89005 v2 Kazakhstan Legislation for Allocation of Mining Exploration Rights Report 2 Applicability of results from report 1 in Kazakhstan and recommendations on potential policy changes in Kazakhstan July 2013 Kazakhstan Joint Economic Research Program Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 TABLE OF CONTENTS 1 KAZAKHSTAN MINING LAW: A REVIEW................................... 4 1.1 General comments on Law N°. 291 Concerning the subsurface and subsurface use .....................................................................5 1.2 Specific provisions affecting competitiveness..............................6 1.2.1 Competitive vs. Non-Competitive Process ............................................................ 6 1.2.2 Geological information ........................................................................................ 14 1.2.3 State Role in Mining ............................................................................................ 17 1.2.4 Security of Tenure ............................................................................................... 18 1.2.5 Termination Provisions ........................................................................................ 22 1.2.6 Transfer/Assignment ........................................................................................... 25 1.2.7 Local Benefits ...................................................................................................... 29 1.2.8 Administration ..................................................................................................... 32 1.2.9 Issues regarding exploration ............................................................................... 33 1.2.10 Competitive Bidding System................................................................................ 34 1.2.11 Dispute Resolution .............................................................................................. 38 1.3 Conclusion................................................................................ 38 2 RECOMMENDATIONS ........................................................... 39 2.1 Official English Translation ....................................................... 39 2.2 Online Availability of Information ............................................. 39 2.3 Exploration Policy and Mining Law Required............................. 40 2.4 Specific Issues to Be Addressed................................................. 41 2.4.1 Competitive vs. "first-come, first-serve" approach to issuance of exploration rights. ................................................................................................................... 41 2.4.2 Licence vs. Contract ............................................................................................. 41 Kazakhstan Joint Economic Research Program 2 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 2.4.3 Transfer/Assignment ........................................................................................... 42 2.4.4 Termination ......................................................................................................... 42 2.4.5 Security of Title .................................................................................................... 42 2.4.6 Dispute Resolution .............................................................................................. 42 2.4.7 Benefits................................................................................................................ 42 2.4.8 Non-Discrimination ............................................................................................. 43 2.5 Geological Information and Administration .............................. 43 2.5.1 Geological Information ........................................................................................ 43 2.5.2 Administration ..................................................................................................... 43 Kazakhstan Joint Economic Research Program 3 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 1 KAZAKHSTAN MINING LAW: A REVIEW The first report outlined what other countries are doing to attract foreign investment in the exploration sector. It was clear that those who were transparent, consistent, and clear were doing well in attracting exploration funds from international private investors. There is a commitment to the general internationally acceptable principles of first come first serve, exclusivity, security of tenure, transferability, non-discrimination and dispute resolution. In addition, they have clear and efficient administrative systems, and most importantly are investing in the generation and dissemination of their geological information. In reviewing the Kazakhstan law, the primary concentration has been on the principles, the administration of the law and geological information. The main concern is whether the law is competitive with those countries reviewed in Report I as well as other countries which are now reforming their legal regimes to attract exploration. This Report has given general comments but has also reviewed the Kazakhstan law against the principles of security of tenure, termination, transfer and assignment, local benefits and administrative issues which are demonstrably weaker than exist in the countries studied in Report 1 and elsewhere. These are all areas where there are problems in the Kazakhstan law or policy making it more difficult to attract foreign investment. There is also a review of competitive processes in countries such as Australia, Vietnam, Nigeria and India. It reviews the reasons for establishing the competitive bidding process and the problems which have occurred. In addition a further review of the generation and provision of Kazakhstan Joint Economic Research Program 4 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 geological information, discussed in Report 1, is warranted because this is a major weakness in the Kazakhstan system and needs to be addressed with some haste. The review in this Report is done by looking at internationally acceptable principles and policies and comparing certain provisions in the Kazakhstan law. 1.1 General comments on Law N°. 291 (June 24, 2010) Concerning the subsurface and subsurface use1 This law is very difficult to understand. It is, as one writer stated, "dense", meaning it is complicated, detailed to the point of confusion. The quality of the translation also does not help. It is important to have a well-translated English version, especially as the working language of international mining is English. In addition to an improved English translation, having some information online which explains how the law works and what is necessary is always helpful. It would include the processes to obtain an exploration permit. The best example of this is Western Australia, which not only has its law and regulations on line, but also a document entitled Mining Act 1978 Basic Provisions - Information Pamphlet. This outlines all the provisions of the law in simple language. Western Australia also has information on all mining titles, what the basic requirements are and how to apply. Other jurisdictions do this as well and it is extremely helpful for those who are doing initial reviews on a country. On the Kazakhstan Government site, the section on Legal Framework has not been translated. This means there is no information in English available on line about mining in Kazakhstan. Companies which are looking for new areas will do an on-line search for information - both legal and geological. If it is not available, it puts the country in an uncompetitive position. While Government officials are used to their system, it cannot be assumed that everyone is. The Kazakhstan system is different than exists elsewhere, except in the Central Asia region and Russia, and is not well-known to the international mining community. Another matter for discussion is the fact that the mining law and petroleum laws are in the same document. In most other countries, it is recognized that mining is a different industry than petroleum from the exploration and production sides as 1 The discussion is the version of the law that was in effect on November 30, 2013. There have been some amendments since then. Kazakhstan Joint Economic Research Program 5 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 well as the economics. A separate law is warranted for a country where mining is robust or there is an interest in attracting investment. In Kazakhstan law the winner of the competitive tender is determined by the amount of the signature bonus and the amount of expenses for social-economic development of the region and development of its infrastructure as well as personnel content and training, local content in goods and services, research and development work, and payment for the geological information. This would be discouraging for exploration companies, especially the more junior and medium sized companies. Greenfield exploration would not have any results until a number of years into the exploration project. Yet their bid would be assessed on socio-economic development of the region and infrastructure and a signature bonus. The reality of the exploration phase is that very little is demanded in exploration for numbers of trained personnel or in local content as mining exploration tends to be localized and involves few people. All of these pre- requisites are fine for production. It is certainly a matter that would discourage legitimate exploration companies. In addition, there is no consideration at all of what should be the most important aspect of an application - the work program the company plans to implement and the expenditures it plans to make to implement that program. It is the work program that will lead to ongoing and more focused exploration and the discovery of minerals. From a policy point of view this is the most important consideration for government when it comes to the exploration phase of mining. The signature bonus is meaningless - the work on the ground over a period of time is key to discovery. This is a major impediment in the Kazakhstan law. 1.2 Specific provisions affecting competitiveness 1.2.1 Competitive vs. Non-Competitive Process Kazakhstan has a system whereby exploration is done by tender except if the foreign entity is working with a national company where a direct negotiation of a contract is possible. This is similar to the Russian law and others in the Central Asian region. Other countries have utilized the auction system. Algeria does so when the deposit has been found by public funds or the exploitation area has been released to government by the party which held the mining rights. Similarly Zambia does so where there are areas of identified mineral resources. The Democratic Republic of Congo auctions when the deposit is studied, documented or worked on by the State or its entities and it is considered an asset of considerable known value. In Kazakhstan Joint Economic Research Program 6 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 all these examples, once the tender has been awarded, the successful party is subject to the same provisions of the law as applies to any other mining entity in that it must be granted a licence under the law. "Both the Non-competitive and Competitive mineral rights allocations should not be treated as a methodology for allocation but as processes that govern the allocation of mineral rights. It should be emphasised that, in a non-competitive or competitive process only the application process should differ, but not the regulatory framework per se. In other words the difference should only be on the route followed to acquire the mineral right. However, the eligibility criteria, the terms and conditions must apply similarly. The law must apply equally to all irrespective of whether one investor acquired its mineral rights through a competitive bid process while the other acquired it through a non-competitive process. The essence is that both investors have to apply for mineral rights."2 "The competitive bidding system, is not commonly used in the minerals and mining sector, as a regulatory process for the allocation and acquisition of mineral rights. This should be seen as alternative process for the allocation of mineral rights, and not as a parallel legal framework. This process may be employed in instances where:  Extinction/lapsing of mineral right - Application may potentially  be lodged in cases where mineral rights have expired, have  been revoked or relinquished;  New discoveries - A new mineral deposit or areas of potential mineral wealth which has been discovered by the State; 2 "Granting Mineral Rights - A Good Practice Note", World Bank Project - Extractive Industries Source Book Program for the University of Dundee, Final Report, 2010 page 2. Kazakhstan Joint Economic Research Program 7 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2  Existence of strategic mineral – where the presence of mineral classified by the host country exists  Privatisation – Where the state wishes to divest from active participation in extractive activities"3  With regard to the classification of strategic minerals mentioned in bullet 5 above, it is customary for countries to designate such minerals if they are essential to national defence, commercial or industrial activities and it is a mineral which is not in sufficient quantities in the host country and must be imported from another country or countries, or there is an issue with the reliability of minerals imports, or the degree to which the country perceives threats from external sources and possibly the rate of economic growth. NEW SOUTH WALES, AUSTRALIA In 2008 the State of New South Wales introduced competitive tendering in the coal sector. The amendments to the Mining Act 1992, allowed for Mineral Allocation Areas (MAA). New South Wales is a major coal producer having produced 188.8 million tonnes of coal in 2009-2010. This resulted in $13.2 billion in income or 80% of the total value of the New South Wales mining sector. The whole State was declared a MAA for the purposes of coal in order to allow for "the controlled and rational allocation of potential coal development areas and the setting of special conditions for each allocation." It was because of this importance that the government decided to follow a more planned approach to allocating coal areas. Guidelines were issued in 2008 which allow for categories of coal mining allocations as follows:  Major Stand-Alone Areas These areas contain sufficient coal resources to develop a medium to large scale new coal mine areas.  Substantial Additions to Existing Mines These areas are located adjacent to existing mines and contain coal resources that could be readily mined by a continuation of the existing operations.  Minor Additions to Existing Mines These are small areas adjacent to existing mines, that based on a logical assessment, would be best mined from an existing mine. 3 Ibid., pages 6 and 7. Kazakhstan Joint Economic Research Program 8 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2  Small Areas Unrelated to Existing Mines These areas are small but may have the potential to be developed as stand-alone “boutique” mines due to particular coal characteristics or location adjacent to a market. The Guidelines also outlined the minimum financial contribution to be paid to the New South Wales Government by the successful bidder when the mining lease is granted. It is based on saleable tonnes from both open cut and underground mines. Three things need to be emphasized about the system set up by the New South Wales legislation: 1. there is no requirement for bidders to have a signature bonus as part of their bid. The successful bidder pays a financial contribution on the grant of the mining lease. 2. the successful bidder is granted a mining lease which is subject to all the same rights and obligations as apply to any other company mining in the State. 3. While this applies to exploration for coal properties, the policy of first-come, first-serve exists for all other minerals. There has been no announced intention to have the competitive system apply to exploration for other minerals, even though the Act would allow for this. It is impossible to assess how the competitive system has worked in New South Wales. In 2008 the government invited companies to bid for 11 coal exploration licences. Several licences were awarded to a paper company4. Questions arose after it was found that it was possible that confidential information on the tender process was given to people who were associated with the successful bidder. It was alleged that a family close to the mines minister owned a secret 25% of the company and that they had bought land in areas around the areas up for bid and stood to make $75 million as their purchased property fell within the tenement. This is now being investigated by the Independent Commission on Corruption and until such time as some resolution is found, the process of competitive bidding is under review. The Minerals Council in its submission to the Productivity Commission Inquiry on Barriers to Resource Exploration, already mentioned in Report 1, stated that: "...processing time for coal applications is...long due to their complexity. Currently all coal exploration licence applications must be competitively 4 A paper company is a company that is constituted legally as a registration or incorporation but has nominal or zero assets and is non-operating. Kazakhstan Joint Economic Research Program 9 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 tendered. There have been multiple issues regarding fairness, transparency, and lack of industry consultation in the process of mineral allocation areas."5 A recent independent study undertaken by PriceWaterhouse Coopers for the New South Wales Minerals Council reviewed the lengthy process time for applications. It concluded that there was a huge economic cost to the delays in processing applications. Research found that delays of 12 months or more in mining assessment times would cost the State 29,000 jobs and $10.3 billion in lost investment and $600 million per year in lost mining royalties over the next 20 years.6 QUEENSLAND, AUSTRALIA The State of Queensland has announced in 2012 that they will follow the New South Wales model of competitive bidding in coal exploration. However, to date, no legislation has been passed so it is not possible to review the system they intend to make. INDIA India has also had difficulties regarding competitive bidding for coal properties. The Coalgate scandal erupted when the government decided not to go to competitive bid on coal properties. It is alleged that the government received less money than it would have through the bidding process and there was collusion regarding the awards. This is under criminal investigation. India needs to mine coal quickly in order to meet the fast-rising demand for power as shortages have been sapping economic growth. This has forced companies to import more expensive coal. In July 2013 the government announced that it had awarded 14 blocks to state and power companies (nationally owned) with 4 going to the country's largest power generator. None of these areas are explored so it will be some time before any development occurs. It next plans to auction 7 explored areas to the private sector through competitive bidding. 7 5 New South Wales Mineral Council Submission to the Productivity Commission on Productivity - Barriers to Resource Exploration, March 2013, page 7. 6 Creamer Media Reporter, July 3, 2013.(internet) 7 "India resumes Coal Mining Rights Grants to Power Companies", Reuters, July 3, 2013. Kazakhstan Joint Economic Research Program 10 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 Very little information is available with regard to India's system but it has been reported that a reserve price is calculated which is to be paid by the companies. This reserve price is linked either to global coal prices or by using Coal India prices as benchmarks. Calculation of the reserve price is based on an estimate made in Geological Reports after exploration. In short at the present time, India will have a competitive bidding system for coal which is for explored properties. VIETNAM In July 2011 the government of Vietnam announced that it would go to a competitive bidding system in all areas except those exempted by government. The initial bid price will be decided by the Ministry of Natural Resources and Environment or the local provincial People's Committee. The amount would not be lower than the amount of fees payable for the issuance of the mining right. Only a draft of the proposed fee for mining rights could be found. It is based on the following formula: T = Q x G x K1 x K2 x R In which: T – Fee for granting the mining rights, in VND; G – Unit price of mineral used for paying royalty, in VND/ (ton, m3, kg...); Q – Reserve volume appraised by competent state authorities, in ton, m3…; K1 – Mining condition co-efficient. K1 shall not be lower than 0.9 for open-surface (opencast) mining, and shall not be lower than 0.6 for underground (pit) mining; K2 – Area condition coefficient. K2 = 0.5 in an extremely difficult socioeconomic condition area; K2 = 0.7 in difficult socioeconomic condition area; and K2 = 1.0 in other areas; R – Coefficient in percentage of mineral reserves, which would range from 2 to 5 depending on specific types of minerals. The latest draft also proposed that a mining company can select one of the following options for payment of the fee: (i) payment upfront before receiving the mining licence, (ii) payment for each period of five years, or (iii) payment on an annual basis. Auction participants must:  exchange relevant information only internally within the participating entity, and not exchange it with the other entities participating in the auction; Kazakhstan Joint Economic Research Program 11 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2  not use means of communication throughout the auction session;  not pay any bribe in order to eliminate other participants, and not collude in order to reduce prices. After the bid is awarded the successful bidder must apply for an exploration licence within 6 months of the auction date award and for a mining licence within 12 months of the award. NIGERIA Having had a poorly operating mining sector, the Nigerian Government passed the Minerals and Mining Act, 2007, which conformed to international best practice. Section 9 of that Act allows the Minister to determine areas where exploration and mineral licences may be granted on a competitive bidding process. The Mining Cadastre Office considers the bids in a transparent process and selects the bid which will "promote the expeditious and beneficial development of a Mineral Resource area." (Section 9). The Act and the regulations state that the criteria on which the bid is decided are  the program of exploration and the expenditure commitments that are proposed;  the financial and technical reasons for the application; and  previous experience. The successful bidder must pay an application processing fee of NGN5000($US30.98) and an Annual Service Fee per Cadastre Unit of NGN 15000 ($US92.94) for a Reconnaissance Permit and NGN2000 ($US12.39) for an exploration licence. Nigeria has posted 10 prospective blocks for coal of which 9 were put up for a bid round. Four were sold successfully and the remainder have been earmarked for proposed coal-to-power projects. Like India, Nigeria needs more power to fuel its economic activities. Its decision to put out coal blocks by competitive bid was seen as necessary to get more mining of coal. It still maintains the first-come, first serve process for other minerals. 