On Thursday 18 November 2010, Mongolia's Minister of Minerals and Energy confirmed that 254 licences for gold mining in Mongolia would shortly be revoked. In addition, it appears that in the region of 1,800 mining licences have been suspended pending a government review. Together, this represents almost half of the licences issued to mining companies in order to allow exploration and exploitation of Mongolia's vast natural resources.
Rich deposits of precious metals and oil mean that Mongolia has attracted a number of foreign investors, many from other countries in Asia. Mongolia has therefore been a hot topic among mining industry players in recent years, with investments in the sector increasing exponentially and several key players looking to raise money through IPOs in Hong Kong.
The effect of this announcement is a solemn reminder that exposure to Mongolia is not without risk, with the lack of a well-developed regulatory framework meaning that compensation to investors affected by this decision is far from certain. We consider below some of the potential remedies that may be available to organisations affected by these announcements.
Reason for the revocation of the licences
Reports from Mongolia are that the decision to review and cancel licences is based on environmental concerns, although it is not possible to confirm specifics. Local news reports that the gold mining licences have been revoked under a law passed in the summer of 2009 which prohibits mining in particular areas of environmental significance, such as near to forests, rivers or lakes. However, it is suggested that such areas only comprise around 10 per cent of a country which is largely desert, and that these actions are intended as a concession to environmental groups who have recently been putting increased pressure on the relatively new democratic government. Entities which are awarded licences for mining in Mongolia are required to submit plans at the time of application which deal with environmental issues and contain an assessment of the impact which the mining activities will have in the relevant area. This is guaranteed by way of a payment to the Mongolian government which is intended to contribute to the cost of clean up operations in the event of an environmental accident.
Legal remedies – Bilateral Investment Treaties
There has been a suggestion that companies affected by the removal of licences may be awarded compensation, but details are vague and further announcements are awaited.
Apart from relevant national investment law, Bilateral Investment Treaties (or "BITs") may represent a means of seeking recourse for foreign organisations who were awarded mining licences, only to find them suspended or revoked by the host state. Mongolia has entered into BITs with Japan, Korea, Malaysia, PRC, Russia, Singapore, UK and USA, among other countries – although no BIT exists at present between Mongolia and Hong Kong.1 The terms of each BIT will differ according to the agreement reached between the two states at the time of signing, but in general and subject to any admission requirements, BITs provide substantive protections to foreign investors from interference by the host state.
In order to bring an investment arbitration against the Mongolian Government to protect their assets, ordinarily investors must demonstrate that (a) they are "investors" of a contracting party (including satisfying relevant nationality requirements) who have an "investment" protected by an investment treaty, (b) the investment treaty or law has been substantively breached by the Government and (c) the investment treaty or investment law contains a dispute resolution provision which would allow the investors to take the Government to arbitration.
"Investment" is usually defined widely. In the Mongolian BIT with the PRC, for example, it includes shares, claims to performance under contract, and "concessions conferred by law, including concessions to search for or exploit natural resources."
Whether or not the BIT has been breached is a more difficult question. Most BITs provide for "fair and equitable treatment" of foreign investors, equivalent treatment between foreign investors and nationals of the host state, and protection from expropriation by the host state.2
Although expropriation is not prohibited by international law per se, it must be (i) for a public purpose, (ii) non-discriminatory, and (iii) subject to prompt, adequate and effective compensation. The unilateral revocation of licensing rights proposed by the Mongolian government may constitute expropriation if it amounts to the indirect 'taking' of the foreign investors' investments. Therefore, even if the revocation is for environmental reasons (i.e. for a public purpose and hence legitimate), the Mongolian government may still be obliged to provide foreign investors with compensation at the standard provided for in the relevant BIT (eg referable to 'fair market value' or 'market value'). Our Asian offices have advised on similar matters in Kazakhstan, Bolivia and Venezuela.
Foreign investors may enforce their substantive rights under BITs pursuant to dispute resolution clauses in the relevant BIT. Some Mongolian BITs provide access to ICSID3 arbitration, which is often preferred by investors, as the fact that a claim is pending against a State is publicly available on the ICSID website (leading to adverse publicity for the State) and there are very few exceptions to the binding and enforceable nature of an award.4
Legal remedies – licence agreement
Another possible line of recourse is under the contractual provisions of the licences themselves. This will depend upon the relative bargaining positions of the parties at the time the licence was entered into, and it may be that the relevant licences contain very little detail other than the specifics of the location and extent of the permitted mining activities. However, if there is a dispute resolution clause, this may offer some form of contractual protection by which a party can bring an appropriate claim. It is worth noting that Mongolia is a signatory to the New York Convention, meaning that international arbitration awards which have been obtained in other countries should be enforceable in Mongolia, pursuant to its terms.
Legal remedies – domestic laws
Lastly, it remains to be seen whether the legislation to which the Mongolian government has referred offers any comfort to companies affected. It has been reported that many of the licences that have been subject to recent suspension or cancellation were signed in the last ten years, and some commentators suggest that while Mongolia wishes to be seen to be contributing to worldwide environmental efforts, it will not want to deter the increasing line of foreign investors who have put money into natural resources there.
Precise details of the companies affected, and how compensation can be sought is awaited, but this will undoubtedly make companies less certain about the stability of Mongolian investment, particularly in the natural resources sector. We will continue to monitor developments in this area.