Mr. John Connors, Managing Partner, Central Asia, Baker & McKenzie

1. 1
almdms #2033587-v1
Mongolian Mining Investment
- Selected Legal Considerations
John Connors
Managing Partner, Central Asia
John.Connors@bakernet.com June 2010
Mongolia Mining investment 2010
21 -22 June 2010 Amora Hotel Jamison, Sydney
2
Addressing
A. Foreign Mining Investment in Mongolia
B. Mongolia’s National Circumstances, Development Goals
C. Competing Pressures on Government
D. Mongolia’s Approach to Mining Regulation
E. Mining Taxation
F. Oyu Tolgoi and Tavan Tolgoi
G. Uranium Sector Policy, Regulatory Developments
H. Risk Factors and Risk Mitigation
I. Future Directions
J. Summary and Conclusions

2. 2
3
A. Foreign Mining Investment
in Mongolia
A. Foreign Mining Investment
in Mongolia
4
Foreign Mining Investment in Mongolia
• Mongolia unique in former Soviet Union/satellites in having
significant foreign mining presence (approx 200 foreign owned, JV
Cos in Mongolia)
Chinese State and privately owned companies
Western majors, specialists, mid caps
Western Juniors
Japanese trading companies
Russian mining companies
Korean majors
Other: sovereign wealth funds, resources, investment funds, suppliers
• Also numerous private Mongolian mining companies
• Approx 3,600 exploration and 1,100 mining licences issued, covering
approx 32% of the country, many to foreign investors
• Mostly mining investors are engaged in exploration and some early
development stage projects. As yet, relatively few operating mines

3. 3
5
A. Foreign Mining Investment
in Mongolia
B. Mongolia’s National
Circumstances, Development
Goals
6
+ landlocked, positioned between Russia and China
+ very small population (approx. 2.8m), 1/3 “poor”
+ nomadic lifestyle traditions (still >40% engaged in herding)
+ limited transport, other infrastructure, industrial plant
+ limited domestic sources of finance and investment
+ still in transition to market economy under rule of law
+ Soviet era legacies in law, admin. but open to other models, ideas
+ vibrant democracy, changing government
+ strong nationalist social and political forces
+ most open of the FSU/satellite countries to DFI in mining
+ endeavouring to balance foreign investment, geopolitical, national
development goals
Mongolia’s National Circumstances

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7
Mongolia’s Development Goals
Economic and social development based on mining and improved
standards of living but not beholden to foreigners
+ education
+ employment and training
+ regional economic development
+ industrial diversification, value adding
+ devt. of essential infrastructure: power, transport, water
+ environmental protection
General recognition that Mongolia can’t develop its resources on its
own, hence needs legal, regulatory and fiscal systems balancing
relevant interests:
– attractive to foreign mining investors
– facilitating modern commercial, financing transactions
– satisfying nationalistic sentiments in politics, electorate
8
A. Foreign Mining Investment
in Mongolia
C. Competing Policy Pressures
on Government

5. 5
9
Competing Policy Pressures on Government
+ Pressures for Liberalisation of Mining and Investment Laws
– domestic economic pressures - need for finance and investment
– foreign investors, Governments of investing countries
– int’l financial institutions (World Bank, IMF, WTO, EBRD, ADB)
– sections of business, government - State should stay out of business
+ Countervailing Pressures
– domestic political concerns – highly nationalistic electorate
– national security concerns – geopolitical balancing of interests
– civil movements – too many concessions, insufficient national
revenue/benefits
old guard, academics – State should own 50-100% of mines
+ Government wishing to both attract further foreign investment
and retain control of natural resources, ensure national equity
interests, social benefits
10
Other Social Pressures
+ Corruption
– Transparency International 2009 ranking Mongolia 120/188 (cf
Kazakhstan120/188, Russia146/188, Kyrgyzstan 162/188)
– reported examples in issue of licences and permits, official monitoring
of compliance with licence terms, environmental requirements, etc.
– May’10 Democratic MPs’ open letter to PM referred to unchecked
growth of corruption, bribery and bureaucracy in government
organizations – urging a comprehensive government response
+ Public Expectations of Benefits from Mining
– Great public expectations of benefits for Mongolia from mining, in part
created by politicians’ promises of direct individual benefits – cash,
shares for individual citizens
– Herders moving into Ulaanbaatar after severe 2009 winter and loss of
livestock (accentuating demands on government for money handouts
from mining revenue)

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Ambivalence Towards Giant Neighbours
+Russian political, commercial relationship still strong
– transit route, important market, source of supply
– post Soviet affiliations
+China's Growing Economic Importance
– now the key market and transport route, source of supply
– also China/HK key source of finance and investment for
local companies
– Western juniors also finding Chinese investors
+National security concerns (fears of economic
domination leading to loss of sovereignty, independence)
- “third neighbour” policy
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D. Mongolia’s Approach to
Mining Law and Regulation