1.2.1.1 Conclusion Other countries are also considering competitive bidding processes for the award of exploration rights, such as the Philippines, which was pointed out in Report 1. The countries discussed above have differing systems but there are several principles which are common. First, there is no signature bonus payable by the Kazakhstan Joint Economic Research Program 12 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 winner as is required in Kazakhstan. In New South Wales for instance, a minimum financial contribution is paid after the award. The amount is set out in the guideline and based on a minimum cents per tonne of saleable coal. This is payable when the lease is granted. The criteria for picking the winner is usually not based on the amount of money they will put up but on the technical proposal. After the award, the money owing comes from the successful bidder and is clearly spelled out. Secondly, while the other countries have used a competitive bidding system, the successful bidders must be granted a mining right under the law thus making them subject to the same rights and obligations of all mining entities. There is no special treatment with regard to how they are treated under the law. Thirdly, except for Vietnam, the main mineral subject to competitive bidding is coal. While the laws allow for other minerals to be included none of the countries reviewed have done this except for Vietnam. Most of the systems reviewed have used the competitive bidding process for already known deposits of minerals for the purpose of mining the reserves. India is using the process to bid out already unexplored areas to state-owned companies and explored areas to the foreign investors. Looking at the experience of New South Wales and India it is quite clear that a competitive bidding system is no more and no less corruptible that the first-come first-serve system. It can and has been corrupted and the potential for other corrupt or collusive practices are evident. It is clear that a competitive bidding system must be transparent, efficient, and free from political interference if it is to work. In fact the first-come, first-serve system at least for initial permits is almost automatic in the countries reviewed so perhaps is less likely to succumb to corrupt practices. The signature bonus approach is not used in any of the countries reviewed. It is an oil industry practice and not suited to mineral exploration, especially greenfield exploration. Under the Kazakhstan law, the notice to participate in a tender gives the minimum amount of the signature bonus that is to be proposed. In other words, there is a platform amount under which the participant could not bid even if it did not agree with the geological authority's determination of the worth of the deposit under Article 49(1). In most other countries the participant determines what it is prepared to pay based upon the information given to it. From the point of view of the Kazakhstan Law, it is clear that most countries have not had enough experience in competitive bidding in exploration to be able to provide a successful case. Most have limited the process to mineral deposits which are known. It is also clear that in all circumstances reviewed that the successful bidder must get a mining right and be subject to the obligations and Kazakhstan Joint Economic Research Program 13 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 rights of any mining right holder under that law. In Kazakhstan, there is a negotiated agreement and, while there may be a standard agreement, clauses can be changed and different approaches depending upon the successful bidder. 1.2.2 Geological information 1.2.2.1 Classification Systems As pointed out in Report 1, the generation and provision of geological information is an extremely important tool for attracting exploration activity. Most countries provide the information free of charge and many generate new information and give it away to potential investors. The governments of Chile, Western Australia, Ghana and Sweden for example, have invested massive amounts of money in geological research which can then be available to potential investors. A review of the Kazakhstan law demonstrates that there is not a wide availability of geological data as it exists elsewhere in countries vying to compete for exploration dollars. It is not known what classification system for geology is used in Kazakhstan but it is assumed that it still uses the Soviet classification system. This is important because companies use world-wide standards for assessing mineral resources and mineral reserves for purposes of reporting to stock exchanges. The main classification systems are the Joint Ore Reserves Committee Code (JORC) of Australia, the Code for the Report of Mineral Resources and Mineral reserves (SAMREC) of South Africa, and CIM (NI43-101) of Canada. Regulatory bodies of many other countries use these same standards when they lack the same rigorous reporting standards or lack internationally recognized industry professional bodies. When international companies are assessing mineral resources or mineral reserves, they will use these systems. Lenders to mining development projects also use these systems when evaluating the proposals for financing purposes. The foreign companies who are working in other countries and have to report to their home country stock exchanges will need to report using these standards. If these classification systems are not used in reporting in Kazakhstan this could be somewhat problematic for foreign companies as the economic evaluations will be different. In the Kazakhstan law, the geological body does this evaluation and gives it to the applicant. There may well be differing opinions on these evaluations. It is important that this classification issue be addressed as foreign entities would have to work with two different systems in order to report internationally. Kazakhstan Joint Economic Research Program 14 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 1.2.2.2 Provision of Geological Information According to the Kazakhstan law, the provision of geological information is only free when it is provided for educational purposes to state-owned or accredited private educational institutions, scientific research where the research is financed from the state budget, subsurface geological studies when financed from the state budget and to state bodies[Article 11(3)]. Otherwise the provision of the information is a cost to the person to whom it is provided. Article 11(3) also states that rules for these uses and for commercial purposes and "exporting geological information beyond the boundaries of the territory of the Republic of Kazakhstan shall be approved by the Government...". The intent of this section seems to be the control of geological information beyond what exists anywhere in the world, with the exception of former Soviet republics. Making rules for the use of geology for commercial purposes seems counter-intuitive. Using this data and allowing it to be used, is more positive than negative in that it can generate new information on deposits. Having to get approval from the government every time a company wants to have geological information reviewed outside of Kazakhstan is also problematic for investors. This would preclude setting up data management systems that can be accessed on the internet, and it would also preclude foreign companies having the information reviewed by consultants outside of Kazakhstan. Taken to its logical conclusion, it would mean rules would have to be made in order for foreign companies to provide the geological information to lenders or providing the information to their home country stock exchanges. There may already be rules which allows for this but they have not been provided for purposes of this Report. Article 49 states that the price of information contained in bid packages will be determined by the Government. The successful bidder has one month to pay for the information as determined by government. The price of the geological package is determined on the basis of the amount of historic costs. Historic costs are defined as "summarised past costs of geological study of the contract territory and exploration of fields that were incurred by the state." [Article 1(91)]. The procedure for determining these historic costs and the price of geological information is approved by Government [Article 11(4)]. It appears that the amount that is required to be paid is not known until after the bid for participation is accepted, and it is at this point that the authorised body presents the amount. [Article 49(2)]. This means the bidder is not privy to the cost of the information when it makes its initial bid to participate in the tender. One must question why this information would not be provided as soon as the potential bidder demonstrates an interest to bid. In other countries the potential bidder would be able to go online and look at the geological information before Kazakhstan Joint Economic Research Program 15 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 even deciding to bid to participate. This is an area where the non-competitiveness of Kazakhstan is obvious and a major detriment to potential investment. Article 49(3) is even more problematic if the intent is to encourage investment. It states: " Applicants shall have no right to disclose in any form or transfer to third persons received geological information." It is understandable that during a bid process, one might want the information to remain confidential for purposes of the tender but this prohibition of disclosing geological information to a third party should not affect the bid process. Normally this information is available all the time in other countries and can be accessed by anyone at anytime. This Article will have a negative effect on smaller and medium sized companies which usually have third party companies assess for them the information they are provided as they often do not have the professional capacity to do so. Even larger companies involve geological expertise from contractors. Those contractor companies would be third parties and this Article precludes them from having the information. Combined with the provision of having rules for the export of geological information, this Article is regressive. It is obvious that geological information is considered secret information which is unable to be shared. This raises three important questions which need to be considered when deciding on future policy: 1. What is the reason Kazakhstan considers geological information to be so restricted in its circulation? How can advertising your geological richness possibly have adverse consequences? 2. How can Kazakhstan possibly compete with other jurisdictions for world-wide exploration funds with countries that not only provide information for free but also spend millions of dollars to generate new information to give away? 3. How can Kazakhstan compete when other countries are allowing the dissemination of their geological information widely throughout the world via mechanisms such as the internet free of charge? As noted in Report 1, the provision and generation of geological information is a key promotion tool in attracting exploration funds. Over and above what procedures may be in place in Kazakhstan regarding its geological dissemination that is outside of its law, it is clear from these legal provisions that a major shift in policy is required in order to become internationally competitive in this important area. Kazakhstan Joint Economic Research Program 16 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 1.2.3 State Role in Mining Article 12 gives the government of Kazakhstan a preferential right to purchase useful minerals at prices that do not exceed prices applied by the users less transport costs and selling costs. This will be problematic in forward contracting, i.e. making contracts for sale before the mine starts operating. If the State has this right, which it appears can be exercised at any time, companies will have to be cautious about entering contracts with other as they may be in breach of contract with a buyer. If the government continues to take this position, it should make its decision well before the mine begins operation so that companies can be assured of future of sales in the project. In addition the price paid should be based on the international market price that the user would get if it did not have to sell to the state. This is both fair and transparent. The law also gives the State the priority right to the contract party or "participants in a having the right of subsurface use or participants in the legal person having the right of subsurface use and other persons to purchase the right of subsurface right that is alienated on the paid or unpaid bases." There is no indication what the circumstances for "unpaid basis" might mean Article 13(1) gives the state the right to have a priority right to purchase the right of subsurface use when the holder of the right wants to "alienate" its right in whole or in part. A national holding company shall be the vehicle for such a purchase. The price paid is market price as determined by Kazakhstan legislation concerning evaluation activity. This is unclear and one questions how this will be determined and whether the subsurface holder has any input into this determination especially when considering the economic evaluation standards used by most international companies.. This would work for a working mine but if it is greenfield exploration and is a farm-in, there may be little or no geological information on which to base a price.8 Article 29(3) establishes that in contracts of "obligatory participatory interest of a national company, participatory interest of the national company in the authorised capital of the operator must be not less than fifty percent." This is obviously in the case when a tender is prepared where a national company is participating with a foreign company. This is problematic for investors as many companies would have no control over the decision-making and their interests may not be considered. 