Some of the reasons for this increasing attention are:

• The local geology is highly prospective for large size mineral deposits
• The country is under-explored
• The Government has firmly demonstrated its commitment to developing the mineral sector by attracting foreign capital
• Appropriate laws have been adopted to encourage foreign investment
• Proximity to major metal markets in China and Japan

Mining Industry

At present, gold production in Mongolia originates primarily from alluvial deposits although there are small hard rock operations in the north part of the country.

Mongolia is a major exporter of copper and molybdenum as well as a leading world producer of fluorspar. A significant proportion of the country's exports come from the Erdenet copper deposit, which is one of the largest copper reserves in the world.

Legal Environment in Mongolia

Mongolia’s legal environment is designed to be supportive of the development of its minerals sector.

Minerals Law

In August 2006 the Mongolian government repealed the 1997 Minerals Law replaced it with a new Minerals Law of Mongolia (Minerals Law). The new law establishes the state as having primary control of its mineral resources, a central premise of modern minerals legislation throughout the world.

The Minerals Law allows any Mongolian legal person to hold any number of mineral exploration licenses of up to 400,000 hectares each. An exploration license holder is afforded the right to conduct exploration for minerals within the boundaries for nine years (three years initially plus two extensions of three years each), and the exclusive right to obtain a mining license for any part of the exploration license. It also provides the right to transfer or pledge any part of the exploration license. Exploration license fees are US$.10 per hectare for the first year, US$.20 per hectare for the second year, US$.3 for the third year, $US1.00 for the fourth, fifth and sixth years, and US$1.50 per hectare for years seven, eight and nine. The Minerals Law includes minimum expenditures on each license. Minimum expenditures are US$0 for the first year, US$.50 per hectare for the second and third year, US$1.00 for the fourth, fifth and sixth year, and US$1.50 per hectare for years seven, eight and nine. A pre mining period of three years has been introduced at the expiration of the exploration license term. During this period the Minerals Law permits feasibility, and environmental impact assessment to be completed. License fees payable in years seven, eight and nine are applicable during this period. The Minerals Law now provides that local communities directly benefit from the payment of license fees and royalties. They will receive 50% of all license fee payments and 30% of all royalty payments.

Mining license holders have the right to engage in mining of minerals within the license area for thirty years (with the right to extend for two additional periods of twenty years), the right to sell mineral products internationally, the right to transfer or pledge all or part of the license, and the right to conduct exploration for minerals within the license area. A mining license holder must pay royalties to the government equal to 5% of the sale value of products sold (with the exception of coal and common minerals resources that are sold domestically on which the royalty is 2.5%).

Mining license fees are US $15.00 per hectare per year, with the exception of coal and common mineral deposits on which the mining license fees are US$5.00 per hectare per year. The State can acquire up to 34% of a strategic deposit, on a commercial basis, where private funds have been used to register the reserve. In cases where there has state funded exploration used to register a resource the State can acquire up to 50% of a strategic deposit. Depending on the amount of investment, stability agreements can be granted for a period of up to thirty years.

The Minerals Law provides for loss carry forward provisions.

Tax Laws

In addition to changes to Minerals Law, the Government recently amended tax laws to provide a more corporate tax friendly environment. The new income tax rate is 10% for the first 3 billion togrogs and thereafter taxed at a rate of 25%, the value added tax was lowered to 10% and the personal income tax rate was lowered to 10%.

Windfall Tax

Despite these changes in May 2006, the Government of Mongolia passed a Windfall Profit Tax Law. This Law imposes a tax rate of 68% when copper reaches US$2,600 a tonne and when gold reaches US$500 an ounce.

The law does allow TC-RC’s(Smelter charges) to be deducted from revenue prior to calculating windfall taxes, and also allows companies that further process concentrates(smelters/refineries) in Mongolia to be exempted from windfall tax entirely.

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