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Mongolia’s Legal System
+ Mongolia: an independent sovereign republic under a national
constitution (1992); a unitary State
+ Civil Law Legal System: Romano – Germanic origins, Soviet and other
influences (including via input of multilateral agencies)
+ Legislative power: State Grand Khural (Parliament) the only body with
legislative power
– elected every 4 years
– convenes twice each year in autumn and spring sessions
– 7 standing committees, including National Security and Foreign Policy.
+ Executive Powers: The government is the highest executive body.
Comprises the prime minister and cabinet. Directly responsible to the SGK
+ Other:
– President - Head of State elected for 4 years term
– Constitutional Court – appointed by the SG Khural
– Courts - independent judiciary appointed by the President
14
Mongolia’s Mining Laws and Administration
+ Primary laws on mining:
– Minerals Law 2006
– Nuclear Energy Law 2009 (regulating uranium exploration, mining)
+ Other important laws/legal acts:
– Constitution, Civil Law
– Company Law, Foreign Investment Law, Tax Law
– Subsoil Law, Land Law, Mining Prohibited in Specified Areas Law,
Environment Protection Law, Labour Law, Labour Safety and Sanitary Law
– Various Parliamentary resolutions, Presidential orders
– Bilateral, Multilateral Treaties
+ Mining administered by several government agencies, including:
– Mineral Resources Authority of Mongolia (MRAM) a subordinate agency
of Ministry of Mineral Resources and Energy (MMRE,) esp Department of
Geological and Mining Cadastre (“DGMC”) – grants exploration licences
(MELs) and mining licences
– Provincial (Aimag) Governors

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1997 Minerals Law
+ Widely considered at the time as establishing a sound basis for
conduct of mining in Mongolia
– drew on western mining law models
– created a licensing system; open to foreign investment
– provided for transparent, secure and transferable property rights
in exploration, mining and processing
– incorporated the fundamental policy principles regarded as
essential by industry
– considered to be progressive, internally consistent and effective
+ However merely a framework
– 65 Articles (32 pages English translation)
– requiring further legislative, regulatory detail, specifying how
principles to be applied in practice
16
2006 Minerals Law
+ Preserves much of the basic structure and substance of the 1997 Law
– licensing system; open to foreign investment
– exploration on first come, first served basis
– relative security of title, transfer freedom
– “investment agreement” (cf “stability agreement”, 1997)
However new provisions reflecting growing resource nationalism
– State entitlements, powers (deposits of strategic importance)
– provisions increasing role of administrative discretion in licencing, regulation
– overall, weakening the rights and security of holders of mineral titles
+ Lack of detail, clarity remains a feature of 2006 Law
– 66 Articles (38 pages English translation)
– uncertainty still exists as to how a number of important provisions will be
interpreted and applied (e.g. several provisions relating to Deposits of Strategic
Importance)

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Grant of Exploration Rights
+ All areas open to exploration other than reserves, special
purpose territories, existing licence areas, etc.
+ Only Mongolian legal person may hold EL
+ EL has initial term of 3 years renewable for 2x3 year periods
+ Exploration rights ordinarily granted on a first come, first served
basis, except
- land explored with State funds or
- land where the holder has forfeited exploration rights
which will be made available by tender.
+ In tenders, cash bids neither required nor allowed. Technical merits of
exploration proposals determinative. (MRAM still has the authority
and responsibility to assess merits of proposals)
+ Note: 2006 Minerals Law removed “exclusive” from wording re rights
of exploration licensee – significance uncertain – allows MRAM to
allocate exploration rights per mineral?
18
Freeze on Exploration Licences
+ Mongolia’s president, Tsakhia Elbegdorj on 20 April 2010
– ordered a halt to the issue and transfer of mineral exploration
licenses until the government can enact a stricter law on mining
investment
– called on the government to hold discussions on the matter in June
– remarked that most of the permits currently held by companies and
individuals operating in Mongolia are being held in contravention of
existing laws and almost half of the exploration license holders neglect
their obligation to provide annual exploration reports, while many are
only using the permits as money making tools and not investing in any
active exploration
+ In early May 2010, the National Security Council NSC partly amended
the presidents’ order to allow transfer of licenses from one owner to
another

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Continuity from Exploration to Mining
+ Exploration Licence holder has the right to progress
from exploration to mining
– an exploration licence holder shall be entitled to
obtain a mining licence according to its exclusive
right (ML Art. 21)
– only the exploration licence holder is entitled to
apply for a mining licence (ML Art. 24.1)
+ However, mining rights must be approved by
Governor of the aimag in which licence area located
(Licensing Law)
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Mining Licences
+ Only Mongolian legal entities entitled to hold ML.
+ ML granted for initial term of 30 years, renewable for
2x20 yr periods.
+ Only the EL holder entitled to apply for ML in the
exploration licence area (ML A 24.1).
+ Requested mining area can’t overlap with an area
under existing valid licence (ML A 24.4). (i.e. no rights
to explore for or export other metals or minerals can
be superimposed on ML area).

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Deposits of Strategic Importance
+ Defined as: deposit with a size that may have a potential
impact on national security, economic and social
development of the country or that is or has potential of,
producing more than 5% of total GDP in a given year (ML
Art 4).
+ In 2007 Parliament (Resolution No. 27)
– deemed 15 deposits as strategic
– also 39 deposits identified as Tier 2 – to be
assessed for Strategic Deposit designation
+ Parliament may also designate other deposits as strategic
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Deposits of Strategic Importance - II
State Participation
+ State may participate in the exploitation of mineral deposits of
“strategic importance” (ML Art.5)
– up to 50% jointly…”in exploitation” if the State contributed to
exploration of the deposit
– for all others “State may own up to 34% of the shares of the
investment”
+ Parliament may determine State share based on a proposal by the
Government (executive branch) or on its own initiative.
+ State share is effected through an exploitation agreement.
+ Erdenes MGL LLC, State owned company established 2007, represents
State’s interests in deposits of strategic importance (except uranium).