8 Farm-ins, that is, a new party providing funds and becoming a part of the exploration activity at any stage of the exploration phase. Kazakhstan Joint Economic Research Program 17 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 It is unclear when and how participating with a national company happens. Article 29 speaks of an "obligatory participatory interest" but the provisions of the law are unclear as to what this means and what process determines this. It would appear that a condition of a tender could be the participation of a national company but this is not specifically stated anywhere. According to the provisions of the Kazakhstan law, national companies are not subject to transfer provisions under Article 38 which is necessary for the private user to get a permit from the competent body. Article 72(5) could also be a deterrent to investment. It states: "According to the decision of the Government of the Republic of Kazakhstan the competent authority is entitled to unilaterally terminate the contract, including any previous contract, in case of subsoil during mining operations in respect of subsoil areas, fields of strategic importance, lead to a change in the economic interests of the Republic of Kazakhstan, endanger national security." The gist of this section is that the government can unilaterally end the contract if it decides there is a danger to national security to allow a foreign entity to continue or there are "changes in the economic interests." These economic interests are not defined and leave many questions as to when and in what circumstances the government would make a decision to terminate a contract. It is totally dependent on the government's discretion when this would happen and contains no provisions whereby the user is given the opportunity to address these issues. Section 72 also states that where the competent body terminates the validity of the contract, the national company shall accept the contract territory in trust management. The national company holds the area until there is a transfer of the assets to a new user usually done by competitive bid. It begs the question as to why the government would terminate a contract on the basis of national security or economic interests and then put the area out to competitive bid. 1.2.4 Security of Tenure (Title) According to the Kazakhstan law, there is no need for competitive bidding for the production phase if: Kazakhstan Joint Economic Research Program 18 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2  the exploration contract gives the exclusive right to obtain a subsurface use,  there is a commercial discovery or if the user is performing operations with a national company or  if there was a tender and only one user applied and it was not rejected. The direct negotiations must be on conditions not worse the conditions stated in the competitive bid [Article 54(4)]. Article 60(1) also states that the subsurface user which discovered and evaluated the field under an exploration contract has "the exclusive right to conclude a contract for production without conducting a tender on the basis of direct negotiations." However Article 60 (2) says the user which made the discovery and evaluated it based on an exploration contract shall have "the right to submit a bid for conducting direct negotiations in respect for the conclusion of a contract for production within the term of the exploration contract or not later than three months from the end of the exploration contract." It is unclear from these sections whether there is or is not direct negotiations or this is a translation problem Within 2 months of the receipt of the bid for conducting direct negotiations, the user and the competent body must "jointly determine" the amount of Kazakhstan's content in goods and services and personnel and "the amount of expenses for social-economic development of the region and development of its infrastructure." If the parties fail to come to an agreement within 3 months of beginning the negotiations, the competent body shall pass a decision refusing to grant the right. In addition, if the contract is not concluded within 24 months from the date of the signing of protocol for direct negotiations, the applicant loses the exclusive right to conclude the contract for production and the blocks will be put up for tender within 3 months. The bid by a new applicant must include measures to compensate the discoverer for "costs associated with the discovery and evaluation of the block of subsurface put up for tender and maintenance of the contract territory." ([Article 60(5)(3)]. The competent body shall establish the "term" of compensation for such costs and the winner of the tender can audit the costs. It is not clear what this means and in any event, the discoverer of the deposit has the best knowledge of what its costs were not the government. While all of this can be appealed "according to judicial procedure" [Article 60(6)], the exploration contract and the terms of dispute settlement in it seem to be negated by this Article. Kazakhstan Joint Economic Research Program 19 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 The process states that there is no agreement with the new tenderer, the discoverer and the competent body shall determine jointly the necessary conditions of a repeated tender and the person which made the discovery and evaluation of the field shall have the right to conclude with the "said person a contract for production on conditions offered by the said person..." Obvious translation problems make this all very unclear as to whom the "said person" is but it does appear that after a tender depending on the outcome of that, the discoverer, i.e. initial holder of the exploration right, can conclude an agreement with the new person. This is extremely confusing. It is doubtful if a foreign company cannot get a contract within 24 months that it would stay in a process that could involve court cases and the involvement of a third party. This Article is a disincentive to investment and would discourage many potential investors. It would definitely concern any lenders as they would expect the right holder to have security especially in the production phase. Where the contract is unilaterally terminated, a national company will hold the contract territory in "trust management". The termination procedures, which will be discussed later in this Report, are further in question. The contract terms are not available and there are obviously provisions in that contract which will have some bearing on these provisions. In most countries, termination would occur when there is a fundamental breach of the obligations. For instance, not fulfilling a work program would seldom result in termination unless it was continuous. There would be discussions regarding solutions and time to rectify the problems. In the Kazakhstan law, these provisions seem to be very one-sided and leave little room for the user's opinion to have much weight. . This unwieldy process goes to the very heart of security of title. The exploration contract may guarantee the right to conclude a contract, it does not guarantee the right to continue into production. Compared to the transfer from exploration to production in other countries this process is fraught with discretionary powers of the competent body. In Sweden for instance, the security of title is very straightforward. In Chapter 4, section 2 the law states: "A concession shall be granted if 1. a deposit has been found which can probably be utilized on an economic basis, and 2. the location and nature of the deposit do not make it inappropriate to grant the applicant the concession applied for." Kazakhstan Joint Economic Research Program 20 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 The Swedish regulations outline what must accompany the application for the concession and further states in Mineral Ordinance "If the application does not meet the requirements of Sections 17 and 18, if it is incomplete in other respects, or if the applicant fails to pay the application fee provided for in Section 19, the Chief Mining Inspector shall order the applicant to remedy the matter within a certain period of time. The order shall be served on the applicant. If the applicant fails to remedy the matter, the Chief Mining Inspector shall refuse the application, but only if the deficiency is of such significance that the application cannot form the basis for consideration of the matter, if no environmental impact assessment has been submitted, or if the applicant has failed to pay the application fee." The reasons for refusing are very clear. The onus is on the Chief Mining Inspector to as the problem must be so significant that the licence should be denied. There is ample time for remedy of the deficiencies. In other words, the applicant is given every opportunity to rectify any problems and the deficiency must be significant. In Ghana, Section 42 states " (1) The Minister shall not reject an application for a mining lease made under this Act, (a) unless the concerns of the Minister have been conveyed in writing to the applicant and the applicant has been given an opportunity to make appropriate amendments to the application or to the proposed programme of mineral operations and has within reasonable time that the Minister may permit, failed to do so, or (b) on the grounds that the applicant is in default, unless the Minister has given the applicant notice of the default and the applicant has failed within a reasonable time that may be specified in the notice to remedy the default. (2) A dispute between the Minister and an applicant in respect of a matter that arises under subsection (1) shall be referred for resolution under section 27 (dispute settlement). [Note: these extensive provisions were outlined in Report 1]. In Ghana the Minister cannot reject the application but must give ample time for remedy and his decision is open to dispute settlement. In the real world the problem would have to be significant. In the Kazakhstan law, it is open to the competent body to refuse to accept any of the proposals of the applicant without reasons and without allowing for remedy. The only remedy is to refuse after a period of time and issue a new tender. The Kazakhstan Joint Economic Research Program 21 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 applicant is subject to various decisions along the way and, as an example, could lose its position if it and the competent body disagreed, for example, on the number of Kazak citizens they would employ. Local industrial benefits have a higher priority than the prospecting plan, as they are a consideration of the decision not the plan, and as the targets for employment or use of services and goods can be totally subjective, it opens the process to possible dispute. The other jurisdictions which were reviewed also have specific provisions as to what the rights and obligations of the applicants are and what provisions are applicable to the application for a mining lease. For instance, in Western Australia, an application for a mining lease must be on the prescribed form, include the rent for the first year, the application fee, a mineralisation report, a resources report and a mining proposal (which can come after the application). While the Minister can refuse the application, he must have adequate grounds, which is especially difficult as there has been a public hearing and a recommendation from the Mining Warden. It is understandable why a foreign mining company would be concerned about the process of transition from exploration to production in light of the internationally accepted standards of transition from exploration to production. Elsewhere it is extremely difficult to deny issuing the mining lease to an exploration right holder. In this law, it is easy to unilaterally deny issuing the subsurface right. In short and to repeat, the only right the successful applicant has is to negotiate a contract. It is not guaranteed a mining right if certain conditions are met as is the case elsewhere. 