Mr. Nabil L. Khodadad, Head Mining & Metals Co-Head, Project Finance and Infrastructure, Dewey & Leboeuf

1. Overview of the Legal Framework for Foreign InvestmentOverview of the Legal Framework for Foreign Investment
in Mining and Infrastructure in Mongolia
Presentation to
Mongolian Investment Summit 2010g
Royal Garden Hotel, London
25 November 201025 November 2010
Nabil L. Khodadad
H d Mi i & M t lHead, Mining & Metals
Co-Head, Project Finance and Infrastructure
Dewey & LeBoeuf, London
Tel: 020 7459 5237Tel: 020 7459 5237
Email: nkhodadad@dl.com
Dewey & LeBoeuf LLP
dl.com

2. 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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3. OutlineOutline
General Overview of Foreign Investment Regime
Foreign Investment in Miningo e g est e t g
Foreign Investment in Infrastructure
ConclusionConclusion
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4. I. General Overview of Foreign Investment
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5. 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 if
For 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 Agreement
Stabilize taxes
Eligibility for and term of Stability Agreement depends on level of investment
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6. Foreign OwnershipForeign Ownership
Foreign Investors may own 100% of any registered business
No legal requirement to engage Mongolian entity to be a joint venture partner,g q g g g y j p
shareholder, agent
Exceptions
Minerals 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
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7. 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 ( e
county 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
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8. 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
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9. 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)
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10. 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 Convention
I 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
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11. II. Foreign Investment in MiningII. Foreign Investment in Mining
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12. 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 Licenses
initial 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 ony p p p y
exploration
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13. Exploration and Mining LicensesExploration and Mining Licenses
Mining Licensesg
initial 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
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14. Foreign OwnershipForeign Ownership
Mineral Law (2006) gives Government of Mongolia right to obtain an equity stake in( ) g g g q y
strategically 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 include
deposits 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
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15. 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 Agreements
for 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
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16. Environmental IssuesEnvironmental Issues
License holders must prepare
an 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
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17. 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
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18. 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)
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19. Elimination of Excess Profits Tax on Gold & CopperElimination of Excess Profits Tax on Gold & Copper
Windfall Profits Tax law passed in 2006
Imposed 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
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20. 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 ane o ed o od ed ce ses to e p o e o e e a esou ces t a
area no less than 200 meters from a forest or water resource
Grants local officials the power to determine actual areas to be mined
Local official can extend the 200 meter minimum
Requires government to compensate license holder for previously incurredq g p p y
exploration expenses or for revenue lost from actual mining operations
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21. 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 regime
Independent of the regulatory framework set out in the Minerals Law (2006) forp 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
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22. III. Foreign Investment in InfrastructureIII. Foreign Investment in Infrastructure
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23. 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
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24. 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
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25. 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 ted
Through tender
By direct agreement under certain circumstances, including when deemed thaty g , g
conducting 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
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26. 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
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27. 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
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28. 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 theCo cess o ag ee e t s a spec y o co pe sat o s ca cu ated t e
event of termination, providing for the proper value of the works rendered,
expenses incurred, and losses sustained, including lost profits
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29. 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 guaranteeg
provide a portion of the financing
provide tax exemptions and waivers
issue a guarantee for minimum revenues
provide compensation
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30. 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 challenges
Law 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
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31. Questions?

32. Nabil L. Khodadad
Tel: +44 (0) 20 7459 5249
Email: 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: nkhodadad@dl.com
• 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 Finance
magazine'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
Dewey & LeBoeuf LLP | 31
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

33. Offices WorldwideOffices Worldwide
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