Thursday, May 8, 2014

Mongolia adopts its State Minerals Policy until 2025

On 16 January 2014, the Parliament of Mongolia approved the State Policy of Mongolia in respect of the Minerals Sector for 2014 – 2025 (Minerals Policy). Further, on 24 January 2014, the Parliament amended the royalty regime applicable to the gold sector with a view to encourage sales of gold produced in Mongolia to the central bank and local commercial banks. The key features of the State Minerals Policy and royalty amendments are set out below.

Minerals Policy

The Minerals Policy embodies declarative and aspirational statements setting out the future direction and objectives for the development of the Mongolian minerals sector. The Minerals Policy comprises four parts: (i) general provisions; (ii) policy principles; (iii) policy directions; and (iv) implementation phases and methods, and expected results.

The Minerals Policy indicates that the State will support and encourage private investment in the minerals sector, limit its role to regulation and supervision, encourage transparent and responsible mining operations, and adopt policies to encourage environmentally friendly and value- added operations. Mongolia will maintain the concept of “strategic deposits” under the Minerals Law, over which the State is entitled to acquire an equity interest of up to 50 percent subject to the source of funding for exploration. Currently, there are 15 identified strategic deposits, including operating and exploration-stage projects. It is anticipated that the list of strategic deposits will be expanded.

Under the ambit of the Minerals Policy, separate policies applicable to specific mineral types, such as copper, coal, and iron ore, will be developed in the future.

While the Minerals Policy sets out the main principles and direction in general terms of Mongolian government policy, it is yet to be seen how such principles and policy directions will be reflected and implemented in subsequent legislation and practice. In that context, it is unlikely that the Minerals Policy of itself will allay the ongoing concerns of private investors over security of tenure issues.

Although the extent of its binding nature (if any) is unclear under Mongolian law, the adoption of the State Minerals Policy is significant as it paves the way for much - anticipated amendments to the Law of Mongolia on Minerals of 2006 (Minerals Law).

Potential amendments to the Minerals Law are expected to include a relaxation of the current moratorium on the issue of new mineral exploration licenses which has been in effect since June 2010. As a result of the moratorium, the number of issued minerals licenses has fallen from over 5,500 to approximately 2,900 as of February 2014. It is widely expected that amendments to the Minerals Law will be discussed during the upcoming spring session of the Parliament scheduled to commence on 5 April 2014.

Gold royalty incentives

Amendments to the Minerals Law approved by Parliament on 24 January 2014 introduced a preferential royalty rate for gold produced in Mongolia applicable until 1 January 2019, which aim to encourage the sale of gold to the Bank of Mongolia or Mongolian licensed commercial banks (who are authorized by the Bank of Mongolia). Prior to the amendments, the applicable royalty rate for gold comprised a basic royalty rate of 5 percent and an additional progressive royalty rate of up to 5 percent depending on the gold price. This resulted in an effective royalty rate of 10 percent if the gold price per ounce exceeded US$1,300. Following the changes, gold miners who opt to sell gold to the Bank of Mongolia or its authorized commercial banks (in practice at market price) will enjoy a preferential royalty rate of 2.5 percent.

The decrease in the royalty rate for the gold sector is a welcome development, particularly in light of recent difficulties in the sector exacerbated by significant changes to the regulatory and tax regime (for example, the 2006 windfall profit tax of 68 percent, and the law prohibiting exploration and mining activities in certain protected zones).

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