1.2.5 Termination Provisions Articles 40 and 72 deal with termination of rights. As indicated in the previous section there are a myriad of reasons for terminating a contract: Article 40 deals with the termination of subsurface use and Article 70 deals with the termination of the validity of the contract. Under Article 40, there are four reasons for termination of the right to subsurface use: 1. termination of the validity of contract 2. expiration of the term of validity or revocation of permits for activities other than mining 3. decisions by Government concerning prohibition of blocks (Article14) 4. liquidation Kazakhstan Joint Economic Research Program 22 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 The first and third of these reasons are problematic for investors. The termination of the validity of the contract could be a unilateral, and possibly unfair, action of the government. Decisions regarding the prohibition of blocks also could cause concern by potential investors. The reason for prohibiting blocks are national security, safety of the population and protection of the environment. These same reasons would have been present before any contract was negotiated. It is unclear what the reasons might be especially in the exploration phase of activities that could not have been contemplated earlier. Article 72 (3) contains a number of instances where unilateral termination of the contract by the State is possible: 1. if there are two violations of the obligations in the contract and they have not been addressed, 2. if the user fails to get the approval of the competent authority for an assignment of the right, 3. if within 2 months from a notice by the competent authority the user fails to confirm its consent for negotiations for an amendment or addition to the contract, 4. where the parties after negotiation for a period of up to four months the amendment or addition of conditions fail to agree, 5. "within a period of up to six months from the date of reaching a coordinated decision in respect of restoration of the economic interests of the Republic of Kazakhstan, the parties fail to sign amendments or additions..." Article 72 (4)(3), or 6. Article 72(5) as stated previously where the State can terminate for changes in economic interests and national security. Very few of these are generally considered grounds for termination of a contract. The negotiation of amendments or additions to either the contract or a prospecting plan should not be reason for termination unless the changes go to the heart of the mining activities. Compared to other countries, especially those reviewed in Report 1, termination by the government is something done in only the most extenuating circumstances. Chapter 6, section 3 of the Swedish Mining law states: "An exploration permit or exploitation concession may be revoked if the permit or concession holder fails to fulfill his or her obligations under this Act or as set out in conditions attached to the permit or concession, or if the Kazakhstan Joint Economic Research Program 23 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 permit holder violates conditions attached to permission for exploration work, or if other exceptional reasons exist." Section 68(1) of the Ghana Mineral law states: "(1) The Minister on the recommendation of the Commission may suspend or cancel a mineral right if the holder: (a) fails to make payment on the due date, whether due to the Republic or another person, required by or under this Act, (b) becomes insolvent or bankrupt, enters into an agreement or scheme of composition with the holder’s creditors, or takes advantage of an enactment for the benefit of its debtors or goes into liquidation, except as part of a scheme for an arrangement or amalgamation, (c) makes a statement to the Minister in connection with the mineral right which the holder knows or ought to have known to be materially false, or (d) for a reason, becomes ineligible to apply for a mineral right under this Act. (2) The Minister shall, before suspending or canceling a mineral right under subsection (1), give notice to the holder and shall in the notice, require the holder to remedy a breach of the condition of the mineral right within a reasonable period, being not less than one hundred and twenty days in the case of a mining lease or restricted mining lease or sixty days in the case of another mineral right and what the breach cannot be remedied, to show cause to the reasonable satisfaction of the Minister why the mineral right should not be suspended or cancelled." In both instances there must be a thoughtful process before any unilateral cancellation takes place. Note the words "exceptional" in the case of Sweden. In most countries the holder of the right would have a process available before any cancellation occurs. This is not the case in the Kazakhstan law. In Ghana the holder of the right has the right to show the Minister why he should not cancel the licence. Having specific terminations based on the actions of the holder rather than the discretionary decision of the government is the norm. This gives confidence to the holders that their right is protected except in dire circumstances. Even in cases of national security, governments would attempt to allow the activity to continue. Kazakhstan Joint Economic Research Program 24 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 1.2.6 Transfer/Assignment Article 36 of the law deals with assignments and transfers. There are 14 subsections and many subsections of those. The sections are very prescriptive and outline exactly when an assignment may take place. A permit is required in order to effect an assignment. It covers a myriad of circumstances which are confusing. For instance, Article 36 (3) states: "Primary issuance of the formal market of securities shares or other securities evidencing ownership of shares or securities convertible into shares of a legal entity that is a subsurface, a legal entity which has the ability to directly and (or) indirectly determine and (or) influence on the subsurface made by such decisions, if such legal entity's main activities are related to subsoil use in Kazakhstan, including the initial public offering on the organized securities market of securities issued under the additional issue, with the permission of the competent authority issued in accordance with Article 37 of this Act." It is questionable as to what this is trying to address. If it is the transfer of shares in a company which has subsurface rights or in a parent company of the company having the rights, this type of control is unusual elsewhere, but if it did exist, it would be in the Securities Act, which normally covers such assignments and transfers of all companies. Whatever it is it really does not belong in a mining law. Pledges require a permit and credits received against a pledge of a right of subsurface use must be used for subsurface use or organization of subsequent processing in the territory of the Republic of Kazakhstan as provided in the subsurface use contract, by the subsurface user himself or by a subsidiary organization with 100% "participatory interest of the subsurface user in its authorised capital". [Article 36(4)]. Again, it is difficult to understand why this is in a mining law. Other provisions deal with the assignment of the right of subsurface use relating to exploration associated with the state geological study of the subsurface which was granted to the subsurface user under the agreement. To assign this needs the permission of that body. It is difficult to understand why such a provision is required. If the user has paid for the information, it should be theirs to do with as they want, subject to restrictions under this law. The information should not be assigned. In a partial assignment of the right of subsurface use, the parties must coordinate with the competent body the mutual rights and obligations within the framework of activities. It is uncertain why this would be necessary for the government to be involved at all. Normally a joint venture or other type of agreement is signed Kazakhstan Joint Economic Research Program 25 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 which outlines the participating interest and how the parties will conduct activities. Such a provision limits the freedom to contract and control one's business dealings. Article 37 outlines the procedure for the issue of permits concerning alienation of the subsurface use right. Information has to be provided on participatory interest, shareholding, securities, authorised capital, participants, proof of ownership of shares, all information on the buyer, its previous activities over 3 years, and all its financial, managerial and organizational data, information on the price. The provisions do not apply to national companies or national managing holding company or subsidiaries. Article 38 deals with the transfer of the right of subsurface use and deals with reorganization of the legal person. It does not apply to the reorganization of a national company or national managing holding company. In all of this the competent body introduces the appropriate amendments to the contract. In Article 34(4) the law a transfer of a right of subsurface use means "the arising of the right of subsurface use with a successor in case of reorganisation of a legal person and in case of death of a natural person which has the right of subsurface use." Is this the limit of a transfer under this law? If so, it would preclude a transfer to another company which bought out the subsurface user. This is restrictive for foreign investors who would normally be involved in farm-ins, buy- outs etc. These provisions on assignment and transfer are confusing, prescriptive, and do not recognize the freedom to contract. There are10 pages in a law pertaining to assignment and transfer. The government should always have the right to approve a transfer or assignment but it should not go behind the commercial dealings unless there is commercial misfeasance or criminal activity involved. If the assignee is a credible company and undertakes to abide by the contract terms, the government really should have no need to go into such confusing detail on what can and cannot be assigned or transferred. The Swedish mining law in Chapter 6, Section 1 states: "An exploration permit or exploitation concession may be transferred with the permission of the authority responsible for considering applications. With regard to an exploration permit, permission may be granted if the requirements set out in Chapter 2, Section 2, second and third paragraphs, are met. Note: Chapter 2, Section 2 states that an exploration permit may not be granted to a person who lacks the possibility of intention of doing the Kazakhstan Joint Economic Research Program 26 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 exploration work or who has previously proved to be unsuitable to carry out exploration work] An application for permission to transfer an exploration permit shall be in writing and shall contain particulars of the names, domiciles and addresses of the applicant and the transferee and, if the applicant or transferee is a legal entity, persons to contact. A copy of the exploration permit shall be attached to the application." The Western Australia Mining Law does not even have a section on assignments or transfers. Instead it merely states in the appropriate section that mining rights may be transferred. For exploration, Section 64 states: During the first year of the term for which an exploration licence is granted, a legal or equitable interest in or affecting the exploration licence shall not be transferred or otherwise dealt with, whether directly or indirectly, unless — (a) the dealing or other transaction in or affecting the interest arises in the due administration of the estate or affairs of a holder — (i) who is dead; or (ii) who is a person who is an insolvent under administration within the meaning of the Corporations Act; or (iii) who is otherwise incapacitated at law; or (iv) which is in the course of being wound up (not being a voluntary winding up);or (b) prior written consent to the dealing or other transaction in or affecting the interest is given by the Minister or an officer of the Department acting with the authority of the Minister. The Papua New Guinea Mining Law has several sections dealing with legal or equitable interests.9 116. INTEREST IN TENEMENT TO BE CREATED IN WRITING. A legal or equitable interest in an existing or future tenement is not capable of being created, assigned, or dealt with whether directly or indirectly, 9 This is of interest as the writer of this paper was responsible for developing the approach and drafting of this section in the PNG law. Kazakhstan Joint Economic Research Program 27 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 except by a written instrument signed by the person creating, assigning or otherwise dealing with the interest, or by his duly authorized agent. 117. DEALING IN TENEMENTS. Subject to this Act, a legal or equitable interest in a tenement may be sold, transferred, mortgaged, charged or otherwise encumbered, transmitted, seized under a warrant or writ of execution, or otherwise disposed of or made the subject of any other dealing. 