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Deposits of Strategic Importance - III
Legal uncertainties, including…
+Delineation of boundaries
+Procedure for/extent of government’s exercise rights
Commercial basis for obtaining stake? Compensation for
expropriation? Deadlock in negotiations? New licences -
negotiations on grant?
+Listing obligation
– Any company which holds a mineral deposit of Strategic
Importance is required to list at least 10% of its shares on
the Mongolian Stock Exchange (ML Art. 5.6)
– Provision not yet enforced re any of those companies with
deposits on the Strategic Deposits List. Not clear how will
work in practice
24
Surface Land Rights
+ Land Use Rights – Business Entity w/Foreign Inv.
– to engage in mining activity, the licence holder, if a BEFI, must acquire
land use rights to the relevant land area
– under the Land Law land use rights may be granted for up to 60 yrs
(although typically granted for shorter terms);
– Foreign Investment Law provides that BEFIs may not renew more than
once
+ Land Use for Special Needs
– Land Law provides that land can be taken by the relevant local
government body for the purpose of among others:
– specially protected areas;
– lands allocated for ensuring national defence and security;
– range lands and hayfields
– DGMC may revoke a licence if the exploration or mining area
designated as special needs land and licence holder fully compensated

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Mining Prohibition in Specified Areas
+ 16 July 2009 - “Mining Prohibition in Specified Areas Law”,
prohibiting minerals exploration and mining in
– headwaters of rivers and lakes;
– forest areas as defined in the Forest Law;
– land areas adjacent to rivers and lakes as defined in Water
Law
+ Will be no grant of new exploration and mining licences
overlapping the defined prohibited areas
+ Under the law, GOM to undertake a survey to determine the
boundaries of prohibited areas - reports that GOM will soon
issue a list
+ Also however reports of government concerns re
compensation obligations provided in the law
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Investment Agreement
+ A mining licence holder which undertakes to invest more than
$50m over the first 3 years of a mining project may apply to the
State to enter an Investment Agreement (ML Art.29), providing for:
– stability and tax rates (income tax, customs duty, VAT, royalties)
– right to export and sell products at international product price
– guarantee that the licence holder may receive and dispose of income
– the amount and term of the holder’s investment
– environment protection, public health
– regional development and employment
+ The term of the Investment Agreement will depend on the monetary
amount of the five years commitment: $50m - 10 years; $100m - 15
years; $300m - 30 years
+ No model form. Initially envisaged that IA for Oyu Tolgoi project
(below) would practically provide a template. Now OT IA not being
described this way

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Regulation of Operations I – Minerals Law
+ ML (Art.35.5) requires complete extraction - “the licence holder
shall exhaust all the mineral reserves. It is prohibited to mine
selecting the high grade areas”. However unclear what this exactly
means or implications of breach
+ Obligations re Reserves Reporting
– EL holder must provide report on reserves
– Govt Agency, based on expert opinion shall include in national
registry of reserves
– ML holder must submit production estimating annually, action plan
annual report; basic indicators of the mining work approved by
surveyors of mines, information on changing reserves, quantity of ore
mined (ML Art. 48)
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Regulation of Operations II – Investment
Agreement
+ Note: Possibility of clarifying extraction obligations in
IA e.g. the Oyu Tolgoi Investment Agreement provides:
– feasibility study contains a schedule of estimated
annual production figures. The Investor will provide an
annual updated table.
– investor will use reasonable efforts to extract and
process mineral ore that is not less than the
estimated quantities.
– actual quantity of products produced in any year
remains within the competence and discretion of the
Investor.

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Local Content Requirements
+ No obligations on Mining Licence holder to purchase, use
locally manufactured goods (cf. e.g. Kazakhstan)
+ However ML (Art.43) provides at least 90% of licence holder’s
employees must be local
+ Also GOM increasingly encouraging mining cos to carry out
value added production in Mongolia
+ ML (Art 29) provides Investment Agreement shall contain
clauses re regional development and job creation
e.g. The OT IA provides that in accordance with Art. 43.1 not less than
90% of the Investor’s employees will be citizens of Mongolia and
Investor will use best efforts to ensure that
– for construction work in construction period not less than 60% of the
employees will be Mongolia citizens
– for mining and mineral work, not less than 75%
30
Transfers
+ Under ML Art 49 the holder of exploration or mining licence may not sell
the licence per se. However :
– exploration licence holder may sell the underlying materials and
reports; and
– mining licence holder may sell the mine, machinery etc.
+ Upon completion of the sale and payment of applicable taxes the holder
may transfer the licence (for no consideration)
+ Licence holder may transfer part of the licensed area (A 50)
+ Note however
– ML prohibits transfers to persons “ineligible” to hold a licence
L Uranium interest transfer, share issue, subject to approval by nuclear
energy committee (NEL Art. 7)
L Registration of transfer with DGMC required before effective
L GOM as a matter of foreign policy sometimes negotiates restrictions
re with whom foreign investors might partner, to whom may sell
equity stakes or what financing foreigners may obtain (i.e where
national impact /security concerns)

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Pledges – Licences as Loan Security
+ Licence holder may, with govt approval pledge its licence to a bank
or non banking financial institution with the related documents,
information etc. permitted to be pledged by law (ML Art. 51.1).
+ However licence alone shall not be a pledge item
The pledgee shall not assume any obligations under the licence
In the event of default the pledgee may transfer the pledged licence
to an eligible person, subject to government approval
Registration of pledge with DGMC required for effectiveness
+ Note:
–pledges recorded on endorsement sheets separate from but
considered integral part of EL certificate
–DGMC does not maintain records of other liens, encumbrances
32
Renewals
+ Exploration licence (3 year term) holder has right to
obtain two, 3 year extensions on fulfilling requirements
+ Mining licence (30 year term) holder has right to obtain
two, 20 year extensions, depending on reserves (A 21,
22)
+ ML provides “if no violations” extension shall be granted
(A 27, 28)

