After 18 months of negotiations and wrangling over a nuclear energy law, the Mongolia State Ikh Khural (Parliament) quietly passed the Nuclear Energy Law (NEL) in July of this year.  During a recent public forum on the NEL sponsored by the Mongolian National Mining Association several members of Parliament admitted the law had been proposed and passed in less than two weeks during July.  This, of course, begs the question of why a law that regulates such an important and potentially dangerous sector was passed so quickly and presumably without much input from other stakeholders in the nuclear sector in Mongolia.

Why a law that regulates such an important and potentially dangerous sector was passed so quickly…

The NEL was passed in order to regulate all aspects of dealing with nuclear materials, from uranium exploration and mining to the running of nuclear reactors.  The Nuclear Energy Authority (NEA) is the regulatory agency which oversees the nuclear sector.  It reports directly to the Prime Minister and under the NEL the agency has been tasked with regulating the nuclear energy sector in Mongolia, including licensing, inspecting, and monitoring.  The NEA is assisted in its duties by an Ad Hoc Committee headed by the Prime Minister and the Head of the NEA.  Additional assistance is provided by the Parliamentary Standing Committee and the Central Intelligence Agency.

Under the new law all uranium license holders, both exploration and mining, must re-register licenses with the state by November 15, 2009 in order to comply with the Law of Mongolia Procedures to on Compliance with the Nuclear Energy Law.  Below are some of the new guidelines which will raise concerns amongst uranium licenses holders in particular and mining license holders in general:

• Subjective guidelines on those who qualify as license holders:  exploration license applicants are scored versus other applicants for financial viability, responsible mining practices, and experience in the nuclear field.  Unfortunately for investors the NEL provides no guidelines on how it will score applicants in these areas, leaving the door open for denying an applicant based on nationality or some other arbitrary reason but ostensibly based on the law.
• The above point leads into the problem area of a lack of transparency of the application process.  The licenses will not be publicly tendered but the decision to approve/reject an application is made solely by the NEA (with comments by the Central Intelligence Committee).
• The NEL is being applied retroactively to current license holders, forcing them to re-register by November 15, 2009 in order to comply with the new law.
• Licensing procedures overly onerous and contradictory:
  • An already overly bureaucratic government has added additional layers to the uranium license application process.  A separate cadastral office has been set up to handle uranium licenses, while the existing cadastral office remains in operation handling all other minerals licenses.  This could potentially lead to licenses being issued for the same areas for different minerals, something that would cause more than a few headaches.  There is also the added level of scrutiny by the Central Intelligence Agency to the application process.
  • Non-transferable licenses – in an industry in which large companies routinely contract junior companies to do exploration work, this regulation has the double whammy of reducing the number of potential companies, and thus the tax base, in Mongolia as well as possibly forcing mining companies to add exploration to its activities, at considerable cost.
  • “Reserve” remains an undefined term in the law.
• Re-registration of licenses – This is compulsory for all existing uranium license-holders in Mongolia.  Re-registration means the company accepts and will meet all new regulations of the NEL, including the compulsory state participation, and there is no guarantee the licenses will automatically be renewed, or that they will be renewed on the same terms as existing licenses.  This, of course, may cost exploration and mining companies millions in previously invested funds on licenses that may be revoked or suspended by the NEA.
• State participation at no cost – Let me clarify that statement – at no cost to the Mongolian Government, but at a great cost to the companies involved.  For license areas where uranium has been discovered without state funds the Government of Mongolia will take a share of no less than a 34% of the shares in the company, with that number rising to the absurd level of no less than 51% of a company’s shares in areas where state-funding was used to discover the deposit.  At the same time a foreign-invested company’s minimum capital investment will remain at least USD100,000.  The implementation of the government’s taking shares is unclear, including the method of deciding the percentage of shares the government will take and the minimum amount of expenditure the state must have invested in order to qualify it to take at least 51% of a company’s shares.
• 60 days to agree – Uranium license holders can have their licenses revoked if no mining agreement is reached within 60 days.  At the same time there is no obligation for the NEA to negotiate in good faith, a fact that leaves uranium companies at the mercy of a nuclear agency which may or may not decide to negotiate an agreement in time.
• Advance payments – the NEL gives the State the right to an advance payment of 10% of the reserve, although there is no indication as to whether this is an advance on royalties, license fees, taxation, or a lump sum to be paid to purchase the exploration work carried out by the exploration license-holder, but paid to the state.  Government officials have suggested this advance payment may be discretionary, and it may only be intended for those mining companies who have not previously held exploration licenses, but this is unclear.

So while Mongolia has taken great strides forward in recent days with the signing of the Oyu Tolgoi Investment Agreement with Ivanhoe Mines and Rio Tinto, it seems to be taking a couple of step back when it comes to uranium mining.  It is understandable a country would want to treat its reserves of uranium differently than other minerals, in light of the sensitivity of the material being mined, but the new law seems to have completely ignored the standards upon which most other nuclear laws are based.

The move is worrisome to companies which are current license-holders in the uranium sector in Mongolia.  Khan Resources, which expects initial capital costs for its project in the Northeast Mongolian Dornod uranium reserve to be $333 million, has expressed concern over the increased government stake in companies. (Khan worries on Mongolian uranium mining moves)

At the same time Mongolian President Elbegdorj and Prime Minister Bayar have been busy negotiating with foreign governments to exploit the uranium deposits in the country, including an agreement with Russia on August 25, 2009 to form a 50%-50% joint venture to mine the Dornod uranium deposit (on the heels of visits by both Putin and Medvedev in recent months), although Khan Resources currently has 58% interest in the joint venture holding the mining license and 100% interest in company holding the exploration license in an adjacent area on the Dornod deposit.  Other recent developments in the nuclear sector include a deal with India following the President’s trip to the country as India attempts to boost the amount of electricity generated by nuclear power.  The Prime Minister discussed uranium ore development on his trip to Japan in July of this year, with the PM saying he would like Japanese businesses involved in the uranium sector in Mongolia.

It is unfortunate that the Mongolian Government has taken the steps it has in the nuclear sector.  With claimed 6% of the world’s uranium reserves, Mongolia has the potential to become an important player in the worldwide nuclear sector as demand for nuclear energy generated power increases in order to help combat coal-powered plants.  The NEL was passed very quietly in July as all eyes were on the much-anticipated Oyu Tolgoi Agreement negotiations.  It is more than a little curious why the Parliament would pass such an important piece of legislation without the input of industry experts and stakeholders.  It is interesting to note the date of the passing of the law and the sudden rise in negotiations, deals and memorandums of understanding with various governments to explore and mine Mongolian uranium deposits.

With this law the Government seems to be taking a step back from capitalist market principles and breaking its own Foreign Investment Law, which states foreign investment shall not be unlawfully expropriated.  Seems it is not the best time to in the nuclear sector in Mongolia at the moment.  Obviously the OT Agreement is going to be a huge revenue generator for the country and I hope the NEL was not passed because the government feels that it no longer needs to attract solid foreign investment.  I certainly think Mongolia remains a good place to invest and it will continue to be so, but the NEL has turned slightly sour a moment that should be nothing but sweet for Mongolia.

Note:  Generous thanks to Lehman, Lee & Xu Mongolia law firm for providing the analysis of the Nuclear Energy Law.