As the mining sector moves from potential to actual production, one of the main challenges is to streamline the licensing system. Decisions in the past have left the country exposed to licence hoarding, environmental concerns and corruption.

In recent years, several steps have been taken to combat these issues. Taken together, they amount to an extended campaign to reduce the number of licences. In the past there had been more than 10,000, but by the third quarter of 2011 that number had been whittled down to about 2900, according to the Mineral Resource Authority of Mongolia (MRAM).

The issuing of new licences was put on hold in 2009, in part because the regulatory and legal regime was in flux. The plan is to begin accepting applications for new licences in the beginning of 2013. The government is expected to pass a new comprehensive mining law in 2012, and new licensing activity may be delayed until after that legislation is approved.

JUST ASK: Before 2006 getting a licence was as easy as asking. Applicants did not need to demonstrate expertise, or even be a mining company. Licences were often issued to unincorporated entities and individual Mongolians. This resulted in many locals hoarding licences without doing any exploration work, with the idea being that a licence’s resale value would skyrocket if commercial-scale deposits were discovered.

ENVIRONMENTAL PROTECTION: The reforms to the mining law expected in 2012 had not been publicly discussed as of late 2011, but were widely expected to further boost environmental protections. “The proposed changes to the 2006 mining law are, we believe, more environmentally driven,” said G. Battsengel, the chief executive of the Mongolian Mining Corporation, one of the largest domestic mining firms. “We hope this will make our industry more sustainable and will positively impact the behaviour of mining companies.”

But legal reforms do not erase the problems of the past. Mongolia wants licence holders to explore, mine or move on. In some cases the government has cancelled exploration licences on the grounds that previous state exploration means that further efforts are unnecessary, and so licence holders should apply for mining rights. In 2007 the government cited this problem when it cancelled 34 licences held by 18 companies, many of them in the uranium segment, which is handled differently to other segments.

NEW LAWS: Gold miners have also been hit hard by the drive to cut down on licences. The 2009 Law on the Prohibition of Minerals Exploration in Water Basins and Forested Areas led to 1782 licence cancellations in November 2010, according to research from the Mongolia-focused investment bank Resource Capital. Environmental concerns were cited, as the licences affected were in areas 200 metres or closer to water or forest resources. The government offered a compensation programme, but media reports put the cost of the plan at a larger-than-expected $5bn. Consequently, the law was suspended and delays in pay-outs caused protests among miners.

WIDESPREAD EFFECT: Mongolia has been accused of using environmental concerns as a pretext for revoking licences for other reasons, with the action to take away the uranium licences of Canada’s Khan Resources seen an example of this practice. Local environmental activists maintain that their concerns are valid. In the northern parts of the country, where most of the surface water is found, the illegal use of mercury for gold mining threatens the viability of the nomadic lifestyle of Mongolia’s herders, many of whom are dependent on the water supply for themselves and their animals.

OWNERSHIP ISSUES: Another possible reason to reduce the number of permits in the system is that MRAM’s database of licences, legal descriptions of their boundaries and their rightful owners has suffered from inaccuracies in the past. This has enable fraudulent practices in the resale market for licences. MRAM has since worked to improve its recordkeeping, including by enlisting the World Bank to help it improve and develop an online version of the licence database.