25.11.2010 overview of the legal framework for foreign investment in mining and infrastructure in...

Overview of the Legal Framework for Foreign InvestmentOverview of the Legal Framework for Foreign Investment in Mining and Infrastructure in Mongolia

Presentation toMongolian Investment Summit 2010gRoyal Garden Hotel, London

25 November 201025 November 2010

Nabil L. KhodadadH d Mi i & M t lHead, Mining & MetalsCo-Head, Project Finance and InfrastructureDewey & LeBoeuf, LondonTel: 020 7459 5237Tel: 020 7459 5237Email: [email protected]

Dewey & LeBoeuf LLPdl.com

Overview of Dewey & LeBoeufOverview of Dewey & LeBoeuf

Dewey & LeBoeuf is a global law firm with more than 1,100 lawyers in 26 offices located around the world

Our mining, energy and infrastructure group has more than 85 lawyers

We are one of the world’s leading law firms in the mining, energy and infrastructure sectors, especially in emerging markets – we have a track record of working on innovative, groundbreaking transactions

W h b ti i M li i ll i i d i f t tWe have been active in Mongolia, especially on mining and infrastructure matters

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OutlineOutline

General Overview of Foreign Investment Regime

Foreign Investment in Miningo e g est e t g

Foreign Investment in Infrastructure

ConclusionConclusion


I. General Overview of Foreign Investment


Foreign Investment Lawg

Foreign Investment Law adopted in 1993 and subsequently amendedForeign Investment Law adopted in 1993 and subsequently amended

Foreign Investment broadly defined

Minimum investment required: US$ 100,000q $ ,

Accords foreign investors no less favourable treatment in respect of possession, use and disposal of their investments than that accorded Mongolian investors

Right to repatriate income & profits

Protection against expropriation, permissible only ifFor a public purpose

In accordance with due process

On a non discriminatory basisOn a non-discriminatory basis

With prompt payment of full compensation

Possible to obtain a Stability AgreementPossible to obtain a Stability AgreementStabilize taxes

Eligibility for and term of Stability Agreement depends on level of investment


Foreign OwnershipForeign Ownership

Foreign Investors may own 100% of any registered businessNo legal requirement to engage Mongolian entity to be a joint venture partner, g q g g g y j pshareholder, agent

ExceptionsMinerals Law (2006) empowers Government of Mongolia to obtain up to a 34% or 50% share of any mine on or abutting a strategically important deposit

Uranium Law (2009) gives Mongolian state through MonAtom the right to takeUranium Law (2009) gives Mongolian state through MonAtom the right to take (without compensation) at least 51% of the shares of a company engaged in uranium mining


Land OwnershipLand Ownership

Only Mongolian citizens can own land

Land ownership rights limited to Ulaanbaatar, provincial capitals and soums (i.e. a d o e s p g ts ted to U aa baata , p o c a cap ta s a d sou s ( ecounty seats)

No corporate entity, whether foreign or domestic, may own land

Foreign individuals and Mongolian and foreign legal entities may own:buildings and other immoveable property outrightg p p y g

lease land for terms ranging from 3 to 90 years


Registration of Foreign InvestmentRegistration of Foreign Investment

FIL requires any investment with 25% or more foreign direct investment to register as a foreign-invested firm with the government

Foreign Investment and Foreign Trade Agency (FIFTA) runs the registration process and is now under the supervision of the Ministry of Foreign Affairs and Trade (MFAT)Trade (MFAT)

FIFTA must certify that the by-laws, environmental practices and technologies of registered foreign companiesg g p


Currency IssuesCurrency Issues

No major issues in converting or transferring investment funds, profits, revenues, debt service, lease payments, etc.

