Image courtesy of Mongolia Talent Network

Mongolia is preparing to submit to Parliament a newly drafted Mineral Law. For such an important milestone, the industry remains conspicuously nonchalant at the mention of these upcoming changes, probably because they feel they are a long way from being passed into law and an even longer way from becoming fully implemented. The country’s regulatory environment could be described as simultaneously too slow and too fast. Much-needed changes fail to materialize quickly enough, while abrupt changes come so often that they are not taken seriously enough. Some think of the proposed new Mineral Law cynically, likely to be rushed in before election time this year, and then scrapped if a less mining-friendly government takes over. 

The current mining regulations date to the 2006 Mineral Law, which suffered multiple, sometimes confusing and overlapping, amendments (over a hundred in number), according to Ganbaatar Jambal, Minister of Mining and Heavy Industry. The main points of the new draft address the most pressing concerns the industry faces: Improving the issuing of exploration licenses; a royalty system aligned with international practices; clearer community development allocations; and more transparency mechanisms. If passed, the law would mark a significant reform. 

Mongolia’s first pieces of legislation in the mining sector opened the door to foreign investment. “The 1993 Foreign Investment Law and the 1997 Minerals Law were attractive to investors and Centerra Gold was the first taste of big foreign investment in the minerals sector other than what the Russians had done with the likes of Erdenet Copper Mine under the old Soviet planned economy model,” said James Liotta, partner at MahoneyLiotta Law Firm, a legal practice established in Ulaanbaatar in the late 1990s. 

What followed next, however, undid the previous regulations: “As investments and discoveries in the minerals sector continued to grow, so did populism. This led to the enactment of the 2006 Minerals Law and Windfall Profits Tax Law, which were far less attractive to investors, and in 2012 the Strategic Entities Foreign Investment Law was enacted. Resource nationalism and creeping expropriation grew, along with international and local arbitration and litigation. The combined effect, along with other policy, administrative, and legislative missteps, triggered an about-face of the investment community. Since this time, and even with the enactment of the current Investment Law, we have seen a growing trend of state-owned participation, or dominance, in the minerals sector and little attention toward the free-market private sector-driven investment economy that led to Mongolia’s economic boom,” continued Liotta.

Two of the laws Liotta mentions were particularly far-reaching. First, the Strategic Entities Foreign Investment Law (SEFIL), now repealed, allowed the government to take over an asset deemed of strategic importance for the country, and it pertained to the state’s participation in the mining sector. SEFIL controversially required companies to seek government or parliament approval over proposed transactions in ‘strategic sectors’, like mining.

The nationalistic impetus at the time was most obviously expressed when the government wanted to renegotiate the royalties paid and cost overruns with operator Rio Tinto just as Oyu Tolgoi was preparing to sell its first concentrate from the open pit. Rather than a negotiation, some of our interviewees called it “taking Rio Tinto hostage.” Under the previous agreement, established in 2009, the government was to provide its 34% share of construction costs upfront, but would only get dividends once those costs were recouped, which meant that the country would effectively pay its share of construction costs by forgoing early dividend flows from the mine. Needless to say, the standoff spooked investors. “For good or bad, OT continues to symbolize the country’s investment environment to the international community, so when the OT shut down operations in 2012, massive ripple effects spread across the industry,” commented Brad Clarke, managing director at Sandvik, a global engineering company.

This event turned the country into what Shaukat Tapia, country manager at PwC Mongolia, calls a “hot big potato” for international investors. Rio Tinto finally resolved its disputes with the government in 2022; the underground mine, which was supposed to start a few years ago, was inaugurated in 2023 and, all going well, will provide copper and gold for at least another 50 years. For the resolution, Rio Tinto was the one who relented first, waving the US$2.4 billion debt owned by the government for the construction (34% of the US$6.93 billion expansion). 

SEFIL came in conjunction with another law, popularly known as the “law with the long name” or LLP, and by its official name, The Law On Prohibiting Mineral Exploration And Extraction Near Water Sources, Protected Areas And Forests. As its name suggests, it prohibited mining close to riverbeds. Shaukat Tapia, country manager at PwC Mongolia, said: “The problem with this regulation was that it came with no warning, so many operators lost their licenses overnight. This move was perceived as anti-business not only by international players but also Mongolians.”

Also, these two laws were at times used to cancel each other. According to the LLP, Mongolia’s first large, publicly listed miner, Centerra Gold, could not develop the Gatsuurt gold mine, close to the Gatsuurt River, in the north of Ulaanbaatar. As a solution, the government declared it an asset of ‘strategic importance’, which meant it could have a 34% right to it, and SEFIL would no longer apply; as a national security asset, it was no longer beholden to environmental protection laws, according to an explanation by Forbes. 

These two pieces of regulation shaped the country’s mining industry to this day, leaving room for more state intervention in mining assets and leading to a dearth of exploration by revoking licenses. Sam Spring, the CEO of Kincora Copper, a copper developer in the South Gobi, said that over 40% of Mongolia’s landmass was covered by exploration tenure when they took over the Bronze Fox project in 2011. Today, the land available for exploration dropped by 10 times, covering just 4% of the country’s territory. During the boom, about 3,000 mining licenses were issued, according to the Economist. Many of these were scrapped during the period of clampdown on the industry. The government granted 1,000 more licenses in 2017-2018, according to Trigteq, and now the total number is reaching back to the boom levels, at 2,900, according to another local consultancy, BlackRock Partners (BRP). These are still not enough; the country holds 6,000 deposits of some 80 different minerals, said BRP.

