Kazakhstan’s new legal regime for mining

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The new SSU Code substantially changes the legal framework for mining in Kazakhstan -- especially in comparison with the legal frameworks governing the oil & gas or uranium operations which are also regulated by the SSU Code. The new mining legal framework, at least on paper, looks more straightforward and investor-friendly now (of course, with a few reservations) now. Even so, it remains to be seen whether this will be so in practice and whether the Kazakhstan Government will follow along this line (especially, with no clear stability guarantee) in possible future boom days in the industry.

On June 29th this year a new Subsoil Use Code (SSU Code) came into effect, replacing the current Subsoil Use Law (Old Law) that was in effect for almost a decade. While the SSU Code has established a completely new legal framework for mining in Kazakhstan and many follow-on changes are on the way, we will look closely at 15 key novelties of interest and importance for existing and new investors in Kazakhstan mining sector. In this article we will focus only on mining of most hard minerals – the legal regime for other natural resources (such as uranium, oil and gas, sand and similar common or lesser-value subsoil substances) is different and not covered here.

Although a licencing regime existed in Kazakhstan in the early years of its independence, it was abolished in 1999, and since then mining has been regulated through a contract-based regime. Under pressure from existing mining operators’ strong lobbying and considering the recent downturn in the world mining industry, the Kazakhstan Government is trying to support and sustain the local industry – which is vital for several cities and population in those cities (comprising a sizeable percentage of Kazakhstan’s total population) by applying world best mining practices. Canada’s and Australia’s licence-based practices were taken as a benchmark for establishing the new legal framework.

Now mining rights for new projects will be granted under licence and there are two types. The first is an exploration licence, which covers exploration and appraisal, for six years with a possible one-time five-year extension in case the exploration licence covers ten or more blocks. Any extension will be subject to mandatory relinquishment of at minimum 40% of the licence area.

The second is a production licence that covers mining, mineral processing and operational exploration, for 25 years with a possible extension for the same period, which may be granted several times. A holder of an exploration licence will have the right of exclusivity to receive a production licence; such exclusivity right will have to be exercised while the exploration licence is still in effect.

Existing investors may convert current contracts into licences under the SSU Code; but they should note that the code explicitly permits any new licence to contain more obligations, includes rules for licence revocation and penalty payments other than those provided in the SSU Code. Alternatively, investors will have to make changes to the current contracts: a necessity mandated by the new requirements of the SSU Code that apply retroactively to the existing contracts and/or the desire to extend the existing contract. Any extension is limited in period and subject to additional obligations with respect to so-called “major fields” that are determined per reserves volume (for example, more than 100m tons of iron ore; more than 250 tons of gold; more than 30m tons of copper or more than 5m tons of lead).

There will no longer be tenders, except for blocks that were included into the state balance of natural resources prior to effectiveness of the SSU Code or areas within 30-kilometer radius from contract area borderline under a subsoil use contract that was made prior to December 31st, 2017. Licences will be granted on a first come, first served basis.

Information about available blocks will be set out in the State Subsoil Fund Management Program (SSFMP) that will be developed by the designated competent authority (currently the Ministry of Investments and Development) and is subject to the intensive discussion between the mining companies and the ministry. It is expected that within the next four years the SSFMP will be fully created and licences will be granted under a new regime step-by-step for approximately 1.2m blocks.

The competent authority may reject granting a licence if a submitted package of documents or requested area does not comply with mandatory requirements. Unlike the Old Law, the new SSU Code provides for the authority’s right to reject granting a licence if there is a recorded imputation against an investor or its affiliate in Kazakhstan (for example, where the previous licence was revoked or there was a breach of liquidation obligations under previous licence). Of course, as before, granting of a licence may also be rejected for national security reasons. Any rejection may be challenged in Kazakhstani courts within ten business days.

Retention is a new concept for Kazakhstan mining law – taken from Australian law and practice. It amounts to a holding status of a block (or a part of it) that has been granted to an investor under production licence but does not have to be further explored or mined due to market conditions, lack of technology, force majeure or rehabilitation procedures.

Retention may be granted by the authority upon the investor’s request for five years, with a possible one-time five-year extension. If retention status is granted, the term of the production licence will be extended for the retention term. While the value of the investor’s minimal financial obligations will be reduced during retention, the investor will still have to perform certain field conservation works, pay training and research and development financial commitments per licence requirements and secure employment / training of employees.

It will no longer be necessary to agree with the competent authority the value and scope of a work program. The SSU Code sets out the value of annual minimal expenses for each of the stages: for exploration – per year of licence and number of blocks; and for production, per licence area and type of mineral. A scope of work is also determined for each of the stages. In case the investor does not pay the required value of annual minimal expenses in a given year, it must pay such expenses within the first four months of the next calendar year during exploration stage, and three months during production stage. Under the SSU Code, information on licence performance (as well as licence holders) will become public.

Following the approval of Kazakhstan Reporting Code (KAZRC) by the Combined Reserves International Reporting Standards Committee (CRIRSCO) and election of Kazakhstan as the tenth CRIRSCO member in 2016, Kazakhstan started switching gradually from the old Soviet-style reserves calculation and reporting system to internationally recognised and market-oriented standards. Starting June 29th, calculation and reporting on reserves under new licences will be made in accordance with KAZRC. By January 1st, 2024 all existing investors in Kazakhstan mining must re-calculate their reserves in accordance with the KAZRC requirements.

