Legal proposals signal rocky spell for mining

By Paulius Kuncinas
Regional Editor, Oxford Business Group

A controversial draft Minerals Law that the government hopes will steer Mongolia’s mining industry into a new era has divided opinion across the country, with supporters highlighting the need for change, while critics say its implementation could put the industry’s future at risk.

The government says the planned legislation forms part of a broader bid to ensure the mining industry is developed fairly and sustainably in a way that benefits the country economically, while putting more social responsibility on companies and providing added protection for the environment.

However, critics say the proposals come down too heavily on investment and licensing regulation, adding that the draft law threatens the very industry it should be trying to strengthen.

On January 18, the President’s Office, with the support of the World Bank, Germany-based GIZ and the Mongolia Mining Journal, held an initial, open-hearing discussion on the planned legislation.

The meeting was organised following concerns from officials that debate on the subject was becoming politically charged, with some critics claiming the law had been designed ahead of an election to fuel the emotions of many locals who feel they are still not benefitting sufficiently from the mining boom.

“The draft Minerals Law should not be politicised for the upcoming presidential election [in June],” said P Tsagaan, head of the Office of the President, in response to the claims. “As you may know, the draft-making procedure started about two years [ago] and it can be even approved by parliament after the election.”

The law proposes a number of new provisions, including an obligation on foreign mining companies to hand over a stake of at least 34% in their existing projects to indigenous groups. It also requires companies to mine lower-ore grades even if the process is not profitable. Under the planned law, exploration and mining licences will be granted only to legal entities in Mongolia, although foreign investors are permitted to set up wholly owned subsidiaries in the country.

External investors are concerned that the proposed legislation will give the government excessive control over foreign mining interests. The proposed law has also come in for criticism from the Business Council of Mongolia, which wrote an open letter to the Office of the President in January that said in part, “The impact of the draft law on the minerals industry will be to halt current minerals exploration and development in Mongolia and greatly discourage any future investment.”

Critics also point out that the draft law leaves key issues unresolved. Luke Lesley, head of mining at London-listed Origo Partners, told Dow Jones that the legislation raised concerns about security of licence tenure, while failing to identify a dispute resolution process or body.

Mongolia’s economy is largely dependent on mining and resource extraction, which accounts for a third of GDP and some 85% of exports. GDP growth, which hit 17% in 2011 and is expected to remain in double digits until 2020, is mostly generated by the Oyu Tolgoi gold-copper mine and coking coal at Tavan Tolgoi. Gold production has increased some 17-fold in the past decade, while copper and molybdenum ore production rose 32%. Annual coal production reached 30m tonnes in 2011, according to officials, up from 4.8m in 1995.

D Bat-Erdene, head of geology at Ulanbaatar-based Biluut Mining and a member of the group that drafted the legislation, defended the proposals when speaking at the open hearing, saying change was necessary. He pointed out that while earlier laws designed to attract foreign investment had created jobs and brought in both foreign capital and technology, they also led to speculation, tensions with local communities and corruption. The proposed law, he said, sought to fix that.

The draft legislation comes on the back of a new law passed last May which made parliamentary approval necessary for foreign investments valued at over MNT100bn ($76m). Supporters of the law see it as a crucial stage in Mongolia’s economic evolution. However, critics say there have already been repercussions, citing reports that global miner Rio Tinto Group is considering a temporary halt to construction work at the $6.2bn Oyu Tolgoi project over government demands for a bigger stake in the project and new mining royalty rates.

The furore over the draft law comes at a time when the government is already reconsidering the possible impact of declining Chinese demand on the economy’s pillar industry. On January 28, The Aluminium Corp of China (Chalco) warned it would seek legal redress if Mongolia breaks what it describes as a loss-making coal supply deal.

Emotions over the draft law will continue to run high as the government struggles to find a balance between pleasing both its population and investors, while also attempting to develop a legal framework that ensures the mining boom benefits future generations. While the divide runs deep, observers suggest that improved communication from the government’s side could help discussions in the interim, perhaps reducing the impact on industry players and investors longer term.

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