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Dispute Resolution
+ Exploration and Mining Licences
Where any actions or failures to act by civil servants/or
Government Agencies has prevented the exercise by licence
holders of the rights conferred on them by this law the citizens or
legal persons may file a complaint with the relevant senior
officials, State agencies, or the courts (ML Art. 64.1)
+ Investment Agreement
– ML Art. 65 provides that any disputes arising out of an IA
according to As 29-30 shall be resolved as per the laws and
international treaties of Mongolia
– The OT IA provides that disputes shall be settled by negotiation
or failing that by binding arbitration in accordance with the
UNCITRAL Rules, in London, administered by the LCIA. The
Arbitration shall apply laws of Mongolia
34
“Ninja” Miners
+ No law yet deals with artisanal mining
+ so called “ninja” miners illegally mining, mostly gold,
silver, causing significant environmental damage (reportedly
approx 35,000 ninjas at 100 different sites in 57 soums)
+ reports that Parliament recently approved proposal to
amend Minerals Law to provide that artisanal mining be
regulated by Government order
– intent to press artisanal miners into cooperatives consisting
of at least 5 members, allocating a certain area per soum
for artisanal mining
– mining licence for cooperatives to be issued by local soum
or district authorities

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Suspensions, Termination of Rights
+ The government agency shall revoke a licence if:
– failure to comply with requirements re licence fees
– transfer to non Mongolian company
– exploration expenditure lower than minimum
– failure to fulfill environmental reclamation duties
(ML Art 56.1)
+ Within 5 days of determination that grounds exist,
government agency shall notify holder
+ Holder may object, with evidence, apply to court
E. Mining Taxation
36
Mining Taxation – 2006 - 2010
+ The 2006 Windfall Profits Tax imposed a 68% tax on the portion
of metal sales price of copper ore and concentrate (defined by
reference to the London Metal Exchange) in excess of US $2,600
per tonne and sales price of gold (defined by Bank of Mongolia)
above US$500 per ounce (raised to US $850 per ounce in 2008)
+ August 2009, Govt resolved to abandon the WPT as from 2011
+ 2009 revocation of VAT (10%) exemption on import of
equipment to be used to bring a mine into production
+ The Mongolia’s tax regime (top corporate income tax rate of 25%)
otherwise seems generally considered to be broadly competitive
with other major foreign mining jurisdictions (although lacking in
clarity and detail)
+ Mongolia has entered double tax treaties with numerous countries
including China, Russia, Canada, Korea and Britain (not Australia)

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Proposed Taxation (Royalty) Changes
May’10 press reports of GOM plans to introduce a new form of tax called “increased royalty” from 1/1/11
(replacing the 68% windfall profit tax) - to be charged according to commodity price in global markets (cf.
profits) on sliding scale.
up to $210
9%
up to $210
10%
up to $160
7%
up to $190
8%
up to $130
6%
up to $100
5%
Processed Coal
up to $65
9%
up to $65
10%
up to $45
7%
up to $55
8%
up to $US 35
6%
up to $25
5%
Unprocessed Coal
above $3,500
8%
$3,000 - $3,500
7%
$2,500 - $3,100
6%
up to $2,000
5%
Nickel
$1,200 above
10%
$1,000 - $1,200
7%
Up to $1200
8%
$1,000 - $1,100
6%
up to $900
5%
Gold
above $9000 per t
10%
$6 - $9000 per t
9%
$5 - $5000 per t
6%
up to $5000 per t
5%
Copper
Note: Press reports only: Subject to Parliament approval implementation.
Also will necessitate change to Article 47 of the Minerals Law (re royalties)
38
Contract and Tax Stabilization
+ No general stability provision in Minerals Law
preserving holder of mining licence or parties to
Investment Agreement from legislative change
+ However Minerals Law provides Investment Agreement
“must contain stable tax environment clause”
e.g. Oyu Tolgoi Agreement provides that various
specified forms of taxation (corporate income tax,
customs duty, VAT, royalty, payment for exploration
and mining licences, other) “are stabilized” (Ch.2)

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Suspensions, Termination of Rights
+ The government agency shall revoke a licence if:
– failure to comply with requirements re licence fees
– transfer to non Mongolian company
– exploration expenditure lower than minimum
– failure to fulfill environmental reclamation duties
(ML Art 56.1)
+ Within 5 days of determination that grounds exist,
government agency shall notify holder
+ Holder may object, with evidence, apply to court
F. Oyu Tolgoi
40
Oyu Tolgoi Investment Agreement
+ On 6 October 2009, (after a 6 year period of negotiation) GOM,
Ivanhoe Mines and Rio Tinto signed an investment agreement
providing for development of the Oyu Tolgoi copper/gold deposit
+ Key Elements
34% GOM ownership
commitments re local employment and procurement
various guarantees, assurances for licence holder
+ Scope – All Investor’s Project Activities
– exploration and mining
– construction of infrastructure
– mine closure and environmental rehabilitation
+ Term
– initial term 30 years
– extendable for additional 20 years

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Oyu Tolgoi Investment Agreement (cont’d)
+ The OT IA almost universally regarded by observers as very
positive sign, demonstrating that
Mongolia can say yes to foreign control of big mining projects
GOM can commit to compensating private holder of rights to deposits
of strategic importance
GOM and Parliament willing to amend laws and regulations to enable,
enhance commercial viability of mining projects
+ “The signing of the OT IA will signal Mongolia’s
transformation…and will be remembered as heralding Mongolia/rise
to become a world mining power” (Canada’s Ambassador Biolik
11/09)
+ March’10 Ivanhoe Mines announced that CPs for effectiveness
satisfied.
+ Attention now turning to financing. May’10 mandate to EBRD, IFC to
develop funding package
42
G.Uranium Sector Policy,
Regulatory Developments

