Mongolia passes mining-friendly law, but 106 licences remain in limbo

Foreign direct investment in the country dropped by 47% during 2013, the value of the currency, the tugrik, is down 20% this year and the Mongolian central bank is burning through foreign reserves as foreign debts balloon to 55% of GDP.

Changes to the 2012 Strategic Entities Foreign Investment Law (SEFIL) approved by the country’s cabinet over the weekend should go some way to improve the situation.

The new law which provides more certainty surrounding mining taxes and royalties and scraps the distinction between private foreign and domestic investors, but keeps certain restriction on state-owned companies wanting to invest in the country, was called a “turning point” by Mongolia’s cabinet secretary.

But skepticism of better relations between the government of Mongolia and foreign investors, particularly in the mining sector which accounts for more than 20% of GDP today, but has the potential to contribute a much greater proportion, remain.

The number one issue  that needs to be resolved according to all players in the sector is the stalled underground development of Oyu Tolgoi. The copper-gold mine which could have final bill of as much as $14 billion is 34% owned by the Mongolian government with Rio Tinto-controlled Turquoise Hill (TSE:TRQ) owning the rest.

Talks over Oyu Tolgoi, which have dragged on for most of the year, are centred on costs with Rio’s management fees proving a particular sticking point.

The mine, which shipped its first copper in July, is set to contribute as much as a third of the nation’s economy if the second phase underground expansion where 80% of the project’s value lies were to go ahead.

A positive outcome on Oyu Tolgoi, where some 2,000 workers have been let go due to the delays, would do much to restore the confidence of investors, many of whom have burned fingers in the country before.

Mongolia in February suspended Entrée Gold’s (TSX:ETG) mining permits in an area adjacent to the Oyu Tolgoi. Talks continue between the Vancouver-based explorer and the government of Mongolia which could be handed stake in Entrée in exchange for a lifting the suspension.

Last year China’s state-owned Aluminum Corp’s bid for coal producer SouthGobi Resources (TSX:SGQ)(HKSE:1878) was blocked by Mongolian authorities sending shares of the Turquoise Hill-owned company into a tailspin it has not yet recovered from.

Mongolia is nevertheless relaunching talks with international miners on developing the other blockbuster mining asset of the nation of fewer than three million people.

State-owned Erdenes Tavan Tolgoi coal-mining company controls the main block of 6.4 billion tonne Tavan Tolgoi deposit, the world’s largest deposit of high-quality coking coal, but the western Tsankhi section which is being offered to foreigners on its own holds some 1.2 billion tonnes.

Mongolia struck a deal with US giant Peabody Energy, China’s Shenhua and a Russian-Mongolian consortium in July 2011, only to cancel the whole process two months later. The much-vaunted multi-billion dollar IPO of Tavan Tolgoi which was first mooted more than five years ago also remains on ice.

Outside these multi-billion dollar mega-projects, foreign miners keen to operate in the country are facing even more daunting tasks.

A moratorium on new exploration licences have been in place since April 2010, but more worrisome is the fact that since January this year 106 existing license holders have had no legal recourse or rights to undertake exploration on their existing licenses due to a criminal court case involving corruption relating to former senior government employees in the Mineral Resource Authority of Mongolia (MRAM).

For only 31 of the 106 impacted licenses about $19m had already been been spent and a further $36m planned. The 106 licenses cover a landmass approximately six times larger in surface area than active mining licenses in Mongolia according to a new report by Independent Mongolian Metals & Mining Research.

The Ulaanbaatar-based research company headed by Dale Choi outlines how the 106 licences holders have essentially become collateral damage in the matter:

“The criminal court case is acting in an administrative court matter, outside of its jurisdiction, and it is proposed that existing licenses holders are to have no preferential right nor compensation mechanism for previous acquisition, legal, exploration and other associated costs despite the standing of these licenses being annually confirmed by MRAM via the acceptance of license fees, approving and re-issuance of licenses.

“During the review and trial of the criminal case related to the above persons, the 106 license holders were not determined as a victim and civil claimant. We are not aware of any specific case-by‐case investigation into the 106 mineral licenses. License holders have not been interrogated and had no legal rights or course of recourse to date. There has been no accusation at any stage that the license holders have undertaken any wrongdoing.”

Another company that fell foul of Mongolia’s bureaucracy and politics, uranium explorer Khan Resources, is currently seeking $200 million of damages from the government of Mongolia due to the illegal expropriation of its permits with a trial by the International Arbitration Tribunal scheduled to start November 11.

Centerra Gold’s Gatsuurt project has also been awaiting approval for years as Mongolia reworks its environmental regulations regarding rivers and streams. The Canadian company completed a 55 kilometre railway connecting Gatsuurt, boasting reserves of 1.5 million gold ounces, to its producing Boroo mine as long ago as 2010, but the project is now essentially on care and maintenance.

Image by Pete Niesen | Shutterstock: Traditional Mongolian cavalry guard begins Nadaam National Games by delivering nine ceremonial white yak tails to the stadium July 2008.