Preface

Dear Readers,

Anderson & Anderson LLP is an international law firm, based in the USA, founded in California in 1885.  We have been active in China for more than 30 years, and in Mongolia for over 14.  Our practice both inside and outside of Mongolia has included a diverse range of fields including IP law, including trademark, patent, and copyright registration and protection, mining law, including related taxation law, general domestic and international tax law, litigation and arbitration both in Mongolia and internationally, direct foreign investment, banking law and structured cross-boarder loans, mergers and acquisitions, derivative contracts, securities law, real-estate and property law, due diligence and contract work related to all of the above fields, initial and secondary public offerings and offerings of bonds on stock exchanges domestic and foreign, other securities-related transactions, as well as establishment of Mongolian subsidiaries and the franchising thereof.

Furthermore, our clients come from a wide variety of backgrounds, including influential international organizations (both governmental and non-governmental), private banks and insurance companies, major media companies, foreign and domestic mining corporations, including wholly-owned subsidiaries, telecom and media firms, as well as manufacturers of construction equipment and the world’s largest soft-drink manufacturer.

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Anderson & Anderson LLP

Ulaanbaatar Office

The Reality of Mineral Prospecting and Exploration in Water Basins and Forest Areas

Introduction

Statistics from the Mineral Resources Bureau show that domestic and international investors are exploring an area of  26.5 million hectares in Mongolia, with 3,114 special exploration licenses.  Pressure from civil organizations and local inhabitants to protect the water and forest resource areas has been mounting.  The Government is set to implement policies to protect water basins and forest areas.  Ministers have said that the demand of civil organizations and the local population is understandable considering the impact of irresponsible mining on the environment.

Action of the Mongolian Government

The Mongolian government is reviewing a list of more than 1,782 mining licenses for possible termination pursuant to environmental regulations.  A senior official, Dashdorj Zorigt, Mongolia’s Minister for Mineral Resources and Energy, also confirmed that the government is suspending 254 gold-mining licenses that did not to conform to law. 

The Water and Forest Law, prohibits mining activities in water basins and forest areas of the landlocked desert country of fewer than 3 million people where water is in short supply.  Since the  Law on Prohibition of Mineral Prospecting Exploration in Water Basin Areas and Forest Areas was enacted in July 2009, the government has conducted surveys to see which licenses may be affected.

Problems of Compensation

At the last session of the State Ikh Khural, the government said that total compensation due to mining companies whose licenses may be cancelled may amount to more than MNT 5 trillion, roughly USD $4 billion; and the minimum impact on the economy will be at least USD $2 billion.

Eliminating almost one third of the mining sector’s activity, which plays an important role in the economy, as the recent law requires, is impractical.  According to the Ministry of Mineral Resources and Energy (“MMRE”) the law renders approximately 84 percent of the copper, molybdenum, and tin; 40 per cent of the gold; and 100 per cent of garnet and green granite deposits unworkable.  In addition, the law will have a negative impact on employment and new developments of the sector.  It is also feared that foreign invested companies will put forward claims on lost profits, on top of the estimated compensation.

Research  of the ‘To Save Mining’ Movement shows mining companies whose licenses may be canceled have loans from commercial banks totaling around MNT 160 trillion (USD $130 billion).  Thus, license cancellation will affect the commercial banks.

Resolving Problems of Compensation

In order to tackle these difficulties, the Government has proposed several measures.

First, the Government proposes to shut down the alluvial gold mining operations:

The Government considers the alluvial gold miners to be worst offenders and, based on the below figures, is proposing to shut down and compensate all 254 alluvial gold mining operations, as a first step in implementation of the Law on Prohibition of   Mineral Prospecting Exploration in Water Basin Areas and Forest Areas.

The Ministry of Environment and Nature has determined three types of areas—headwaters of rivers, forest areas, and protected zones of water reservoirs—are being affected by 391 mining and 1391 exploration licenses (in total 1,782).  According to the below table, of the 391 mining licenses, 254 are for alluvial gold.