Since the SSU Code provides that only one person (either an individual or a legal entity) may be a licence holder, it will not be possible to establish an unincorporated joint venture (or consortium) for this purpose. However, there is no restriction on setting up a joint venture (SPV) that will act as licence holder, and nothing under Kazakhstan law prohibits such SPV to be a foreign (non-Kazakhstan) entity acting via its Kazakhstan branch.

The SSU Code provides for completely new rules on securing performance of liquidation (abandonment) obligations. There will be no liquidation fund (made in the form of a bank deposit account opened in investor’s name). Rather, an investor will have to secure these obligations by granting a pledge of a bank deposit, or parent-company or bank guarantee and/or insurance in favour of Kazakhstan.

While a bank deposit may be opened with a Kazakhstan bank (including a foreign bank licenced in Kazakhstan) and insurance policy may be provided by a Kazakhstan insurance organisation (including a foreign insurer licenced in Kazakhstan) only, a guarantee may be given by any foreign bank or foreign parent company that complies with minimal credit rating requirements that will be set by the Competent Authority.

For exploration licence security, the required value per block will be determined by the authority. Total security value (for all blocks covered by exploration licence) will be decreased upon relinquishment of certain portion of licence area and completion of liquidation works on such relinquished part.

Security value for production licence will be determined per liquidation plan to be developed by the investor and approved by the authority. While in general an investor will be free to choose the preferred form of the security (a pledge, guarantee and/or insurance) for its project, the SSU Code requires that for a production licence the security value must be covered by bank guarantee or pledge of bank account as follows: during the first third of the production licence term – no less than 40%; during the second third of the production licence term – no less than 60% and during the remainder period – 100%.

The current and further evolved SSU Code rules on state priority right with respect to transfers of the subsoil use right or related rights will no longer apply to hard minerals projects (although it will continue to apply to oil and gas and uranium projects).

The requirement of permission of the Competent Authority will remain, however. Such permission will be valid for a year and may be extended for additional six months. Other key novelties of the SSU Code in this regard are: the list of exemptions from such permission will be broadened – the list is still not perfect and does not exclude most of immaterial transactions that do not constitute “change of control” per se, but at least it is expanding; the term of granting such permission is substantially reduced down to one month – but, for “major fields” such term will be three months due to required consideration of the application by the national security authority; and the application will be filed by the proposed buyer (not the seller, as it is provided in the Old Law).

It is also important to keep in mind that an exploration licence may not be transferred within the first year of its validity. Lack of the Competent Authority’s permission will result in the underlying transfer being void and revocation of licence (only if there is a threat to national security and such breach of law has not been cured within a year or replaced by another transaction permitted by the Competent Authority).

Unlike the Old Law, the SSU Code defines direct control, which includes holding more than 25% of interest, shares, convertible securities; voting right for more than 25% of all votes; receipt of more than 25% of net income in subsoil user; or decision-making rights in accordance with a contract or Kazakhstan law. Indirect control, which involves the right to control another entity through third entity that holds direct control over such other entity. An investor under contract or licence will need to notify the competent authority in writing on any change of control (direct or indirect) within 30 days after any change. Like Old Law, the SSU Code does not provide for an express consequence of the lack of notice on change of control.

An encumbrance of subsoil use right under licence will no longer trigger the Competent Authority’s permission but will need to be registered with the Ministry of Justice in the same manner as for encumbrance over movable property. While there are no clear rules on obtaining the Competent Authority’s permission before or during foreclosure, it appears that such permission will be required only for a new holder of the licence to validate the foreclosed subsoil use right.

While the SSU Code is clear with respect to the stability (and related general carve-outs, such as national security, public safety) of contracts in the oil and gas and uranium sectors, there is no such clarity with respect to stability of licences for hard minerals. Investors will have to rely on a general principle of the SSU Code that declares stability of the subsoil use terms, without defining what such terms stand for. In addition, existing investors must apply various provisions of the SSU Code to the existing contracts since the SSU Code establishes retroactive effect for some of its provisions (e.g., liquidation, transfer, etc.). This is a complex, difficult subject, requiring detailed analysis in each case.

Licences will be governed by Kazakhstan law only and disputes under licence will be considered by Kazakhstan courts, unless a relevant international treaty (e.g., a bilateral investment treaty) ratified by Kazakhstan expressly permits resolution in foreign court and/or arbitration. This rule reflects the Kazakhstan Government’s unwillingness (which has grown stronger year by year since the turn of the new century, and arguably has become one of the key factors in the Kazakhstan investment climate having become less attractive) to let the licence holder and licensor to freely choose at least the dispute resolution venue and procedure.

Any breach of law and/or licence may be cured within a certain period, which varies depending on the type of breach. During the production stage a breach related to local content requirements or training and/or R&D financing commitments may be cured by paying a penalty (for local content requirements – 30% of unperformed obligation; for training and/or R&D financing commitments – the unpaid amount). The competent authority will notify a breaching party of licence revocation and the licence will be cancelled within three months after such notice. Revocation may be challenged in Kazakhstan court within 15 business days after receipt of the Competent Authority’s notice.

The SSU Code also establishes a separate new licence regime for artisanal mining (for precious metals and stones) by individuals at placer deposits or pits. Only Kazakhstan citizens will be able to obtain such three-year licence from regional authorities. Such mining works may be conducted on another licence holder’s licence area only upon consent of that licence holder.

Since the SSU Code has completely changed the legal framework for hard minerals mining, the Ministry of Investments and Development developed several new rules and regulations that are referred to in the SSU Code and will provide more details on certain matters under the SSU Code. These documents became available to public on June 29 and require a thorough additional review and analysis.

By Aset Shyngyssov, partner in the Kazakhstan office of global law firm Morgan Lewis.

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