Aspire Mining poised to benefit: "Mongolia open for business"
Aspire Mining (ASX: AKM) will gain a filip from the Mongolian Government’s new legislation that clearly signals the country is open for foreign investment.
The net result is that it should enhance perceptions of foreign companies doing business in the country.
The new Mongolian Investment Legislation achieves this by providing the political and legal stability as well as clarity that investors have been looking for.
In addition, with effect from 1 November 2013, foreign investors will not be distinguished from Mongolian nationals, removing previous requirements for government or parliamentary approval.
It also proactively provides additional investment incentives that are expected to further improve sentiment towards Mongolian related investments.
This gives company’s the confidence to progress their projects from development into construction and production phases.
Mongolia had recently approved a full repeal of the Strategic Entity Foreign Investment Legislation (SEFIL), implemented in May 2012 to protect its minerals, rail infrastructure, telecommunications, media and defence sectors.
This resulted in increased political and legal uncertainty and is linked to a 17% drop in foreign direct investment during 2012 and a further 47% during January - August 2013.
Mongolian President Ts Elbegdorj publically confirmed in December 2012 that implementation of SEFIL “made Mongolia’s investment environment unfavourable”.
The new legislation was enacted on 4 October 2013 with the full bipartisan support by both the Government and the opposition.
New Investment Law
Provided an investor is not 50% or more owned by a foreign government, there are no restrictions on the level of investment.
It also includes provisions to ensure that any future changes must have 66% or more votes in favour by Parliament and has the support of both the major political parties.
The new law also provides the following:
- Tax stabilisation through a Stabilisation Certificate granted to eligible investors upon application which cannot be changed by future legislation unless those changes benefit the investor;
- Protection of investor interests with the formation of a specially appointed Council of non-salaried members appointed for this specific purpose;
- Relaxation of the percentage of foreign workforce employed;
- No restriction on the movements of assets in or out of the country;
- Provisions protecting against nationalisation of investors’ assets.
The introduction of a tax Stabilisation Certificate means that investors which meet the criteria will have the current set of rates applied to corporate income tax, customs duties, VAT, and royalty frozen over a period.
Within the “stabilisation period”, these rates cannot be amended by the implementation of future laws unless the amendment benefits the investor.
Criteria must be met upon application for a tax Stabilisation Certificate, one of which is the investment amount to new and existing projects.
Projects that commenced within 5 years of enactment of the new Investment Law, and meet the requirements, will be eligible for tax stabilisation benefits.
Alternatively, an investor who proposes investment of 500 billion Mongolian Tughrik (A$313 million) or greater, has the option of entering into an Investment Agreement with the Government which not only stabilises taxes but also stabilises the operational environment.
The period of the Investment Agreement is similar to that of the Stabilisation Certificate.
For development of rail and mine infrastructure, Aspire would likely meet the criteria applicable for a tax Stabilisation Certificate or Investment Agreement covering a period of greater than 20 years, based on its investment in Mongolia since 2010 and future expected investment to develop the Ovoot Coking Coal Project and Northern Rail Line.
Impact on Sentiment
The new law has resulted in a shift in recent media coverage from negative to positive headlines.
Khan Investment Management, a Mongolian investment fund, noted the new law is a clear sign the country is on the cusp of a significant and sustained recovery.
Positive impact
This would also be positive for companies such as: Aspire Mining, Mongolian Mining Corp (HKG:0975), Modun Resources (ASX:MOU), Centerra Gold (TSE:CG), Prophecy Coal (CVE:PCY), FeOre Ltd (ASX: FEO), SouthGobi Resources (TSE: SGQ, HKG:1878) and Wolf Petroleum (ASX: WOF) which have each received various approvals from the Government within this time.
Analysis
The new legislation makes Mongolia a far more attractive business destination by introducing incentives and increasing the confidence for investors to commit to projects or move existing projects into construction and production phases.
Significantly, for Aspire, it looks likely to meet criteria for a tax Stabilisation Certificate or Investment Agreement covering a period of greater than 20 years, based on its investment in Mongolia since 2010 and future expected investment to develop the Ovoot Coking Coal Project and Northern Rail Line.
As importantly, the changes are far wider in their scope as they positively impact market sentiment toward companies operating in Mongolia like Aspire, whose Ovoot project ranks as Mongolia’s second largest coking coal reserve and one of the higest quality coking coals in the world.
Sentiment is all important in investment markets and previously the market perceptions were not tuned optimally toward Mongolia. Proactive Investors believes it has held back market valuations of companies operating in Mongolia and we expect a gradual re-rating of the Aspire Mining share price to be not far away as the reverberations of "Mongolia is open for business" - filter through.