 Number of Mining Licenses   Percentage
 
Gold    278 (alluvial 254, hard rock 24)   71.1 % (65% alluvial, 6.1% hard rock)
 
Building material  43  11 %
 
Coal  31  7.9 %
 
Others  39  10 %
 
Total Mining Licenses  391
 

The compensation amount to alluvial miners is estimated to be MNT 510.2 billion. 

The Mineral Resources Authority (“MRA”) estimates that compensation to all exploration license holders would be around MNT 315.4 billion, and to all mining license holders about MNT 4.73 trillion.  Total compensation for all 1,782 license holders is estimated at MNT 5.15 trillion (USD $4 billion).  Implementation of the law and other activity expenses would cost MNT 14 billion.  (USD $1.3 billion).

Of the 254 alluvial gold mining licenses holders (composed of around 130 legal entities) the average company has around 60-100 employers.  Jobs lost will not exceed 100 thousand.

At the moment  254 alluvial gold miners  from 390 licensed entities are operating in  water basin areas. Therefore the revocation of the licenses of these 254 alluvial gold miners is clearly the first step.

Pursuant to the Law on Prohibition of Mineral Prospecting Exploration in Water Basin Areas and Forest Areas alluvial gold miners operational activities were stopped except for natural monitoring, reclamation, remediation, and exploration. 

The State Organization of Geology and Mining has thus urged the Professional Monitoring Agency to suspend the licenses, so that no further work is done until the issue is resolved.

 In the next step, the Government proposes to take the following measures:

discussing the possibility of listing the deposits as strategic for those with high compensation requirement and large contributions to local development;

shutting down and compensating all (non-gold) mining operations utilizing surface water;

annulling and compensating all 460 gold exploration licenses;

annulling and compensating 931 non-gold exploration licenses;

annulling and compensating all remaining affected mining licenses.

Ultimately, revoked license holders will receive compensation from the State Budget of the year in question.  The Central Authority of Geology and  Mining office will accept  requests for compensation from license holders and make the compensation 2 years thence.  Consideration will be made to taxes paid, expenses made, income gained and degree of environmental rehabilitation by each license holder.  Settlement with each company will be reached and compensation will be issued.  The compensation will not permit recovery of liabilities, such as non-performing loans incurred due to license holders’ failure of performance of its actual contractual obligations to others. 

Other Overarching Problems

- Lack of budget for the compensation

The Mongolian Yearly State Budget is USD $2 billion.  The amount needed for complete compensation is US$ 4 billon.  Clearly, this is a problem.

- Illegal small miners / person /

Even if the Government revokes licenses for license holders in headwaters of rivers, forest areas, and protected zones of water reservoirs, exploration will certainly still continue by illegal small miners.  In fact, it is likely that illegal small miners will affect the environment more than legal entities.

Conclusion

The Government is in a predicament because it has committed to lease cancellation, but does not have the resources to compensate the leaseholders.

The license issue may have serious repercussions if it spreads beyond gold.  Several international mining companies have recently established operations in Mongolia and have made public offerings in Hong Kong and Canada.  The government says it will release a full list of companies affected. 

Analysts warn of the dangers of investing too much in emerging countries such as Mongolia due to the dangers of government U-turns over investment policies.  For investors in Mongolia, the risk to the estimated 1,782 licenses has been known for some time, but the largely unknown factor for those impacted is the compensation claims which need to be assessed and most find it difficult to see the source for any payment.  Indeed, there is speculation among professional organizations that the announced revocations are legally unenforceable as the law on mineral resources is clear that licenses can be canceled only after compensation is agreed upon and paid. There can be no cancellation before compensation.   The draft budget does not provide allocations for such compensation, so the mining entities can continue with work under their licenses.

At the present, however, there are 2 opposing movements: ‘To Save Mining’  and ‘To Save Nature’.  ‘To Save Nature’ movement argues that because the mining companies have already destroyed the environment, they do not have right to have compensation.

Anderson & Anderson LLP, Ulaanbaatar Office

David C. Buxbaum (Attorney) and Buyantogos. Baljinnyam  (Attorney)