License ban alarms investors, but has long-term benefits

Mongolia"s decision to revoke hundreds of gold mining licenses has alarmed investors but the government"s efforts to clean up its mining sector could have long term benefits, says a Wall Street Journal report quoting the head of a foreign fund. Energy and Mining Minister D. Zorigt announced late last month that 254 gold mining licenses would be suspended for violating the country"s environmental laws, while another 1,700 licenses would be put under review. The move came after a series of policy changes over the last year aimed at bringing the booming but still nascent industry under greater supervision and control.

In April, President Ts. Elbegdorj ordered a halt to the issuance and transfer of mining licenses until parliament passed a new and stricter law. Small and unqualified miners were the main target of the new rules, Eric Zurrin, chief executive of ResCap, an investment bank active in Mongolia, said. "Too many outsiders were trying to pick up licenses in a bit of a lottery and trade, and you know what that can lead to. These licenses need to be properly explored and well thought through," he said.

The gold projects suspended last week were said to contravene the country"s new water and forest law, which bans mining activities in water basins and forests. Mongolia, under pressure to develop its economy, has sought to open up its mining sector to foreign investors, but it has already led to a backlash. In September, Mongolian environmental activists armed with hunting rifles opened fire at the site of a gold mine owned by China"s Puraam and Canada"s Centerra Gold about 100 km north of Ulaanbaatar, which they accused of running roughshod over local environmental laws.

But the ambiguities in the legislation are causing uncertainty, experts have said. Mr. Graeme Hancock, senior mining specialist with the World Bank in Ulaanbaatar, has said that the law passed last year did not offer any definition of water basins or forest areas, leaving it unclear what projects would be under threat. "It was a knee-jerk reaction that isn"t justified," he said. "The answer lies in creating a sound management framework, not in just trying to ban it. The problem now is that by banning these projects, they will be replaced by ninja miners -- and that is a worse outcome than what they had."

The government has been struggling to find the right mix of policies that will enable it to avoid the mistakes made by other poor but mineral-rich countries, and some of its decisions have caused alarm. A Mongolian-based mining executive said that a policy allowing the government to turn any deposit into a "strategic national resource" was especially worrying. "If the Mongolian government can revoke our licenses with immediate effect and declare the mines to be a strategic national resource, where does that leave us?" he said.

Investors said the windfall tax has slowed progress in Mongolia"s mining sector. "Potential investors have been focusing on coal," said Zurrin, referring to a mineral not covered by the tax. "But the interesting one is the copper-gold belt, where very few are looking right now. Because of the 68 percent windfall tax investors just said, "Forget it, I"ll look for coal"."