A short introduction to regulation of mining industry in Kazakhstan.

1. The Subsoil Code and a new reality for
subsoil users in mining field
Yerbolat Yerkebulanov
Partner
20/06/2018

2. CONTENTS
I. Introduction
II. Legal environment for new subsoil users
III. To preserve a Contract or transition to a
Licence?

3. I. INTRODUCTION
1.1. General issues
• The Code on Subsoil and Subsoil Use dated 27/12/2017
("Code") comes into force on 29/06/2018.
• The Code replaces the Law on Subsoil and Subsoil Use dated
24/06/2010 ("Law"), save for limited exceptions remaining
effective for current subsoil users.
• Every subsoil use contract (“Contract”) concluded before
29/06/2018 remains valid, as well as relevant project documents.
• The Code:
a) preserved the contractual regime of granting subsoil use right
(“SUR”) for hydrocarbons and uranium; and
b) introduced a licensing regime of granting SUR for solid minerals
(except for uranium).
• Term of a licence for (i) exploration – up to 6 (+5) years, (ii)
mining – up to 25 years (∞ extensions) (“Licence”).
• Stability clause against further changes of Licence conditions,
except for 7 spheres (tax, customs, etc.).

4. 1.2. Simplification of barriers for M&As
• MID – Ministry of Investment and Development, Objects – shares in
subsoil users/their parent companies.
Issue Before 29/06/2018
(under the Law)
From
29/06/2018
(under the
Code)
Priority right of the
State*
Applicable for 62 solid
minerals deposits of
strategic significance
N/A
Exceptions when no
consent of the MID is
required
3 exceptions (Article 36.5
of the Law)
14 exceptions
(Article 44.2 of
the Code)
Consent for pledge over
SUR or Objects
Required N/A
Note: According to the MID’s clarification, the above provisions of the
Code apply only to transactions, which transfer documents were
executed on or after 29/06/2018.
* Yet, a
prior MID’s
consent is a
must for
transfer of
SUR/Objects

5. 1.3. Other issues
• Holders of SURs for solid minerals appraise mineral resources
under KAZRC/CRIRSCO standards;
• Holders of Contracts may appraise mineral resources either under
GKZ or KAZRC/CRIRSCO standards until 01/01/2024.
• Holders of Licences are exempted from payment for compensation
of historical costs (unless their territory was under a Contract before
01/01/2018).
• Holders of Contracts/Licences being on exploration stage may
deduct (through depreciation) their expenses incurred from
01/01/2018 under their exploration Contract(s)/Licence(s) from the
taxable income under their other mining Contract(s)/Licence(s)
(Article 259 of the Tax Code dated 25/12/2017).
• Reports not quarterly, but annually (audited for Licence holders).
• State technogenic mineral formations may be transferred free-of-
charge to subsoil users upon their applications filed by 29/06/2020.

6. II. LEGAL ENVIRONMENT FOR NEW SUBSOIL USERS
2.1. Available information on mineral sites
State Subsoil Fund Management Program (“Program”)
Territories under Annexes to the draft Program:
1. State geological survey of subsoil;
2-1. Exploration of solid minerals (“first come, first served” or
auction);
2-2. Production of solid minerals (auction until 01/01/2023);
3. Exploration and production or production of hydrocarbons;
4. Reserved territories (specially protected natural areas, etc.);
5. Defense and state security, settlements and water fund lands;
6. Buffer zones (≤ 200 blocks within 30 km from boundaries of mining
allotments of town-forming entities) (6 companies may initiate
auctioning until 01/01/2023).
Notes:
1. Map of occupied and vacant subsoil sites – gis.geology.gov.kz/geo
2. E-Catalog with metadata for ≈ 130 thou. geological reports – e.geology.kz

7. 2.2. What exploration territory may I obtain?
1) New territories under the Program. Applications Date: 15/09/2018.
Not directly:
2) Non-Program territories may be acquired by Tau-Ken Samruk or Qazgeology
until 29/06/2020. (In practice: Acquisition  Transfer of the right as a contribution
to charter capital  Buy-out of the national company’s shares in a subsoil user by
the partner.);
3) Territories of current subsoil users (if M&As are considered)

8. 2.3. Territories to become available
I Stage – 2018-2019 (67,617 blocks, 155 thou. km2). II stage - 2020-
2023 – major part (≈ 3,5 times more) of territories after completion of
state geological survey during 2019-2022 (below map).
Note: Plans to make major part of geological reports freely available
online by 12/2019 (National Bank of Mineral Resources Data).