22. 22
43
Nuclear Energy Law 2009
+ New Nuclear Energy Law (NEL) - effective August 16, 2009
– to regulate relations connected to exploitation of radioactive
minerals and nuclear energy
– ensuring nuclear and radioactive safety, to safeguard the
population, society and environment
ie creates a uranium specific regime for licensing, regulating
exploration, development, mining and sale of uranium (independent
of Minerals Law)
+ NEL classifies all radioactive mineral deposits, regardless of
size, as strategically important (Art. 6)
+ Monatom LLC a State owned company, established Feb. 2009 to
undertake uranium exploration and mining and hold State
equity in uranium projects
44
State Participation in Uranium Mining
+ Radioactive minerals existing in the subsoil are the property of the State
(NEL A 5.1)
+ In case of a reserve determined through exploration conducted
through expenditure from the State budget which is to be exploited
with another party the State shall own directly not less than 51% of the
shares the joint company and without payment (A 5.2)
+ In case of a reserve determined through exploration conducted without
expenditure by the State budget the State shall hold not less than 34% of
the shares of the company holding the mining licence without payment (A
5.3)
+ If the State should possess more shares than those specified – the State
Great Khural shall determine the State’s shares according to a proposal
submitted by the Government considering the past and future amount of the
State’s investment (A 5.4)

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45
Corporate Decision Making - Government
Approvals
A decision on the following made by the licence
exploration or mining holder’s shareholders meeting,
board of directors, or executive body shall become valid
after it is approved by the Nuclear Energy Committee (NEL
Art.7)
the sale, gift, pledge and transfer of more than 5% of the
shares
newly issue a share subscription or share convertible
security of more than 5% of the total issued shares
A restructuring of the company by merger, consolidation,
division and separation
46
Western Investor (esp Juniors) Concerns
+ GOM’s entitlement to take, without compensation, at least
51% or 34% of the company (cf the deposit) that will
develop the mine i.e. Govt. requiring a very substantial, free
carried, non compensated interest in any uranium mining
operation
+ GOM has stated will insist a compliance with Art.7 re prior
NEC approvals
+Also, uncertainties – e.g. reportedly, GOM officials have
expressed the view that the separate licensing regime
under NEL, enables the State to issue a distinct licence for
uranium exploration for an area otherwise licensed for
other mineral exploration

24. 24
47
Mining Agreement - Uranium
+ The State authority shall conclude a mining agreement with a
mining licence holder undertaking uranium mining within 60
days after issuing the licence. (NEL Art 29.1)
+ The following must be reflected in the mining agreement:
– reasons for mining of radioactive material
– the term of mining the deposit and details of radioactive
materials
– technology, production capacity and quantity of products to be
mined as reflected in the feasibility study
– conditions of product sales
– plans for environmental protection and reclamation
– rights obligations and responsibilities of the parties
48
Investment Agreement - Uranium
+ The licence holder may request entity into an investment
agreement with the purpose of providing a stable
environment to undertake the activities for up to 10 years
(NEL, Art. 30.1)
+ The investor shall send together with the request, a draft
agreement attaching information on the size of the investment
to be made in the 1st 5 years, plant capacity, name and type of
product, method and technology of mining the deposit and a
feasibility study
+ The matters stipulated in Articles 29.1.1 – 29.1.9 of the
Minerals Law shall reflected in the Investment Agreement
+ The Investment Agreement may be extended for up to 10
years

25. 25
49
Uranium Sector - State to State Relationships
+ Several recent instances in which agreements with State owned
companies evidently favoured over investment agreements with
private companies
+ Speculation re possible reasons
– Geopolitical concerns balancing interests re giant neighbours
– Also, govt. to govt. interaction with “3rd neighbours” towards
broadening diplomatic relationships
– GOM wish to maintain control of strategic resource
– GOM strategy also to develop value adding activity
– History of State to State deals between Mongolian govt.and
foreign Governments
– GOM’s awareness that State owned companies consider
uranium to be a strategic resource may be willing to invest
even at a loss and less concerned by lack of infrastructure
50
Mongolia’s Mining Laws Compared – I
Developed Western Mining Jurisdictions
+ State ownership entitlements and powers
+ lack of detail, clarity
+ process - important new provisions being adopted
without much consultation, careful consideration
+ uncertainty - no settled approach to big projects
+ administrative discretions and practicalities of
mining administration
+ general legal, country circumstances, issues
Overall, more of a work in progress – policy direction not
settled (esp role of the State)

26. 26
51
Mongolia’s Mining Laws Compared - II
CIS Neighbours
+ open exploration regime, licensing system (cf contracts)
+ mining specific (cf “subsoil” laws, also covering oil & gas)
+ transfer freedom (no State preemptive rights)
+ ready availability of geological information (cf “secrets”)
+ commercial freedom/absence of state acquisition rights
+ greater operational freedom
+ relatively limited local content requirements
+ laws user friendly (easy to navigate, simple style English
translation on internet)
Overall, despite concerns, Minerals Law and mining investment
regime less “Soviet” and in many ways more open and attractive to
DFI than in neighboring countries
52
H. Risk Factors and Risk
Mitigation