Mongolian companies can open offshore bank accounts

Foreign-held interest bearing bank accounts are subject to withholding tax at a rate of 20%

All domestic transactions must be conducted in local currency (Tugrogs)


Resolving DisputesResolving Disputes

Mongolia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)

Mongolia is signatory to the Convention on the Settlement of Investment Disputes (Washington Convention)

Mongolia has signed Bilateral Investment Treaties (BITs) with many countriesMongolia has signed Bilateral Investment Treaties (BITs) with many countries

Benefits of BITS and ICSID ConventionI t ti l bit tiInternational arbitration

Avoid domestic courts

D ti l d fDomestic law no defense

Broad protection standards under international law

Measures having an effect equivalent to expropriationMeasures having an effect equivalent to expropriation

Fair and equitable treatment


II. Foreign Investment in MiningII. Foreign Investment in Mining


Exploration and Mining LicensesExploration and Mining Licenses

Mineral resources are the property of the Statep p y

Only legal entities registered in Mongolia can hold exploration and mining licenses

Exploration LicensesExploration Licensesinitial term of 3 years

license may be extended twice each extension for a three year periodlicense may be extended twice, each extension for a three year period

license holders are required to spend certain minimum amounts, commencing in the second year

2nd and 3rd year miners must spend at least US $.50 per hectare per year on exploration

4th t 6th i t d t l t US $1 00 h t4th to 6th year miners must spend at least US $1.00 per hectare per year on exploration

7th to 9th year miners must spend at least US $1.50 per hectare per year on y p p p yexploration


Exploration and Mining LicensesExploration and Mining Licenses

Mining Licensesginitial term of 30 years

may be extended twice for terms of 20 years each

Royalties

Requirement of active mining companies to ensure that 90% of their workforce are Mongolian nationals

A license holder investing $50 million or more may enter into an Investment Agreement with the Governmentwith the Government


Foreign OwnershipForeign Ownership

Mineral Law (2006) gives Government of Mongolia right to obtain an equity stake in ( ) g g g q ystrategically important deposits

up to a 50% stake if the State has contributed to the exploration of the deposit

up to a 34% stake if the deposit was developed with private funds and the state has not contributed to the exploration of the deposit

G t i t f th h it t k t f i k t lGovernment is to pay for the share its takes at fair market value

Strategically important deposit defined to includedeposits which are producing or have the potential to produce above 5% of GDP per year

mineral concentration where possible to maintain production that has a potential impact on national security, economic and social development of the country at national andon national security, economic and social development of the country at national and regional levels

Holders of mining licenses for strategic deposits must sell no less than 10% of the shares of the license holder on the Mongolian Stock Exchange

Unclear how this provision of the law is to be implemented


Investment AgreementsInvestment Agreements

Investors who undertake to invest more than $50 million within the first five years of their mining operations are eligible to enter into Investment A t ith th M li G tAgreements with the Mongolian Government

Investment Agreement can create fiscal and legal stability

Government acts through the Cabinet of Ministers represented by cabinet members responsible for taxation, geology, mining and environmental issues

M i d ti f I t t A tMaximum duration of Investment Agreementsfor investments of US$50 million to $100 million: 10 years

f i t t f US$100 illi t $300 illi 15for investments of US$100 million to $300 million: 15 years

for investments in excess of US$300 million: 30 years


Environmental IssuesEnvironmental Issues

License holders must preparean environmental impact assessmentp

an environmental action plan which addresses any adverse impacts identified in the environmental impact assessment

License holders must deposit 50% of their environmental protection budget for a particular year in a special bank account with the Government to secure the license holder's obligations under the environmental action planlicense holder s obligations under the environmental action plan

Current mining license holders responsible for environmental liabilities incurred by former license holdersy


Taking SecurityTaking Security

License holder may pledge mineral licenses and immovable property and register such pledge

Only banks and other financial institutions can be registered a pledgees of mineral licenses

Problem: Only Mongolian legal entities (or nationals) can hold mineral licenses

No system to register pledges over movable property

Banks need to be careful about enforcing pledges over mineral licenses since they could become responsible for environmental liabilities incurred by their borrower or former license holdersborrower or former license holders


Recent Changes to the Mongolian Tax CodeRecent Changes to the Mongolian Tax Code

Effective 1 January 2007, the Tax Code creates a level playing field between foreign and domestic investors

Ability to carry forward losses has been extended from 2 to 8 years (2009)This was a condition for the development Oyu Tolgoi project

