By Alex MacDonald
LONDON--Proposed changes to Mongolia's mining law threaten to
undermine the economic viability of its fledgling mining sector,
with negative consequences for the entire economy and future
investment in the country, business leaders and investors
warned.
The legislation, which includes a requirement for existing
miners to relinquish stakes in projects to indigenous groups, marks
a departure from the free-market principles that have benefited the
country since the 1990s, The Business Council of Mongolia, the
country's largest business group, said in a four-page open letter
to Mongolia's president last week.
Mongolia has seen foreign investment in mining wane after it
introduced a new law last year that restricts foreign ownership in
strategic sectors such as mining. Politicians have also made at
least two unsuccessful attempts to change the terms of a mining
agreement signed in 2009 to develop the massive $6 billion Oyu
Tolgoi gold and copper project. The project is expected to account
for about a third of the country's economy by 2020.
The legislation, if approved in its current form, will "halt
current minerals exploration and development in Mongolia and
greatly discourage any future investment," The Business Council of
Mongolia, which has more than 250 members, said in its open letter.
It also threatens the development of the nation's largest coal
reserves, Tavan Tolgoi, the council said. Mongolian state-owned
Erdenes-Tavan Tolgoi Co. owns rights to develop those reserves and
has been seeking to raise up to $3 billion via a public share
offering that has already been delayed several times.
The draft law, which would replace the one signed in 2006,
proposes several measures that would give the Mongolian government
a firmer grip over its mineral resources while raising concerns
about ownership rights and possibly lead to higher taxation. The
legislation would require that mining companies hand over a stake
of at least 34% in their existing projects to indigenous groups. It
would also require companies to mine lower ore grades even if
they're not profitable, said Luke Lesley, head of mining at
London-listed Origo Partners PLC (OPP.LN), a private equity group
that owns stakes in various Mongolian mining companies.
The draft law also raises concerns about security of license
tenure and fails to identify a dispute resolution process or body
given overlapping powers between different ministries and local
government, Mr. Lesley said. The Council also said was unclear
whether the government may be able to apply the draft law
retroactively to existing projects. Mining companies that currently
operate in Mongolia include globally diversified miner Rio Tinto
PLC (RIO), operator and major shareholder of the Oyu Tolgoi project
through Turquoise Hill Resources Ltd. (TRQ.T), Peabody Energy Corp.
(BTU), and Erdene Resource Development Corp. (ERD.T). None of them
were immediately available or able to comment.
"Both domestic and foreign investors have unanimously and
unambiguously responded negatively to these amendments," the U.S.
embassy in Mongolia said in a report about investment climate
published Tuesday. "They argue that the amendments grant the
government broad and vague discretionary authority to revoke
exploration and mining rights without meaningful checks on these
powers; and impose taxes and fees, development obligations, and
production, management, and employment practices that may render
commercial mining impossible in Mongolia," it noted.
"It makes it very hard to raise money for any of these projects
with all of this lack of clarity," Mr. Lesley said.
Businessmen and investors are also concerned that the draft law
may fall foul of political posturing ahead of the presidential
elections in May. The draft legislation is "almost certainly
politically motivated," said Mr. Lesley. "Both of the main parties
are looking at popular measures that could be put to the
electorate."
Last year, politicians pushed through a law that restricts
foreign ownership in key strategic sectors such as mining. The law
was passed just before parliamentary elections in June in response
to voter concerns that Mongolia may be compromising its sovereignty
by giving foreigners too large of a stake in its key sectors. But
since the elections, the government has been considering relaxing
some of those rules in order to make it more business friendly.
The draft legislation on mining is currently open to
consultation until Jan. 18, according to Origo. Both the Business
Council of Mongolia and Origo said they have submitted
comments.
Origo expects the draft law will be submitted to parliament for
a vote in April in order to approve the law ahead of the
presidential elections.
"Passage of the Draft Law in its current form is likely to
damage Mongolia's brand as an investment destination," the Business
Council said, noting that it would lead investors in all sectors of
Mongolia's economy to re-evaluate the country's sovereign risk
profile. The end result could repel rather than attract foreign
direct investment, the Council said.
Write to Alex MacDonald at alex.macdonald@dowjones.com
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