A company in Mongolia may receive notice of the revocation or suspension of its exploration or mining licenses by Mongolian authorities, for failure to comply with Mongolian law. 
Similarly, when acquiring a mining company in Mongolia the purchaser must first check the validity of licenses, before making an acquisition.
 
What is Legal Due Diligence?

Due diligence of exploration or mining licenses is the process of investigating and auditing the legal status of an exploration or mining license. This investigation is intended to confirm all material facts and risks in regard to the acquisition of these licenses or of the company which is holding them.

Due diligence on Mongolian mining companies will include investigation of the fulfillment of all its legal obligations in relationship to its licenses, including geological, environmental plans and reports, annual environmental reports, land rights, safety measures, warranties and pledges, etc.

This investigation is crucial since an investor can have its license revoked for many reasons such as: non-payment on time and in full of annual license fees, failure to protect the environment, failure to maintain safety measures, transfer of the license to another legal entity, etc.

Specificity of Due Diligence on Mongolian companies

As a recent former communist country, Mongolia is still drenched with old bureaucratic procedures. The country has a young legislature that confers on the State plenary rights in regard to mining activities. For this reason, due diligence work involves Mongolian national and local authorities.

Tips by a Mongolian lawyer on Due Diligence of an Exploration License

The following program is a suggestion for due diligence of an exploration license.

8:30 am – Meeting in the company’s headquarters in Ulaanbaatar with the directors of the company
In general, the target company’s personnel are willing to help a lawyer undertaking due diligence, by providing required information and documents, except for troublesome ones.

A proper due diligence generally requires a review of the original documents. A specific difficulty often arises during this process when requesting the most recent environmental and geological plans and reports in there original form. According to the Minerals Law of Mongolia, these original documents shall remain on the site of exploration activities. To obtain them may take some time, especially if the target company’s representatives are reluctant to travel across the country.

After checking all requested documents and obtaining the necessary powers of attorney, the lawyer heads to different levels of the Mongolian authorities to obtain information on the status of the licenses and the company being investigated in relation to the licenses’ status.

14:15 pm – Request for documents and information from State Agencies and other national authorities[ Depending on the case, the Tax Office, Environmental Authority, Water Authority, Land Authority, Court of Appeal, etc. all must be contacted for a proper Due Diligence. ]

Mongolian State Agencies are a labyrinth where each wall is a department that forwards you to another one. Your request shall be correctly addressed to the relevant State Agency and its relevant Department; otherwise you will not receive a response to your questions and will have to make another request with the proper Department. It may take 3 to 10 days to receive copies of the documents and reference letters requested.

In terms of mineral licenses, a specific agency with which the lawyer shall deal with is the Mineral Resources Authority of Mongolia (MRAM).

The MRAM is in charge of issuing and coordinating mineral licenses within the country. At this stage the lawyer shall be very careful. Every fact, even if it seems obvious and logical needs to be carefully checked. For example, the lawyer needs to verify that license coordinates corresponds to its license certificate and the information registered in the cadastral. Indeed, being shown other licenses than the one requested, often happens in Mongolia.

Checking the cadastral register is a way to know if the location of the license is protected by any environmental law.

New Environmental issues: the case of Water Basins and Forests

According to the law of the 9th July, 2009 regarding prohibition of mineral prospecting exploration and mining in water basins and forest areas in the territory of Mongolia, licenses issued around watersheds and forests may be cancelled. As such, the Land Authority issued a decree specifying several licenses to be revoked. However the implementation of this law was suspended for the following reasons:   this statute does not provide a clear legal definition of “water basin”. Therefore, the MRAM, Water Authority and Land Authority do not have a unique understanding of this concept; furthermore, the Government does not have sufficient funds to compensate the holders of the licenses to be revoked pursuant to this law. As a consequence, in practice, no license has been revoked yet and license holders are still operating. Amendment of this statute shall be discussed at the next session of the State Great Khural. Because of this unsecure legal environment, some license holders may try to sell their licenses. Therefore, close attention shall be paid to this matter, when purchasing a license.

For all inquiries related to geological plans and reports and exploration expenses, the lawyer will have to address its request to the Geological Research Department of MRAM.

16:00 pm – Request for information from the local governor and the local inspection agency

These two authorities can provide all the information in regard to the land covered by a license; as well as environmental information and reports.

These authorities are located in the same Soum or District as the exploration area. Therefore, they will be able to provide information that is not found in documents, such as: how the environmental protection plan is carried out in practice; whether the company annually reported its activities to protect the environment; and if there is any major disturbance in the area covered by the license, etc.

Obtaining documents from these authorities often takes a long time. The lawyer may have to visit them personally. The lawyer may also request a letter stating that all required documents in relation to the license have been submitted by its holder, to confirm the fulfillment of all legal requirements concerning the environment, etc.

18:00 pm: Verifying all documents and drafting a report

One important point in terms of licenses’ validity is the age of the licenses at the time of the purchase. Indeed, an exploration license is initially for three years with two possible extensions of three years each. An another major point concerns the existence of pledges and warranties with regard to the licenses that need to be double checked on the licenses’ certificate and with the Cadastre of MRAM.

23:30 pm: Sending the report to the client

Due diligence work may be conduct by the investor itself. However due diligence in Mongolia is specific. The culture of the administration and its procedures are not all set forth in the laws. Therefore use of services of a specialist that is able to understand both Mongolian culture and legal procedures on one hand and the requirements of investors on the other hand, is very desirable.