118. TRANSFER OF A TENEMENT TO BE APPROVED AND REGISTERED. (1) An application for approval of a transfer shall be in writing and shall be submitted with an instrument of transfer on the prescribed form to the Registrar, who shall submit the application to the Board for its consideration. (2) The Minister may, on the recommendation of the Board - (a) approve; or (b) refuse to approve, an application under Subsection (1) and any approval may be subject to such conditions as the Minister considers necessary in the circumstances. (3) Where the Minister approves a transfer under Subsection (2)(a), the Registrar shall register the instrument of transfer. (4) An instrument of transfer of a tenement does not convey a legal or equitable interest in the tenement unless and until it has been - (a) approved by the Minister under Subsection (2)(a); and (c) registered under Subsection (3). 119. INSTRUMENTS, OTHER THAN TRANSFERS TO BE APPROVED AND REGISTERED. (1) This section applies to - (a) an instrument by which a legal or equitable interest in an existing or future tenement is or may be created, assigned, or otherwise dealt with, whether directly or indirectly, which is not an instrument of transfer to which Section 118 applies; and (b) a tribute agreement. (2) No: - Kazakhstan Joint Economic Research Program 28 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 (a) legal or equitable interest is created, assigned or otherwise dealt with by an instrument, either directly or indirectly; and (b) tribute agreement is valid, unless and until the instrument has been - (c) approved by the Minister under Subsection (4)(a); and (d) registered under Subsection (5). All of these countries allow transfers and assignments and very simply allow for the interests to be created. They require approval to ensure there is no commercial or criminal issues connected with the transaction or the new holder would be unable undertake the obligations. The commercial dealings are not questioned. The provisions in the Kazakhstan law go well beyond what is required. These are important provisions because they give companies the ability to attain financing and technical capacity in their exploration activities. They need to be free to do this. The provisions in this law are onerous, confusing and intrusive. 1.2.7 Local Benefits Most countries which are major resource economies, struggle with the transfer of knowledge and the use of local goods and services. It is commendable that Kazakhstan has provisions in the mining law that requires subsurface users to use local personnel and goods and services. As part of the obligations the users must use equipment, materials and finished products manufactured in the country "provided they are consistent with the requirements of the tender" and attract work, services in the operations provided those services are "consistent with the standards, price and quality characteristics of goods and services provided by non-residents" of the country. Article 75(10) outlines the obligations of a subsurface user. Article 78 (1) states that subsurface users and their contractors are obliged to purchase goods, work, and services from Kazak manufacturers "provided that they are consistent with the requirements of a given project document and the legislation of the republic of Kazakhstan." There are also provisions to give preference to Kazak personnel and for training of local personnel. It is assumed that this means the goods and services would have to be competitively priced but it is not specific in its wording. The provisions of the law certainly stress that this is a priority of government but it is unclear whether these provisions have the flexibility to accommodate green-field exploration activities. Kazakhstan Joint Economic Research Program 29 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 It also provides that in selecting a winner the organizer must reduce the price of the bids submitted by Kazak manufacturers by 20%. [Article 78(2)] which is preferential treatment on its face and does not allow for competitive pricing despite what is said in the law. It is also unclear what measures the government is making to assist local industry to be internationally competitive and what measures it is instituting to develop service industries and research and development initiatives. One example of the need for benefits plans can be found in the offshore legislation in Eastern Canada. The Accord Acts (enacting agreements between the federal and provincial government adjacent to the offshore area) state in Section 45 "In this section, "Canada-Nova Scotia benefits plan" means a plan for the employment of Canadians and, in particular, members of the labour force of the Province and, subject to paragraph (3)(d), for providing manufacturers, consultants, contractors and service companies in the Province and other parts of Canada with a full and fair opportunity to participate on a competitive basis in the supply of goods and services used in any proposed work or activity referred to in the benefits plan." The operative words are "full and fair opportunity to participate on a competitive basis in the supply of goods and services used in any proposed work." The Act goes on to make it necessary for the licence holder to have education and training plans and research and development plans. The reports on these plans are yearly. The Board has guidelines as to what is necessary. There is no ability on the part of the Offshore Board to terminate the licence if companies do not meet their targets. Instead, these benefits plans are made public as are their reports so it is public pressure that is a motivation for the companies to meet their targets. In addition the provincial government normally enters agreements with the companies and can use the provisions of these agreements to get some rectification. As already mentioned in this Report, the award of a competitive tender for exploration is based on the offered amount of the signature bonus, bank guarantee, expenses for social-economic development, Kazakhstan content, training, content of goods and services, research and development and payment for geological information. This is problematic for exploration activities. According to Article 60 regarding the award of subsurface rights on the basis of direct negotiations does not deal with exploration at all. Instead it deals with the transition between exploration and production and states that the competent body and the user will determine the conditions of the production contract in the Kazakhstan Joint Economic Research Program 30 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 amount of Kazak content in goods, services, work and personnel and the expense for the socio-economic development of the region and development of its infrastructure. It is interesting to note that Article 58(3) states that bids for production contract must provide for an amount of signature bonus and the amounts of personnel, goods, services to be purchased. This must mean that despite providing for these items, when the bid is awarded it must be agreed as to what these provisions will be. It is confusing. What is of concern here is that there is no consideration of the work program, the expenditures to be spent on exploration in awarding the tenders. Local benefits plans are needed when projects are planned. But these provisions seem difficult for exploration activities in that there is often few people employed or infrastructure required when exploring. The other provisions in Article 74 are the amount of reporting that is necessary for the procurement of goods and services on a quarterly basis on purchased goods work and services and personnel commitments, training and so on. In addition annual reports are necessary for procurement data. Medium and long term plans are necessary. Again this does not fit for exploration as much as it would for production. It is a lot of work for very little benefit. The provision of local goods and services, personnel and procurement are extremely political issues. There are often issues which arise making it impossible to meet goals and objectives. Despite the reports being made, there does not seem to be provisions for negotiating changes and allowing for shortcomings. In fact the contract can be terminated if these goals are not reached. It seems a very subjective test would be used to decide to terminate a project because certain personnel were not hired. In exploration activities such long-term plans are not necessary. There needs to be more flexibility in these provisions and it should not be grounds for termination of an exploration contract. There should also be provision to introduce a fair, competitive system for both national and foreign companies. These provisions are geared to the production activities of oil and gas companies and possibly mining companies. They do not take into account the differences in mining exploration. In effect it puts a burden on potential explorers over and above exploration programs. Kazakhstan Joint Economic Research Program 31 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 1.2.8 Administration As pointed out in Report 1, the administration of the law is very important. The ability to process contracts, licences and leases is necessary in order to compete internationally. Companies look for a simple, efficient process. The Western Australia example where targets are set for the timely processing of mineral titles is a clear example. The Kazakhstan legislation is filled with procedures and processes. There are timelines for each activity but the confusion of the procedures and the inter- relationship of varying procedures leaves the question as to whether the process is efficient or effective. For example, Article 68(2) states that the conclusion of the contract for exploration subsurface use "must not exceed eighteen months from the date of the passing if the decision by the competent body...". This is for both direct negotiations and competitive tendering. Eighteen months is far too long to issue an exploration right. In none of the examples reviewed in Report 1 was there this length of time for the issuance of the right. It is one of the first matters that should be addressed in any changes coming forward. For the first quarter of 2013, the Department of Mines and Petroleum in Western Australia approved 98% of the exploration licence applications within the target of 65 business days. This is with a public hearing process taking place on every application. They also finalized 92% of the work program applications within 30 days. Finalizing exploration rights should be counted in days not months. While it is the case that Kazakhstan uses competitive bidding and thus there is a longer period between the bids going out and being received, once the bid is received the process should go quickly. More importantly, apparently the approval for a prospecting plan requires the approval of 9 state bodies. The law limits the time for approval to 6 months. This seems impossible as approvals from these 9 bodies are done sequentially rather than in parallel. This means the environmental assessment does not happen until other approvals are obtained before its turn. This is untenable. There is absolutely no reason each body cannot review its particular interest and advise its assent or denial in parallel. This process is cumbersome and inefficient and ineffective. The 24 month period which is required to negotiate a contract could well be passed before all these approvals are forthcoming. This demonstrates that the administrative system and the processes are not in sync with what is happening elsewhere. This is a real disincentive and this needs to be addressed as part of anticipated reforms. There are procedures throughout the law and it is impossible to review these in detail. However, it is clear that many government organizations are involved in Kazakhstan Joint Economic Research Program 32 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 decision-making. It is unclear how the Ministry plays in coordinating the reviews of other Departments so as to make decision-making timely and effective. 