Parliament revoked an exemption on VAT taxes of 10% on equipment used to bring a mine into production except on equipment to be used in the production of highly processed mining products (2009)of highly processed mining products (2009)


Elimination of Excess Profits Tax on Gold & CopperElimination of Excess Profits Tax on Gold & Copper

Windfall Profits Tax law passed in 2006Imposed 68% tax on profits from gold and copper miningp p g pp g

Gold: tax applies when gold reaches US$ 850 an ounce

Copper: tax applies when copper reaches $2,600 per tonne

Fortunately, Parliament amended the Windfall Profits Tax so that the windfall profits tax for gold and copper will end on 1 January 2011

This was a key condition for the development Oyu Tolgoi project


Law on Prohibition of Minerals Exploration in Water Basins and Forested Areas (2009)Forested Areas (2009)

Prohibits mining in water basins and in forested areas

Revoked or modified licenses to explore or mine mineral resources within an e o ed o od ed ce ses to e p o e o e e a esou ces t aarea no less than 200 meters from a forest or water resource

Grants local officials the power to determine actual areas to be minedLocal official can extend the 200 meter minimum

Requires government to compensate license holder for previously incurred q g p p yexploration expenses or for revenue lost from actual mining operations


Uranium Law (2009)Uranium Law (2009)

Created the Nuclear Regulatory Authority of Mongolia

Created MonAtom, a new state-owned holding company, to hold Uranium assets that the Government will require from current right holders

Revoked all uranium exploration and mining licenses and then required all holders to register these licenses (for a fee) with the Nuclear Regulatory AuthorityAuthority

Required investors to accept that MonAtom has a right to take 51% of the company that will develop the uranium mine without compensationp y p p

Created a uranium-specific licensing and regulatory regimeIndependent of the regulatory framework set out in the Minerals Law (2006) for p g y ( )developing other mineral and metal resources

State can issue distinct license for uranium exploration on a property otherwise dedicated to other mineral and metals explorationdedicated to other mineral and metals exploration


III. Foreign Investment in InfrastructureIII. Foreign Investment in Infrastructure


Great Potential for Foreign Investment in InfrastructureGreat Potential for Foreign Investment in Infrastructure

Mongolia needs to enhance its infrastructure including:Power

Roads

Rail

Water

Sanitation

Other

Law of Concession creates a legal framework for investment in infrastructureg


Law of Concessions GeneralLaw of Concessions - General

Effective as of March 1, 2010

Helps facilitate investment and financing of infrastructure projectse ps ac tate est e t a d a c g o ast uctu e p ojects

Various concession types, including:Build-Operate-TransferBuild Operate Transfer

Build-Transfer

Build-Own-OperateBuild Own Operate

Build-Own-Operate-Transfer


Law on Concessions Granting of ConcessionsLaw on Concessions – Granting of Concessions

List of concession item approved by government

Concession granted:Co cess o g a tedThrough tender

By direct agreement under certain circumstances, including when deemed that y g , gconducting a tender would jeopardize national security

Tender shall include the general terms of the concession agreement

Unsolicited proposals to conclude a concession agreement will be considered


Law of Concessions Contents of Concession AgreementLaw of Concessions – Contents of Concession Agreement

Concession agreements shall be governed by the laws of Mongolia and shall include, inter alia

ownership of property to be transferred to concessionaire

right of concessionaire to receive payments for operating the concession item

rights of the concessionaire to obtain financing and create security interests

financial support from the state

right of the concessionaire to receive compensation in the event of increase in costs/decrease in revenue due to changes in law

the amount of payments if any upon the transfer of the concession itemthe amount of payments, if any, upon the transfer of the concession item


Law on Concessions Duration and ExtensionLaw on Concessions – Duration and Extension

Duration to be agreed by the parties taking into account particulars of the industry, timeline of the investment, volume of the investment, time to recoup i t t t d fit d th ttinvestment, expected profits and other matters.