The net result is that it should enhance perceptions of foreign companies doing business in the country.
The new Mongolian Investment Legislation achieves this by providing the political and legal stability as well as clarity that investors have been looking for.
In addition, with effect from 1 November 2013, foreign investors will not be distinguished from Mongolian nationals, removing previous requirements for government or parliamentary approval.
It also proactively provides additional investment incentives that are expected to further improve sentiment towards Mongolian related investments.
This gives company’s the confidence to progress their projects from development into construction and production phases.
Mongolia had recently approved a full repeal of the Strategic Entity Foreign Investment Legislation (SEFIL), implemented in May 2012 to protect its minerals, rail infrastructure, telecommunications, media and defence sectors.
This resulted in increased political and legal uncertainty and is linked to a 17% drop in foreign direct investment during 2012 and a further 47% during January - August 2013.
Mongolian President Ts Elbegdorj publically confirmed in December 2012 that implementation of SEFIL “made Mongolia’s investment environment unfavourable”.
The new legislation was enacted on 4 October 2013 with the full bipartisan support by both the Government and the opposition.
New Investment Law
Provided an investor is not 50% or more owned by a foreign government, there are no restrictions on the level of investment.
It also includes provisions to ensure that any future changes must have 66% or more votes in favour by Parliament and has the support of both the major political parties.
The new law also provides the following:
- Tax stabilisation through a Stabilisation Certificate granted to eligible investors upon application which cannot be changed by future legislation unless those changes benefit the investor;
- Protection of investor interests with the formation of a specially appointed Council of non-salaried members appointed for this specific purpose;
- Relaxation of the percentage of foreign workforce employed;
- No restriction on the movements of assets in or out of the country;
- Provisions protecting against nationalisation of investors’ assets.
The introduction of a tax Stabilisation Certificate means that investors which meet the criteria will have the current set of rates applied to corporate income tax, customs duties, VAT, and royalty frozen over a period.
Within the “stabilisation period”, these rates cannot be amended by the implementation of future laws unless the amendment benefits the investor.
Criteria must be met upon application for a tax Stabilisation Certificate, one of which is the investment amount to new and existing projects.
Projects that commenced within 5 years of enactment of the new Investment Law, and meet the requirements, will be eligible for tax stabilisation benefits.
Alternatively, an investor who proposes investment of 500 billion Mongolian Tughrik (A$313 million) or greater, has the option of entering into an Investment Agreement with the Government which not only stabilises taxes but also stabilises the operational environment.
The period of the Investment Agreement is similar to that of the Stabilisation Certificate.
For development of rail and mine infrastructure, Aspire would likely meet the criteria applicable for a tax Stabilisation Certificate or Investment Agreement covering a period of greater than 20 years, based on its investment in Mongolia since 2010 and future expected investment to develop the Ovoot Coking Coal Project and Northern Rail Line.
Impact on Sentiment
The new law has resulted in a shift in recent media coverage from negative to positive headlines.
Khan Investment Management, a Mongolian investment fund, noted the new law is a clear sign the country is on the cusp of a significant and sustained recovery.
Positive impact
This would also be positive for companies such as: Aspire Mining, Mongolian Mining Corp (HKG:0975), Modun Resources (ASX:MOU), Centerra Gold (TSE:CG), Prophecy Coal (CVE:PCY), FeOre Ltd (ASX: FEO), SouthGobi Resources (TSE: SGQ, HKG:1878) and Wolf Petroleum (ASX: WOF) which have each received various approvals from the Government within this time.
Analysis
The new legislation makes Mongolia a far more attractive business destination by introducing incentives and increasing the confidence for investors to commit to projects or move existing projects into construction and production phases.
Significantly, for Aspire, it looks likely to meet criteria for a tax Stabilisation Certificate or Investment Agreement covering a period of greater than 20 years, based on its investment in Mongolia since 2010 and future expected investment to develop the Ovoot Coking Coal Project and Northern Rail Line.
As importantly, the changes are far wider in their scope as they positively impact market sentiment toward companies operating in Mongolia like Aspire, whose Ovoot project ranks as Mongolia’s second largest coking coal reserve and one of the higest quality coking coals in the world.
Sentiment is all important in investment markets and previously the market perceptions were not tuned optimally toward Mongolia. Proactive Investors believes it has held back market valuations of companies operating in Mongolia and we expect a gradual re-rating of the Aspire Mining share price to be not far away as the reverberations of "Mongolia is open for business" - filter through.
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