27. 27
53
Changing Perceptions of Country Risk
+ Hopes high after 1997 Mineral Law - influx of DFI in coal, copper, gold,
uranium exploration
+ Mongolia’s position deteriorating 2006 – 2009.
45/72
51/72
67/72
42/72
2010
23/25
18/25
8/25
11/25
2010
Fraser InstituteBehre DolbereCountry
58/6558/6423/2519/25Russia
59/6546/6419/2518/25Kazakhstan
62/6533/6413/259/25Mongolia
54/6542/6410/2510/25China
2009200620092006
+ 2009/2010
– positives: signing of OT - IA, abolition WPT
– negatives: provisions in Nuclear Energy Law, Mining Prohibited in
Specified Areas Law; TT uncertainty, ongoing policy debate
54
Non Commercial Risks in Central Asia
+ Security of Mining Tenure
– terminability
– convertibility of exploration rights to mining rights
– ability to renew contracts, licenses
– consent to transfers
+ State Priority / Acquisition Rights
– compensation, means of determining FMV
+ Aggressive Tax Policy and Administration
+ Creeping Expropriation – changing legislation; reducing investors’
contract and tax stability
+ Environmental Regulation and Liability
+ Acts of Provincial, Regional Administrators – e.g. in grants of ancillary
permits, consents to land use, water entitlements
+ Corruption, Administrative Interference

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55
Legal Uncertainty - Mongolia
Frequently citied uncertainties in legal system limiting
available legal protection:
+ rapid legislative change
+ uncertain laws, ambiguous and conflicting interpretations by
officials
+ passing of new laws with limited consultation
+ inconsistency between laws
+ limited judicial and administrative guidance on interpretation
+ substantial gaps in the regulatory structure due to delay or
absence of implementing regulations
+ debt collection, bankruptcy procedures not well developed
56
Judicial Uncertainty
+ Mongolian judicial system still has relatively little
experience in enforcing existing laws and regulations,
leading to:
uncertainty regarding the outcome of any litigation, including ability
to obtain quick, effective enforcement or enforcement of a
judgment or arbitral award in another jurisdiction;
– transaction or business structure that would be acceptable in a
developed legal system may be regarded as outside the scope of
existing Mongolian laws, regulation or legal precedent and hence
invalid.
+ Lack of established, accepted, interpretations of new
principles of Mongolian legislation, esp those relating to
business, corporate and securities laws
+ Lack of judicial independence from political social and
commercial forces

29. 29
57
Acts of Provincial Administrators
+ Grant of exploration and mining licence subject to approval of
governor of relevant aimag but no clear guidance on what legal
grounds will warrant refusal
+ ML (Art 42) also provides licence holder shall “conclude
agreements” with local admin bodies on environmental protection,
mine exploitation, infrastructure development in relation to mine site
development and job creation etc.
+ No clear regulatory provisions on use of powers, creating potential
for differences of interpretation at provincial, central levels
+ Reported industry claims
–some provincial administrations abusing powers to designate land as
special use zones (by classifying land as for agricultural use)
–misuse of local offices’ power to give advisory comments on grants and
permits for water use and grant of mining licences
58
Risk Mitigation Strategies
+ Thorough Due Diligence (project and regulatory)
+ Joint Venture with State/selected local company
+ Involve internationally prominent entity
+ Balanced, effective Investment/Mining agreement
+ Government to Government/Diplomatic Support
+ International Arbitration (Agreement and Investment
Structuring through BIT Country)
+ Other Practical Measures (e.g. PR Insurance, Probity)
+ Remember Country Risk doesn’t equal Project Risk

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59
Risk Mitigation - Other Practical Measures
+ Understand the “soft side” of Political Risk
+ Limit capital investment commitment (e.g. consortium)
+ Confirm project economics can withstand a major change
+ Constructive relations with both Central Govt, local
officials
+ Active social involvement/obtain local support/open
communication with local communities
+ Preferential use of local employees, facilities
+ Maintain good relationship with local workforce (terms,
OHS)
+ Strict environmental standards and compliance
+ Conduct business in transparent and ethical manner
60
What Should Legal Due Diligence Cover?
Title to shares, interests, etc.; authority to sell
Vendor
Due Diligence
Review
Target entity: assets, liabilities, decision makingTarget Co
Title - exploration, mining (contract / licence / tender
agreements). Other projects specific risks, issues
Project,
Contract/Licence
Areas of country and legal risk, incl. security of
tenure, legal & fiscal stability, investment protection
Development and environmental approval process
Parties’ legal rights to undertake/operate the
project
Procedural requirements, government consents
Parties’ rights to implement sale and purchase
Legal Investment
Framework
DescriptionItem

31. 31
61
Mining Agreements with Government: Key Legal
Considerations for Investors
+ Ensure Comprehensive Coverage – all necessary rights
– implementation regulations, discretions minimal
+ Ensure State is bound by the contract
– suitably empowered signing authority and contract validly overrides all
inconsistent laws, either:
• appropriately empowered admin authority (competent authority) binds the
State; or
• Parliament’s ratification in order to validly override inconsistent laws
(object to create special project agreement containing special law for the project
i.e. general law applies except as provided)
+ Carefully consider Stability Issues
– State always free to change the law; but
– should ensure that it agrees won’t do that and that agreement is subject to
foreign law enabling the investor to take steps to international and arbitration
breach of contract
62
Differing Priorities, Risk Perceptions
+Juniors – Stock Market Orientation
– Availability of prospective new ground / secure tenure
– Stock exchange/other exploration funding availability, attractiveness
+Major Western Mining Companies – Supplier Orientation
– Preference for full or majority ownership/control
– High visibility, responsiveness to markets, media, analysts, NGOs
– Development funding operational, logistical interests
+Raw Materials Users, Trading Cos – Procurement
Orientation
– Metals, Power, State owned companies
– Strategic national industries, home govt. support
– Often content with minority JV interest/offshore equity and offtake
+Differing National Perceptions of Strategic significance,
opportunity: China, Korea, Japan

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63
Investment/ Resource Procurement Strategies
+ Offtake/Long Term Minerals Supply Contract only
+ Offtake/LTSC plus equity funding support for holding entity (e.g. public
company share or convertible placement)
+ Offtake LTSC plus debt funding support for local operating company mine
development
+ Offtake plus acquisition of minority interest in JV controlled by local private
company/national company/SOE
+ One of the above plus funding for essential infrastructure
+ Other earn-in to advanced exploration prospect, substantial JV interest
+ 100% owned, greenfields project
+ 100% or majority acquisition of a defined resource or operating
mine/processing facility
+ 100% private mining/metals company acquisition
+ Public mining/metals company takeover
64
I. Future Directions?