Mongolia now wants investors to look again at its licenses, both by making the issuance process more transparent and digitalized and by issuing more licenses. Since last year, Mongolia started granting exploration licenses “at a stable rate,” said Minister Ganbaatar. According to Sambuudorj Erdenebat, the CEO of Glogex Consulting, based out of Ulaanbaatar, the government is planning to release another 400 exploration licenses soon. Mongolia’s open bidding system, created at the end of 2022, allows investors to check the licenses available in a much more transparent way.

Bayarmandal L., the chairman of the agency in charge of issuing licenses (the Mineral Resources and Petroleum Authority of Mongolia or MRPAM), admitted that the agency received complaints about the selection of exploration licenses quite often, because the previous process was slow and notoriously bureaucratic, but believes that the new system is much smoother: “Since 2022, mineral special licenses issuing process through a selection process has been developed into the electronic system www.tender.gov.mn in cooperation with the State Procurement Department. All the selection process has been completely digitalized, and the licensing area became publicly announced on November 23, 2022,” he said.

The same progress cannot be said of the state’s intervention in mining. Amongst one megamine (Oyu Tolgoi), a handful of listed developers (like Australian-listed Xanadu Mines and Aspire Mining, or Canadian-listed Erdene Resource Development), and developers and early producers (like Steppe Gold and MoEnCo), sit an unusually high number of state-owned enterprises or SOEs, including Erdenes Tavan Tolgoi (ETT) and Erdenet Mining Corporation (EMC), the operators of the country’s top-three largest mines. Erdenes Mongol, the government’s umbrella company that holds the stakes in 23 different legal entities across the mining value chain, accounts for 14% of the country’s coal reserves, 65% of copper, 15% of fluorspar, and 55% of iron. In total, it contributes almost a third of the country’s earnings, and two-thirds of the royalties paid back into the country, according to Erdenes Mongol’s CEO, Narantsogt Sanjaa. 12 of the natural resource companies of Mongolia are SOEs, according to the National Bureau of National Research. 

Bayar Baatar, principal consultant at Baatar Consulting, noted that it is unhealthy for the taxpayer to coincide with the tax receiver in a normally functionating free market economy. “I would say there is more state participation today than10 years ago. Whether we can attribute this to the overall growth of the industry or to nationalism is a separate question,” he said. 

An article published by the Mongolian National News Agency confirms that the number of state-owned enterprises (SOEs) has increased in the last five years by 2.8 times. This is across the board, not just in mining. Of the 98 companies owned by the state in different sectors, more than half operate unprofitably, notes the source. But the most profitable are the two mining giants, Erdenes Tavan Tolgoi (ETT) Coal Mine and the Erdenet Copper Mine. To nationalize Erdenet was a tumultuous journey. Erdenet, which means treasure in Mongolian, was a JV between Mongolia and Russia, but it was acquired in 2016 by a private company called Mongolia Mining Corp, backed by the largest commercial bank in the country (Trade and Development Bank or TDB). Just two years later, the government decreed by parliamentary resolution that the shares should belong to Mongolian nationals, and nationalized it, illegally, as a local court found. It remains to this day a national asset. 

The gap between paper and practice

For more private players to invest in the country, Mongolia will have to provide a much clearer investment framework. For instance, Orano, which plans to invest US$1.6 billion in the Zuuvch Ovoo project, required tax stability over the project’s lifetime, expected to stretch over three decades. It would also need irregularities in the current laws to be sorted out since uranium mining is subject to both the Mineral Law and the Nuclear Energy Law. According to Marc Meleard, executive director at Badrakh Energy, the local JV between Orano and the government, Mongolia wants higher royalties from the project, which would entail a lower shareholding, currently set at 34%. The Mineral Law would have to be amended to clarify that uranium mining should only be governed by the Mineral Law. 

Going back to the start of this article, a lot hinges on the new Mineral Law, and on the country following up on it. Mongolia has struggled in the past with implementation, as well as sudden changes and periods where nothing happens, especially before an election. Equally, on the regulatory side, approvals and permits tend to stall around these times. The different laws must communicate with each other well to create a well-thought-out and attractive legislative ecosystem. An attractive minerals law is insufficient without transparent dispute and tax resolution frameworks. “Many investors also worry about the lengthy, complex yet unorganized procedure of tax audits and tax disputes," said Sang Yong Cho, Partner at KPMG Mongolia. “The same ease of opening a business does not apply when closing a business or undergoing tax litigations. Foreign investors usually comment that the onerous bureaucratic and judicial process takes no less than 18-24 months," he added. 

The problem, Yong Cho said, is a mismatch between the legislators’ preference for keeping domestic tax law simple and foreign investors’ need for more complex transactions. “When investors try to clarify uncertainties from tax offices or departments under the relevant ministry, it often takes months to hear back. Sometimes, they never get a reply."

Yong Cho, like others, sees Mongolia as a young democracy. Many of its laws, including its tax system, are only 30 years old and require further guidance before they can align with international practices, but progress has been made recently, including the 2017 Amendment to the Minerals Law that sought to increase transparency and improve the business environment, or the recent decision that Mongolia should follow the OECD transfer-pricing guidelines – there, however, regulations were again delayed so everyone is again in wait-and-watch mode. 

The will to make the changes is there. The steps noted in this article, including a redrafting of the mineral law and a tender system aligned with international standards, point to that. Besides the Mineral Law, Mongolia has also redrafted its Investment Law, which stipulates more legal guarantees to investors. This law was developed within the country’s long-term Vision 2050 master plan. That same plan also outlines ambitions to diversify the economy beyond mining and beyond its two neighbors. So let’s delve into that in the next article.