export commodity coal has not helped either, with coal exports falling 143% by volume in the first half of the year.

The flagging economy has put great pressure on Prime Minister Norov Altankhuyag to kick start investment flows, and the passage of the new legislation was part of a 100-day economic stimulus initiative. However, for many, the poorly received legislation is just more evidence backing the US embassy's opinion that Mongolia's support of foreign investment is more "aspiration than reality".

Mixed Bag

The good news is the passage of the amendment to the Minerals Law lifted a moratorium for new exploration licencing that has been in place since 2010. In addition, the duration of new licenses was extended from nine to twelve years. The law also makes it a bit harder for the government to revoke licenses.

What it's missing, as law firm Minter Ellison pointed out in an overview, is the introduction of a competitive process for licence tenders. Instead, the current "first-come-first-served" basis for applications is retained.

The largest outcry, meanwhile, came from the miners who say they can't find the "win-win" solution the government had privately promised them to resolve a dispute over licences revoked late last year. In November, a judge voided at least 106 licences that had been issued during the tenure of a senior bureacrat at the Mineral Resources Authority who was found guilt of corruption.

Mongolia-focused Kincora Copper, which saw a C$7m write off last year due to lost licences, is one of 27 companies affected. It argues it attained the licenses legally, and that the court had no grounds to revoke them.

"At no time did the court offer specific evidence proving that these licences,  among the hundred granted during the official's term, were improperly granted," reads the US embassy report. The document adds that Mongolian courts lack authority to make administrative decisions: "In effect, investors have had their economic rights expropriated by judiciary acting outside its jurisdiction, without any opportunity to appeal these losses to a proper authority."

According to the government's tender resolution meant to settle the matter, which was passed on the same day as the amendment to the Minerals Law, companies will now have to compete for the licences once again.

"The government realizes that the court made the wrong decision, but still stands by the decision. It's been made very clear by this tender resolution," said Tumurkhuu Batbayar, who heads an association representing the former licence holders.

Batbayar says he and and the other original licence holders had privately been promised the return of their licences along with preferential rights from Mongolia's Mining Ministry. Batbayar had only his 15-years' experience as a career geologist to identify lucrative licences by sifting through government archives rather than deep pockets. He said the he was worried about the prospect of having to compete with bidders with government connections or the cash to outbid him.

"We're not expecting the tendering to be done in a fair and open manner," he said.

Tax Dispute

However, the long squabble with the country's biggest investor remains Mongolia's largest obstacle to getting investment flows going again.

Mongolia has tried to show that relations have warmed with Rio Tinto, the private investor in the $6.5bn Oyu Tolgoi copper and gold mine, since the international miner put the brakes on construction of an underground mineshaft. That halt came after Mongolia balked at what it said were overblown costs. Rio Tinto owns 66% of the mine indirectly through majority ownership of Turquoise Hill Resources; the government owns the remaining 34%.

Now, a tax dispute could be the catalyst for new problems. Turquoise Hill, in a statement on June 25, reported that it had submitted a notice of dispute. That followed receipt of a letter from Mongolia's General Tax Authority claiming the company owe $130m in taxes for 2010- 2012, plus interest and penalties.

The notice filed by Turquoise Hill grants 60 days for resolution. "If the parties are unable to reach a resolution during this period, the dispute can be referred to international arbitration," reads the statement.

Tax Authority Commissioner Tunrev Batmagnai told bne he could not go into detail about the case because tax payment is confidential. "If the taxpayer confirms the conclusion, then that's the final word," said Batmagnai. "If not then we have the dispute council [to refer to]... Right now Oyu Tolgoi and the government of Mongolia are at this point."

The Tax Council, he says, is an already-existing panel of figureheads from various areas of government, and is independent of the General Tax Authority. It has 30 days to rule on the dispute, but that will only leave 30 days of potential negotiation for the dispute filings between the government and Oyu Tolgo. "They've created too much pressure for both sides," Batmagnai suggests.

He also laments that Oyu Tolgoi had caused the audit to drag on because it did not have all of the relevant documents in Mongolia, as specified by Mongolian law. "They're going against the law, how they've handled this," he said, adding that punitive measures would be taken for any violations. 

Maybe so, but investors will likely be more interested in the outcome of the tax dispute than claims against Rio's paperwork management.

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