33. 33
65
Tavan Tolgoi
South Gobi Aimag, Tsogt Tsetsii Soum
250km from Chinese border
6.4bt coking and thermal coal
suitable for open pit mining
discovered in 1950’s, during Soviet era
major portion held by State (part Energy Resources LLC)
Government plans to attract a strategic investor has drawn
substantial international interest and competition (China, US,
Australia, Brazil, Japan, Korea, Russia, India)
also diplomatic pressure from goverments
66
Tavan Tolgoi Development Model
GOM initially proposed sale of 49% interest (51% to be
held by Erdenes MGL)
Feb’10 auction cancelled – new tender bids being called
GOM determined to hold TT 100% and derive greater
value for Mongolia than obtained under Oyu Tolgoi
arrangements
Development model proposed PSA/CCOW (cf ML)
Government also stated (May’10) will look for benefit to
national interest
– greater role for Mongolian companies and individuals
– greater advance payment
– commitments to infrastructure value adding and
technology

34. 34
67
Contrast Tavan Tolgoi with Oyu Tolgoi
IM
EM OTLLC OT
GOM
RT
IM
Sub
100%
ML
IA
34%
66%
Oyu Tolgoi
(Mining Licence)
68
Contrast Tavan Tolgoi with Oyu Tolgoi
Inv.1
EM
Contractor
TT
GOM
Inv.2
Holdco
100%
ML IA
PSA
TavanTolgoi
(PSA/Contract)

35. 35
69
Also Contrast Private Investment Structures
Shareholders Agreement
Mining Licence
Foreign
Inv
SPV I
(foreign)
Holding
Co
SPV II
(Mongolian)
Holding
Co
Operating
Co
GOM
70
Recent Developments re Tavan Tolgoi
Reports that GOM submitted to Parliament on 27th May a report of the
working group on TT which included
+ draft Investment Agreement
– Mongolia to remain 100% owner;
– equal treatment of domestic & foreign bidders in selecting a contractor
– Parties- Erdenes MGL (requesting I.A. as licence holder), GOM (Minister of
Finance, MRE, Environment)
– Details - 19 Chapters, 144 Articles, 2 Appendixes: stable tax environment,
authority to license holder to sell its product & manage revenue, environment,
CSR concepts.
+ draft Coal Mining Agreement
– Concept - Production sharing arrangement (drawing on Australian, Indonesian
coal mining agreements, Mongolian oil PSA)
– Details - 21 Articles, 1 Appendix; Price calculation formula; Product sale; Pre
payment and bonus; Reporting procedure
+ draft Tender Bid Documents
+ draft Parliamentary Resolution authorizing TT exploitation

36. 36
71
Other Big Projects – Which Approach?
PM Batbold (7 Feb.2010) – ownership and investment in big
projects to be decided on a case by case basis. Possibilities:
+ Joint Ventures
– will State require carried interests to enable it to meet cost?
– interest charges?
+ Production Sharing Arrangements
– mining company bears the cost of developing the project
– mining company shares production/revenue with State
+ Contract Mining
– Government bears the cost of developing the project but hire a
contractor to carry out the extraction work
– challenge given development costs and government finances
72
Ongoing State Participation in Projects?
+Idea of ownership has symbolic importance (people mindful
of historic exploitation; wary of greedy foreign investors)
+ Also people’s expectations of direct benefits created by
successive governments’, political parties’ election
promises
+ Western analysts however, argue:
– Mongolia would be better served by taxing, royalties
– Govt has conflict of interest (shareholder in company vs people)
– Govt as owner more vulnerable to dips in production
– Mongolia doesn’t have the capital or resources to fund devt, mines,
infrastructure

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73
State Participation (cont’d)
Western Commentators also arguing
+ Attempts to avoid cost by compulsory (free) acquisitions or
by compelling licensees to fund government share, will
damage international investors’ confidence
+ If Government insistent on equity
– should limit State equity to max 34%; paying full mkt value of
time and acquisition
– mkt value to be determined by independent valuation process
and agreed by govt and licence
– actual level of equity to be determined in concluding an IA
– govt must finance the acquisitions without recourse to licence or
its shareholders
74
Funding Project, Infrastructure, Development
+ Mongolia has massive funding needs to meet its aspirations for
development of resources, infrastructure, industrial projects. To be
met by …
+ Joint Ventures
– shareholder equity/loan funding
– convertible debt
+ Project Finance
– an important potential means of mine development funding, risk minimization,
but lending limits and increased risk aversion by lenders
– “pure” project financing yet to emerge in Mongolia - Western lenders
generally remain very wary. Bankability concerns include issues re country
risk, loan security, enforceability and available means of risk allocation/mitigation
– important role for Multilateral Lenders/Investors (e.g. IFC, EBRD, ADB)
+ International Capital Markets (HK, London, other)
– GOM policy favouring international capital markets as main tool of privatization
– Govt bond issues
– public issue of shares in Nat. Champions?
– reports of plans for listing TT, OT holdings

