Exploration and mining industry reforms expected in 2010 in the Kyrgyz Republic

Aicholpon Jorupbekova

It is expected that 2010 will bring fundamental changes to the Kyrgyz Republic’s metals and
mining sector. The Ministry of Natural Resources, the main mining authority of the Kyrgyz
Republic, has introduced a set of new laws and regulations aimed at reforming existing legal
framework adopted back in 1997.

Proposed new laws and regulations – among which are mining concession laws, subsoil use and
protection laws, law on production sharing, amendments to existing tax and land codes – contain
far-reaching and fundamental changes to the regulation of the mining sector. Pursuant to the
concept of the legal reforms declared by the government, changes were drafted to ensure greater
security of mineral rights granted to companies, minimize state interference in the operation of
companies and apply economic instruments as opposed to administrative tools to instigate rapid
exploration and production in the mineral resources sector.

Even though these laws drafted by the Ministry of Natural Resources are only at the drafting and
discussion stages, the main concepts are likely to remain and laws will be adopted and enter into
force in 2010.

Based on our initial review, the proposed draft laws introduce changes that should greatly benefit
mining and exploration companies and eliminate some of the major difficulties that companies
face under the current legal framework. The main changes are related to procedures for obtaining
mining rights, freedom of transactions with licences and concessions, the elimination of barriers
for obtaining surface rights, and minimisation of state interference in company operations.

Different regimes of obtaining mining rights

First of all, the procedure for obtaining exploration and mining rights will change and companies
will have the right to select from a number of different regimes under which exploration and
mining rights are granted. Currently, absolute majority of exploration and mining rights are
granted through direct negotiations with the mining authority by issuing a licence. However,
working under a licence meant that companies were required on a regular basis, usually every 2-
3 years, to apply for extension of a licence, strictly follow licensing requirements which were too
general and did not meet their individual needs. In most cases, small failures to meet licensing
terms could lead to disproportionate punishment in the form of licence revocation. Should the
proposed changes become effective, companies will have a choice to either obtain exploration or
mining licence and operate under a general regime or enter into more flexible and negotiable
concession or production sharing agreements. As opposed to licensing, concession and
production sharing agreement regimes will allow the companies to negotiate with the state
individual terms that meet the companies’ needs, provide more legislative stability and result in
longer validity periods. In order to ensure transparency and greater access to mineral reserves
deposits, exploration and mining rights will be granted through open competitive auctions on a
first come first served basis, and less through direct negotiations depending on the size and
importance of the mineral deposit. This approach will eliminate future disputes on the validity of
rights granted through direct negotiations, which are currently common as direct negotiations
held to grant a licence seems rather secretive and known only to insiders.

Freedom of transactions with mining rights

The proposed changes are another step towards meeting companies’ needs. One of the obstacles
that companies face nowadays is illiquidity of their exploration and mining rights. Today’s
mining laws prohibit sale of exploration and mining rights (licences) and contain a number of
restrictions related to transfer and pledge of such rights in whole in or part. A company wishing
to transfer or pledge its licence and rights granted by such licence for the purposes establishing a
joint venture or bringing in additional financing to the project must obtain prior consent from the
Ministry of Natural Resources. The Ministry at its sole discretion may or may not consent to
such transfer or pledge. Pursuant to new draft laws, companies will have a right at their sole
discretion sell, transfer or pledge their rights; such actions only need to be registered with the
Ministry of Natural Resources.

Surface rights

Legal reforms will also affect current regulation of foreign companies’ land use rights. As
opposed to some of the jurisdictions, when a company is granted a right to explore or develop a
certain area, such right does not include land access and use rights. Land use rights shall be
obtained after companies obtain exploration and mining rights and from local authorities where
licence areas are located. Such local authorities are not under the control of the Ministry of
Natural Resources. Moreover existing Kyrgyz land regulations impose foreign land use and land
ownership restrictions. If a mining company is at least 20 percent owned by a foreign entity or
controlled by foreign entity in any manner, it may obtain land use rights by obtaining a
resolution of the Government of the Kyrgyz Republic signed by the country’s Prime-minister.
This procedure may take two to eight months and involve approvals from three to five different
state agencies at different levels. Companies face difficulties in dealing with local governments
and lose time, as without valid land use rights they will not be able to access licensed areas. In
order to minimise barriers for exploration and development related to obtaining land rights, the
Ministry of Natural Resources proposed changes that will enable it to grant land use rights
simultaneously when exploration and mining rights are granted.

Minimisation of state interference in company operations

As an attempt to minimise the number of state bodies involved in the activities of exploration
and mining companies, the Ministry is now authorised to deal with the mining safety and
environmental protection matters of the mining and exploration companies. Previously these
authorities were vested on different state bodies and companies were required to knock on many
different doors to obtain approvals for exploration and mining works and documentation.
Proposed changes also limit the power of the Ministry of Natural Resources to revoke
exploration and mining rights. With limited exceptions, the decision to revoke the exploration
and mining rights of a company will be made only by the courts.

While proposed changes minimise the state authorities’ interference and grant more freedom to
companies, they introduce a number or economic tools to fight speculators who live on buying
and selling licences and those who tend to hold on for licences for extended periods without
conducting any operations. One proposal is to apply bonuses each time a licence is transferred or
ownership in a company holding exploration or mining right changes. In order to encourage
companies to actively explore and relinquish explored areas, the Ministry of Natural Resources
intends to apply progressive licence fees payable per each hectare of the licensed area.

Conclusion

As many will agree, reforms initiated by the Kyrgyz Government are timely and above examples
clearly demonstrate the state’s willingness to improve the existing legal regime in order to retain
current and attract new investments into the mining sector, especially in today’s reality.
However, success of these reforms will depend on whether they will be brought to the end. They
need to be supported by not only the drafter (the Ministry of Natural Resources) but also other
state bodies, including regional governments, and implemented in the manner in which they are
drafted today. Perhaps then exploration will increase and a number deposits ready for production
but untouched since the independence of the Kyrgyz Republic will finally enter into production.

(First published in internet journal
“Financier World Wide”, January 2010)