9. 2.4. How quick can I start exploration?
* For New territories added to the Program – a new Applications Date to be set out after
2 months following the amendments.
** Before starting exploration – submit an exploration plan and provide a security for
liquidation works (pledged bank deposit, guarantee and/or insurance).
Note: From 01/01/2019 – commercial discovery bonus (0.1% of the cost of approved
reserves).
Under the Law Under the Code
(for ≤ 200 blocks)
Standard procedure From 01/2015 – Simplified
procedure (for ≤ 10 blocks)
Procedure
1. Win a tender
2. Coordination of a
project document and a
contract under a model
form
1. Lodge an application
2. Direct negotiations and
execution of a typical
contract.
(If other application(s) for
certain blocks within 5
business days  an auction
 the standard procedure)
1. Lodge an application for a
New territory from the
Applications Date*.
2.1. If other application(s) for
your certain blocks within 1
month  auction for such
blocks.
2.2. If no other application(s)
or after 1 month – “first come
– first served”.
3. Obtain a licence.
18 months (540 days) 25 business days 10 business days (starting
from 16/10/2018) **

10. 2.5. Mandatory expenses under an exploration licence?
1. Signature bonus – 100 MCI* (≈ $730) (If an auction – 280 MCI)
2. Annual rental payments
3. Minimum annual exploration expenditures
4. Security for liquidation works
For: 10 blocks – 7,200 MCI (≈ $52,472); 50 blocks – 36,000 MCI (≈ $262,363).
Period, years Rate in MCI (USD)
For 10 blocks For 50 blocks
1-3 2,300 (≈ $16,762.1) 7100 (≈ $51,743.9)
4-6 3,500 (≈ $25,507.58) 10700 (≈ $77,980.31)
7-8 5800 (≈ $42,269.7)** 15000 (≈ $109,318.19)**
9-10 5,800 (≈ $42,267.7) 19800 (≈ $102,030.3)
11 11,500 (≈ $83,810.6) 29900 (≈ $217,907.5)
Period, years Rate in MCI (USD)
For 10 blocks (≈ 23 km?
) For 50 blocks (≈ 115 km?
)
1-3 150 (≈ $1,093.2) 750 (≈ $5,465.9)
4-5 230 (≈ $1,676.2) 1150 (≈ $8,381)
6-7 320 (≈ $2,332.1) 1600 (≈ $1,093.2)
8 year and further 600 (≈ $4,372.7) 3000 (≈ $11,660.6)
** At extension
for 7-11 years:
not less than
40% of blocks
shall be
returned (save
for territory of
commercial
discovery)
* 1 MCI –
monthly
calculation
index – in
2018 is KZT
2,405, i.e. ≈
$7.29)

11. 2.6. Mandatory expenses under a mining licence?
1. Signature bonus – for auctioned ≥ 500 MCI (without an auction – 50 MCI).
2. Annual rental payments
3. Minimum annual mining expenditures
4. Security for liquidation works
The amount to cover the estimated cost of works for liquidation of
consequences of operations both performed and for the forthcoming 3 years
from the date of the last positive integrated state expertise of the liquidation
plan.
5. Financing tuition of Kazakhstani personnel
1% of mining expenses for the previous year (from the 2nd year).
6. Financing R&D works
1% of mining expenses for the previous year (from the 2nd year).
No. >5 ha 5-8 ha For each further ha within
territory comprising >8 ha
1 For native metals, ferrous or non-ferrous ores mined under a mining
licence and mining works plan
6,940 (≈ $52,050) 13,740 (≈ $103,050) 720 (≈ $5,400)
2 For other minerals
1,160 (≈ $8,700) 2,300 (≈ $17,250) 120 (≈ $900)
Area Rate in MCI (USD)
For 1 km2 4450 (≈ $3,375)

12. III. TO PRESERVE A CONTRACT OR TRANSITION TO A
LICENCE?
3.1. Right of choice
• A current subsoil user may:
1) preserve its Contract; or
2) before expiration of the Contract to transition to exploration
or mining Licence(s) upon consent of a commission
created by the MID.
• Such a Licence may contain grounds for (i) its revocation or
(ii) charging a penalty in addition to standard conditions set
out by the Code, as well as extra obligations of the subsoil
user (e.g. liquidation works, etc.).
• Re-registration of SUR from a Contract to a Licence neither
terminates the SUR emerged under the Contract nor entails
termination of encumbrances (pledge) over the SUR
available at the moment of re-registration.