1.2.9 Issues regarding exploration This law raises a number of issues regarding mining exploration. A number of these have already been noted. The biggest issue with regard to this law is the processes and procedures that accompany almost everything that happens. Amendments to a work program must go through the same process as the initial approval which is sequentially through all the state bodies for a possible total of 18 months. Work programs must be done and approved on a yearly basis. Prospecting plans are for six years and, while there can be additions or amendments, they have to go through the same procedure as was in place for the initial program and could be denied if one of the reviewing bodies disagrees. This could potentially be 18 months. It seems incongruous that this process for an amendment or addition would have to have such a review. It certainly would not elsewhere. What if during the contract period a deposit is found and the user wants to change their approach to exploration to focus more on that deposit. That would be in the government's interest, yet the user would have to wait for this cumbersome, ineffective process before it could begin this new approach. It appears that exploration contracts must be subject to competitive bidding as direct negotiations are only available to a holder of an exploration contract where they have an exclusive right to go to production. Direct negotiations seems to be possible if a national company is part of the application. However, a foreign investor would be faced with the competitive bidding system and what that entails. The procedures leave some questions. For instance Article 54 deals with the procedure for conducting repeated tenders. If the initial tender is declared invalid the competent body may decide to reconsider the competition or amend the bid documents and go to a new competition which will go through the same procedure. If it goes for the latter, the initial bidder (which it is assumed will bid again) will not be charged the fees and cost of the geological package. Another paragraph gives the competent body the right to go to direct negotiations for the one bid that was not rejected in the initial tender process. The negotiations would be on conditions not less than that initial bidder stated in its competitive offer. It is totally unclear here when the competent body would go to a new tender or enter direct negotiations. This adds immense uncertainty to the process of Kazakhstan Joint Economic Research Program 33 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 obtaining a right. If after a competitive bid process, only one bid is valid or appropriate for award (it meets technical requirements), it should be awarded without question. Nowhere in the law does it state that two different contracts can be for the same area or what the subject of those contracts is. Yet Article 70(2) suddenly deals with the situation where operations are performed by two or more users under different contracts within the same area. The article states that the parties must agree how they will conduct their work. If they do not agree "the subsurface user that performs operations relating to exploration or production...shall have the right to establish the procedure of conducting of work." The following paragraph states that if operations are performed within the one area by two or more users, the user with which the contract was concluded earlier has the right to establish the procedure for conducting work. The second user must "observe the procedure". It is uncertain what this means but it is assumed that the second user must abide by the decision of the earlier user. This procedure would be less questionable in the event of two mining production projects. However when it comes to exploration it leaves many questions. Do the parties have contracts for the same minerals in the same area or for different minerals? There is nothing in the law that clarifies this matter. It also puts a second user in a position where the operations might be affected negatively both in the case of exploration and production. It also raises the question as to why a contract would be concluded with two or more different parties over the same area that where their respective operations would be affected without dealing with it before the contracts are concluded. 1.2.10 Competitive Bidding System The bid system is rife with time limits that seem confusing and which are very long. In Article 47(4) the time to submit bids to participate in the tender must be within one month from the publication of the tender notice. Yet Article 48(3|) states that the applicant which is accepted for participation in the bid will be notified within one month from the date of that the competent body accepts the bids to participate in the tender. Article 52(3) states that the summarisation of the tender results must not exceed 15 days from the submission of the bids. So the time involved in submitting bids to participate and the announcement of a successful bidder is a total of five months - one month to apply to participate, one month for the competent body to decide on pre-selected bid list, and 3 months for the Kazakhstan Joint Economic Research Program 34 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 applicants to submit bids on the tender, and 15 days to summarise the results and make a decision on the successful bidder for a total of 5 months and 15 days. Article 47(5) states the time between publication of the tender and the date of starting the summarisation may not be less than 4 months. The actual process is a 5 month process. Article 68 states that the time for concluding the subsurface contract "must not exceed eighteen months from the date of the announcement of the successful bidder. With the inefficient administrative process it is doubtful if this time limit can be accomplished. Direct Negotiations Direct negotiations require a bid to participate. Article 57(6) states the negotiations must be conducted within 2 months of the arrival of the bid. (It can be prolonged by the competent authority). If accepted, a protocol is signed by the applicant. The paragraph goes on to say that the competent body shall notify the applicant of its decision within 10 days from the signature of the protocol. The question is why the applicant would sign a protocol before the competent authority has made its decision. This again, could be translation issues, but it is confusing for the reader. As pointed out previously in this Report, the transition from exploration to production is problematic for potential investors. Two months from the receipt of the bid to conclude a production contract, the competent authority and the applicant must determine the amount of Kazak content and expenses for socio- economic development and development of infrastructure. After this has been concluded, a protocol will be signed by the parties. If there is not agreement on those conditions, within 3 months from the beginning of negotiations, the competent authority can decide to approve or reject the bid. If the applicant is at fault for there being no contract within 24 months from the signature of the protocol, the applicant loses the exclusive right to conclude the contract and it shall be put up for tender. It does not provide for the actual reasons why the applicant may be at fault or excuse things which might occur that would delay this (for example a force majeure event). Term for exploration Article 69 states the contract for exploration has a term of 6 years. This is too short a time for exploration. Exploration is a slow process and it can be many years before an economic deposit that is discovered. It is estimated that at best it is 7 to 10 years before a new mine will commence when a new discovery is made. It can be longer especially when there is reluctance amongst investors to advance Kazakhstan Joint Economic Research Program 35 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 the money to explore.10 Other commentators suggest it is closer to 10 to 15 years. Most countries give adequate time to explore and most of those reviewed allow longer than 6 years and allow for extensions beyond the initial term. Even though a geological deposit is found it does not necessarily mean it is an economic deposit. An economic deposit is achieved when: 1. capital for development can be raised within a reasonable period of time. 2. tenure and ownership is respected 3. a reasonable profit margin can be projected 4. technology for the mining and treatment exists or can be developed within a reasonable time 5. social and political acceptance of the mining activity is positive.11 It does not appear that there is a renewal or extension available for the exploration contract. Article 69 which established the term for exploration as 6 years goes on to say that the term of validity with regard to offshore petroleum operations may be prolonged for up to 2 years. Article 62(3) confirms this position. In order to do the appropriate exploration, there would have to already be a known deposit to do a program in a 6 year period. It is not adequate for greenfield exploration which is a longer process. The law needs to have flexibility to ensure that the realities of exploration can be accommodated. One of the other issues is the definition of mineral. In the law there are seven definitions of minerals. These are: mineral raw materials, main useful mineral, useful mineral, strategic mineral raw materials, associated useful minerals, technogenic mineral formations and commonly occurring minerals. This is unnecessary and merely confuses the reader. One definition is sufficient and if certain minerals are not included or are treated differently that needs to be either put in the definition or be subject of a section explaining its special treatment. In Western Australia mineral is defined as follows: 10 Mineral Exploration, Mineral Information Kit for Aboriginal Communities, Natural Resources Canada, 2004? 11 Willard Lacy, An Introduction to Geology and Hard Rock Mining, Rocky Mountain Law Foundation, Science and Technology Series. Kazakhstan Joint Economic Research Program 36 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 "minerals" means naturally occurring substances obtained or obtainable from any land by mining operations carried out on or under the surface of the land, but does not include — (a) soil; or (b) a substance the recovery of which is governed by the Petroleum and Geothermal Energy Resources Act 1967 or the Petroleum (Submerged Lands) Act 1982; or (ba) without limiting paragraph (b), geothermal energy resources as defined in the Petroleum and Geothermal Energy Resources Act 1967 section 5(1); or (c) a meteorite as defined in the Museum Act 1969; or (d) any of the following substances if it occurs on private land — (i) limestone, rock or gravel; or (ii) shale, other than oil shale; or (iii) sand, other than mineral sand, silica sand or garnet sand; or (iv) clay, other than kaolin, bentonite, attapulgite or montmorillonite; In the Philippine law the definition is: "Minerals" refers to all naturally occurring inorganic substance in solid, gas, liquid, or any intermediate state excluding energy materials such as coal, petroleum, natural gas, radioactive materials, and geothermal energy. The South Africa law defines mineral and includes stockpiles, tailings and so on: "Mineral means any substance, whether in solid, liquid or gaseous form, occurring naturally in or on the earth or in or under water which was formed by or subjected to a geological process and includes sand, stone, rock, gravel, clay, soil and any mineral occurring in residue stockpiles or residue deposits but excluding: (a) water, other than water taken from land or sea for the extraction of any mineral from such water; (b) petroleum; or (c) peat" Kazakhstan Joint Economic Research Program 37 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 1.2.11 Dispute Resolution There are a few provisions in the law which allow for appeals. For instance the result of a bid can be appealed. However there are no grounds given for such an appeal. The loser would need to be able to justify its reasons. There is no mention of what legal processes are involved. The contract does allow for provisions on dispute settlement but it is unknown what these are. Foreign investors need the assurance that where there is unfairness, bias or non-transparent procedures there is an independent judiciary which is not open to political pressures. Otherwise international arbitration provisions are necessary. In addition, there needs to be consideration of circumstances where contracts are terminated. Fair processes and the ability to address the problems are absolutely necessary and they are lacking in this law. 1.3 Conclusion There are many issues with this law as it pertains to exploration. The law is very prescriptive in nature, is unclear as to intent in many provisions (which could be caused by the poor English), has little flexibility, requires major processes for every decision that is made. Despite the fact there are model contracts, these are open to changes once negotiations start which means there may not be equal treatment of every user. In reading this law in its entirety, it is clear it was meant for production as there is little in it which recognizes the special requirements needed to enhance exploration activities. Nothing in it demonstrates to the reader that there