Concession agreement shall be extended if:the activities are disrupted or delayed due to force majeure

the activities are disrupted or delayed as a result of a decision taken by state authoritiesauthorities

additional requests or demands by the authorized entity necessitates an extension for the concessionaire to recover the increase in costs


Law on Concessions TerminationLaw on Concessions - Termination

Limited termination rights by either party to the concession agreement

Concession agreement shall specify how compensation is calculated in the Co cess o ag ee e t s a spec y o co pe sat o s ca cu ated t eevent of termination, providing for the proper value of the works rendered, expenses incurred, and losses sustained, including lost profits


Law on Concessions Financial Support from the StateLaw on Concessions – Financial Support from the State

The State may provide the following financial support to the concessionaire:issue a loan guarantee g

provide a portion of the financing

provide tax exemptions and waivers

issue a guarantee for minimum revenues

provide compensation


ConclusionConclusion

With the signing of an Investment Agreement for the Oyu Tolgoi copper-gold project and the abolition of the 68% Windfall Profits Tax (as of 1/1/2011), the li t f f i i t t i i i h i ifi tl i dclimate for foreign investment in mining has significantly improved

Remaining challengesLaw on Prohibition of Minerals Exploration in Water Basins and Forested Areas (2009)

Uranium Law (2009)Uranium Law (2009)

Procedure for awarding exploration licenses

New Law on Concessions creates an investor-friendly legal framework forNew Law on Concessions creates an investor-friendly legal framework for investment in infrastructure


Questions?

Nabil L. Khodadad Tel: +44 (0) 20 7459 5249Email: nkhodadad@dl comNabil L. Khodadad

Based in London for more than two decades, Nabil co-heads the firm’s Project Finance and Infrastructure Group and heads its Mining and Metals Group Nabil has been ranked as a leading project finance

Email: [email protected]

• Currently advising a major foreign investor on a large integrated mining and power project in Mongolia

Group and heads its Mining and Metals Group. Nabil has been ranked as a leading project finance, energy and mining lawyer by Chambers & Partners in the 2007, 2008, 2009, 2010 and 2011 Chambers UK Guide. Nabil is also a member of the Documentation Committee of the London Market Association.

Currently advising a major foreign investor on a large integrated mining and power project in Mongolia• Currently advising European Goldfield on a $300 million loan facility to finance a gold project in Greece• Currently advising StatOil on the development and financing of Phase 1 of the Shtokman Gas and LNG Project with

GazProm and Total• Advised a mining major on a large acquisition involving mining assets in Mongolia• Advised Newmont Mining on the IFC-led financing of the Ahafo Gold Project in Ghana• Advised the EBRD on the $350 million financing of LUKoil's and SOCAR’s investments in the Shah Deniz Gas Field and the

S th C Pi liSouth Caucasus Pipeline• Currently advising Uz-Kor Gas Chemical, LLC, on the +$3 billion for the development and financing of the Surgil gas field

and the Ustyurt Gas Chemical Complex• Advised Eskom on a $3 75 billion World Bank loan to finance the construction of a coal-fired power plant a wind powerAdvised Eskom on a $3.75 billion World Bank loan to finance the construction of a coal fired power plant, a wind power

plant and a solar power plant• Advised Azerbaijan (ACG) Ltd, a subsidiary of SOCAR, on a $750 million loan facility arranged by BNP Paribas to finance

its share of investment in the Azeri, Chirag and deepwater Gunashli offshore oil and condensate fields, Project Financemagazine's "European Oil & Gas Deal of the Year" for 2006magazine's "European Oil & Gas Deal of the Year" for 2006

• Advised Preem Petroleum AB in connection with an approximately $3.5 billion syndicated financing arranged by Skandinaviska Enskil Banken AB and Svenska Handelsbanken AB with respect to its financing

• Advised Zarafshan-Newmont on the EBRD and Barclays-led financing of the Murantau Gold Project, EBRD’s first


y g j ,syndicated loan in the CIS and Project Financial International’s “Deal of the Year”

• Advised IFC in connection with its financing for the revamping, modernization of S.C. Petrotel-Lukoil's refinery in Romania

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