13. 3.2. When may a Contract be extended?
• Exploration term may be extended for the time required for appraisal
of the discovery.
• Mining term can be extended for ≤ its initial term (but ≤ 25 years), if so
allowed by the Contract.
• If not allowed, the subsoil user has an exclusive right to obtain a
mining licence.
• For major deposits (e.g. >: 250 tons of gold, 5 mln tons of copper, 100
mln tons of iron ores, etc. (Article 14.3 of the Code)), if the mining
term is extended for > 10 years, the MID may require that the subsoil
user commits to ensure construction/modernization of
production/processing facilities, implementation of an investment or
social project, supplies of mined minerals to Kazakhstani facilities, etc.
by itself/its subsidiary/joint venture. (If no agreement reached, the site
after expiration of the SUR is subject to auctioning.)
• Mining term may be extended for ≤ 5 years to determine the capability
to extract useful components from technogenic mineral formations.

14. 3.3. Pros and cons of Contracts and Licences after 29/06/2018
Obligations
Contract
(exploration
/ mining)
Exploration
Licence
Mining
Licence
Local content in staff + - -
Local content in goods (for Contracts
concluded before 01/01/2015)
+ - -
Local content in works, services + - + (≥ 50%)
Regulated GWS procurement + - +
Tuition of Kazakhstani personnel (=/≈1%)
+ -
+ (from the
2nd year)
Transfers on social development of a
region +
- (unless 1
km from a
settlement)
- (unless 1 km
from a
settlement)
Financing R&D works (≈1%) + -
+ (from the
2nd year)
Payments to liquidation fund (1%) + - -
Securing liquidation works - + +
Minimum exploration/mining expenditures - + +
Processing of > 1/2 of mined ore solid
minerals with metal content > 30% in
Kazakhstan (if feasible)
- - +
Special rights
Retention status - - +
Territory transformation - + +
Processing agreement - * - +
* Plans to
cover
mining
contracts as
well

15. 3.4. Retention status and processing agreement
Retention status
The status entitles not to commence or suspend the extraction of ore solid
minerals under a mining license at a specified area for a period of ≥ 5 years
(+5 years extension).
Retention status releases a subsoil user from minimum annual mining
expenditures.
Grounds: unprofitability of mining due to market conditions, force majeure,
absence of ecologically compliant technology for mining, a court decision
on rehabilitation procedure for the subsoil user.
Processing agreement
If holders of SUR for mining* invest into creation of new, enhancement or
modernization of acting solid minerals processing facilities for the amount
of > 7 mln MCI (≈ $51 mln), they may conclude a processing agreement.
Potential investment preferences: corporate income tax and land tax – 0%
(>10 years), property tax – 0% (>8 years), investment subsidy
(reimbursement of ≥30% of construction costs), release from customs
duties and import from VAT, simplified procedure of hiring foreign
workforce, etc.
* Technically, transitional provisions of the Code
shall be amended to entitle holders of mining
contracts to such a right.

16. 3.5. Liability under a Contract
Below provisions of the Law remain effective on or after 29/06/2018
No. Grounds for termination of a Contract
1 failure to rectify more than two violations of contractual obligations within
the term specified in the MID’s notice;
2 Transfer of SUR or Objects without MID’s consent (where applicable);
3 Execution of < 30% financial obligations during 2 consecutive years.
No. Grounds for termination of a typical exploration contract
1 untimely transfer of social payments;
2 violation of the requirements for the minimum amount of costs and types of
work by years that must be performed within one block;
3 use of the subsoil site not for the intended purpose envisaged by the typical
contract.

17. 3.6. Liability under a Licence
No. Grounds for revocation of a Licence
1 Transfer of SUR or Objects without the MID’s consent, which caused a
threat to national security (term for rectification ≤ 1 year);
2 a breach of obligations to pay a signature bonus, rental payments and/or
comply with minimum annual exploration/mining expenditure commitments
(term for rectification ≤ 3 months).
The licence terminates within 3 months after the date the subsoil user receives the
licence revocation notice from the MID. It may appeal against the licence revocation
within 15 business days –> the final decision is taken by court.
Revocation is not allowed if the failure to perform or improper performance of
obligations was caused by force majeure (not including absence of technical and/or
financial resources, of necessary GWS on the market, or the imposition of an
administrative penalty).
Penalty under a mining licence *
For a failure to:
1) ensure a minimum share of local content in works and services – 30% of the
cost of works and services related to the unfulfilled obligation);
2) finance either the tuition of Kazakhstani personnel or R&D works – 100% of the
amount of unfulfilled obligations.
* Payment of a penalty terminates the main
obligation for the relevant reporting year.

18. Thank you for your
attention
Yerbolat Yerkebulanov
GRATA Law Firm
Partner
yyerkebulanov@gratanet.com
+7 701 7600040
The constantly updated Subsoil Code in
English/Russian available at
gratanet.com/subsoilcode.pdf