is an inherent policy addressing the unique issues facing exploration such as time to find deposits, short timelines in issuing rights, extensions of term, etc. It appears the thinking behind the law was dealing with production activities and exploration was an after-thought. The provisions outlined in the Report demonstrate that the Kazakhstan law does not contain the appropriate provisions to make it competitive with countries that are promoting mining. Its administrative system is very inefficient. Its lack of providing geological information makes it far less competitive than other countries. Geology is the first thing that will attract prospective investors. The lack of availability is definitely a detriment to attracting new investors to the country. If there is to be a change in attracting foreign investors there needs to be changes which address exploration on a stand-alone basis and the commitment to establishing competitive standards and policies. Kazakhstan Joint Economic Research Program 38 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 2 RECOMMENDATIONS In these reports, there has been consideration of what other countries or jurisdictions are doing to attract exploration activity. Their laws, regulations, administrative procedures, and approach to providing geological information were all examined. In the second Report, the law of Kazakhstan was reviewed to ascertain whether its provisions were competitive with the countries that had been reviewed and with international principles and policies. Based on these two Reports, there are major issues that Kazakhstan needs to address in order to become competitive enough to attract the international exploration funds. Based upon the review the following recommendations area made: 2.1 Official English Translation The present law needs to be translated into good English which can be understood. This will make the provisions less confusing. It is imperative that this law be provided online in English as well as all the subsidiary legislation that pertains to mining. 2.2 Online Availability of Information If the international mining community is to become more familiar with Kazakhstan, its geological potential and its mining regulatory regime, information must be available on line with open access. This needs to be in English and should Kazakhstan Joint Economic Research Program 39 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 include a simple outline of the requirements for mining companies similar to the Information Bulletin from Western Australia. 2.3 Exploration Policy and Mining Law Required Before developing any new amendments to the present law, there needs to be consideration of drafting a new law which deals with mining exploration and production. Starting with the development of a policy document, which will outline the directions and changes that need to be instituted, it will give an opportunity to develop the changes suited to the Kazakhstan system. This will give time for discussion and will define the approach of the country to mining. It will also outline what needs to be done in order to be competitive. It will outline reasons for changes so that people understand the reasons for change. Once the policy is defined and approved, a new law needs to be drafted which will contain international principles and policies developed by the Government. The Government of Kazakhstan has undertaken this review to discover what other countries that have vibrant mining sector are doing. It has also asked for a review of its own mining law which Report 2 has found wanting when compared to what is happening elsewhere. To demonstrate a commitment to attracting new mineral investment in the country, a new mining law is necessary for the following reasons:  there are numerous amendments required to update the present law to international standards and to put those in the present law will make it more confusing. It could also impact on the provisions pertaining to oil and gas.  the present law is really oriented to the production phase of oil and gas and less so of mining production. It is not a law which has considered the needs of exploration in either the mining sector (or oil and gas sector). Having the two sectors under one piece of legislation does not work well mainly due to the fact that the two sectors are very different in both economics and technical aspects.  a new mining law and new principles will create an environment whereby new administrative procedures can be implemented which will be more effective and efficient than is the case at present.  a new mining law will demonstrate to the international mining community the seriousness of the Government of Kazakhstan's desire to become a major mining country.  a new law will recognize international business practice in the sector which is needed to compete with other mining countries. Kazakhstan Joint Economic Research Program 40 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 2.4 Specific Issues to Be Addressed Whether the Government's decision is to draft a new law or draft amendments to the present law, there are a number of issues which must be addressed in either. Reports 1 and 2 have outlined international best practice and what is required if Kazakhstan is to become competitive. 2.4.1 Competitive vs. "first-come, first-serve" approach to issuance of exploration rights. The other reports demonstrate that competitive bidding does not fit well into new greenfield exploration. It is better suited to areas where there is a lot of geological information already amassed. Most countries with the competitive bidding process have this approach. It would make Kazakhstan more attractive if the process of obtaining rights were open to individual application rather than the competitive bidding system for exploration. If the competitive bidding is maintained then it needs to be changed to shorten the time frame for issuing the exploration right and be subject to a more efficient process than currently exists. If a licence were issued, this could happen based on the prospecting plan and expenditures like it is in other jurisdictions. The signature bonus approach to competitive bidding should be changed to reflect what other countries are doing. These were reviewed in Report 2.This approach is oil industry practice and is untried in the mining exploration industry. It is also a disincentive to attract new explorers. 2.4.2 Licence vs. Contract The negotiation of a contract for exploration is too lengthy a period. It discourages new investors as they are able to get a mining right much more quickly in other countries. Consideration should be given to allowing for a licence to explore with the obligations outlined in the law and the first-come, first-serve principle attached to the process. The licence would be issued based upon technical conformance for prospecting plan and expenditures and would have a term that can be extended. It would also have specific time lines for the maximum time for issuance as is practiced in the other countries under review. Based upon what other countries are trying to do to be competitive, the time for an issuance of an exploration licence should be no more than three months. The requirements for licences should be similar to the countries which were examined in Report 1. Kazakhstan Joint Economic Research Program 41 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 The underlying policy should be to allow new entrants as quickly and as simply as possible while still ensuring legitimate companies are conducting the exploration. 2.4.3 Transfer/Assignment New provisions are needed which would recognize the commercial practices of mining and the need to raise funds for exploration on the international market. Allowing businesses to conduct their own affairs within the law is a necessary step to ensure new players are introduced and rights holders are able to conduct their affairs freely so they can undertake ambitious exploration programs. The present law in Kazakhstan is complicated, intrusive, and fails to recognize normal business practice. 2.4.4 Termination New provisions are needed to ensure that the rights are protected and that rights holders have the ability to rectify deficiencies with regard to their rights or operations before termination is possible. 2.4.5 Security of Title New provisions are required to ensure that the discoverer of a deposit who holds the exploration rights is able to develop and produce the minerals found. At present there is only the right to contract and the process allows the right to be forfeited on a time basis. This should never be a reason for terminating the security of title. 2.4.6 Dispute Resolution Any new provisions in the law must ensure that there are appeal provisions that define who and where the appeals will be heard, under what circumstances and the timing. There need to be provisions which allow rights holders to deal with their rights and give them assurances that their rights are respected and protected. 2.4.7 Benefits There is no quarrel with the government wanting to ensure that goods and services and personnel from Kazakhstan are given every opportunity to be involved in the industry. The process that is included in the law is geared to production and a long-term presence in the country. Simpler procedures and obligations are need for the exploration activities. For instance, a plan on how they will procure local goods and services and personnel over the life of the exploration right with annual reviews would be more acceptable. Kazakhstan Joint Economic Research Program 42 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 Failure to meet local benefits obligations should not be a reason to lose an exploration right or mining right. 2.4.8 Non-Discrimination It is recommended that provisions in the law giving preferential treatment to national and state-owned companies be reconsidered in order to establish fair and transparent rules for all mining entities. This principle is a key issue in attracting foreign investment and needs to be addressed to make the mining sector more competitive. 2.5 Geological Information and Administration Regardless as to whether there are amendments to the present law or a decision to proceed with a new law, the issues of the provision of geological information and the administrative decision-making process are two areas which must see reform if new entrants are to be attracted to the mining sector. 2.5.1 Geological Information Both Report 1 and 2 have stressed that the generation and provision of geological information is of prime importance in attracting new explorers. It does not bear repeating all the reasons why it is essential as Report 1 thoroughly examined it. It is absolutely key to change the way this data is treated if there is to be any success in future in attracting new entrants. It is recommended that the following be addressed:  the classification system used to determine reserves and resources so that companies can use international standards. This needs to be flexible.  geological data should be open to anyone who requests it at any time and it should be free of charge.  a data management system needs to be set up which is available on the internet.  data should be generated by the geological body in areas where there are potential mineral deposits and provided for free. This should be at the government's cost. 2.5.2 Administration The present system of administering the law is unwieldy, non-transparent, ineffective and inefficient. There needs to be a complete overhaul of the decision- Kazakhstan Joint Economic Research Program 43 Kazakhstan Legislation for Allocation of Mining Exploration Rights REPORT 2 making process. A system such as that used in Kazakhstan would not be able to cope with a huge number of exploration applications. Even if there is a new law, it will not adequately work if the decision-making process is not reformed. Kazakhstan will never be able to compete with most mining countries if this administrative system stays as it is. The sequential decision-making process is inefficient and needs to be reformed to be a parallel system overseen by the ministry responsible for mining. Inefficiency costs the government money. As noted in Report 2, the study by PriceWaterhouseCoopers in New South Wales, demonstrated that inefficiencies in administration cost the government in royalties, income and employment opportunities. As the old adage goes "time is money" and the time involved in the present administrative system is unacceptable. A performance management system needs to be instituted and training needs to take place to commence the change in this area. Kazakhstan Joint Economic Research Program 44