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75
Mongolia’s “National Champions”
+ In December 2009, WSJ report of PM Batbold’s announcement that
GOM intends to
– establish 3 major state owned holding companies and
– raise capital by offering shares on intn’l and domestic stock markets
(to help finance major mining, energy, and infrastructure projects)
The companies:
– Mongol Erdes (Minerals) – to consolidate mining assets
– Mongol Erchim (Power) – to combine power assets
– Mongol Ded Butets (Infrastructure) – to include various infrastructure
projects
Mongol Erdes? Possibly to be established under Erdenes MGL
And possibly will hold shares in strategic deposits
+ In Feb 2010 PM Batbold stated not yet decided whether to group
different classes of assets into 3 companies or to create and list
smaller cos around specific commodities
+ Ongoing discussions, planning
76
Listing of Holdings in Major Projects
+ Reports on 15 June 2010 MP D Zorigt (Minister for Mineral Resources
and Energy) announced:
– a State owned company will be established on a 3.5 bt section of
TT with 100% ownership
– its shares will be distributed to citizens of Mongolia evenly, under
the Law on human Development Fund
– not less than 10% of the Company will be sold on the Mongolian
Stock Exchange in accordance with the Minerals Law
– the remaining 3bt reserves will be offered to foreign investors
+ Also reported plan for Erdenes MDL to be become a powerful and
competitive company able to raise funds on world capital markets
+ Recent reports that GOM planning to list at least part of its
shareholding in Oyu Tolgoi and Erdenet Mining Corp. on both
Mongolian and an international stock exchange, possibly Hong
Kong

39. 39
77
Future Mining Policy Directions?
+Natural resources policy remains very emotive issue
– lengthy, vigorous debates, polarized views in getting to
OT IA; now TT issues, uncertainty re other big projects
– many stakeholders with high expectations
+Likelihood of further debates, further legislative changes,
differences in future IAs
+Experience in other countries (e.g. Indonesia’s Contract
of Work “generations”) also suggests indicate contract
terms may become less investor friendly as sector
matures
78
Possible Future Directions? (If e.g. Mongolia
follows the Kazakhstan example)
+ limits on stabililization, tax and general law
+ more specific obligations regarding local procurement
+ provisions regarding change of control of companies (further
up the chain) holding mineral licenses/investment agreements
+ treatment of convertible debt as equivalent to share acquisition
+ greater operational regulation – extraction, work program
approval and monitoring
+ required public disclosure by mineral licence holder (as if a
public listed company)
+ changing taxes and royalties
No suggestions yet but…

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79
Future Law Reform, Liberalization?
+ Improving the Legal, Regulatory Framework for Foreign
Investment
– reducing bureaucratic controls
– separating mining from oil & gas
– improving judicial certainty
+ Reducing Political/Legal Risk
– enhance legal, contract and tax stability
– move away from State capitalism, strategic assets and “national champions”
+ Infrastructure – Facilitating investment in, enabling access to,
private development of transport, power, water
– PPP
– tariff deregulation
+ Facilitating Financing of Major Project Development
– loan security, registers and enforcement
+ Query future directions. National, political considerations first
80
Mongolia’s Agreements with China
+ Agreement on Encouragement and Protection of
Investments (26/08/91)
+ Agreement on Avoidance of Double Taxation (26/08/91)
+ Agreement on Mongolian Access to the Sea and Transit
Transportation through Chinese Territory (26/08/91)
+ Other Arrangements Under Consideration include:
– China-Mongolia Free Trade Agreement
– press reports of proposal to permit Chinese workers to
work on Oyu Tolgoi being debated closed doors
+ Possibly in future another intergovernmental agreement on
rail transport may be considered necessary

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81
J. Summary and Conclusions
82
Mongolia’s Mining Law and Policy 2006 - 2010
+ Significant change over past 4 years in Mongolia’s policy towards and legal
regulation of foreign mining investment
+ Policy rapidly evolving with mixed signals being sent to foreign investors –
both openness, encouragement of DFI and resource nationalism/‘Statism’
with uncertainties, risks for DFI
+ Signing of the OTIA and repeal of the WPT regarded as very positive
+ However elements in 2006 Minerals Law, NEL and Mining Prohibition in
Specified Areas and current policy uncertainty worrying for foreign miners
+ Mongolia’s basic regulatory framework remains overall, relatively open and
attractive to foreign mining investors compared with neighboring CIS
countries
+ Yet much work remains to be done. Industry wants to:
– a settled, workable investment framework
– more clarity, predictability and efficiency in granting securing tenure and
in related laws
– reassurance that the goal posts won’t change once foreign investors
have committed substantial investment funding into large projects

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83
World Bank Mining Policy Division 2008
Comments still apt:
+ Mongolia’s mining sector undoubtedly has significant potential but
development dependent on govt’s ability to establish and maintain
– a clear mining policy
– a stable and transparent legal framework for mining,
environmental pollution, corporate governance
– policies and procedures to attract world class mining investors
with resources, management and technology
– efficient mining sector institutions and strong administrative
capability for oversight
– appropriate policy, transparent management of mineral revenues
+ Need to improve tax regime and adopt a Model Investment
Agreement for all new mining investments.
almdms #2033587-v1
Mongolian Mining Investment
- Selected Legal Considerations
John Connors
Managing Partner, Central Asia
John.Connors@bakernet.com June 2010
Mongolia Mining investment 2010
21 -22 June 2010 Amora Hotel Jamison, Sydney