Mongolia”s decision to revoke hundreds of gold
mining licenses has alarmed investors but the government”s efforts to clean up
its mining sector could have long term benefits, says a Wall Street Journal
report quoting the head of a foreign fund. 
Energy and Mining Minister D. Zorigt announced late last month that 254
gold mining licenses would be suspended for violating the country”s
environmental laws, while another 1,700 licenses would be put under review. The
move came after a series of policy changes over the last year aimed at bringing
the booming but still nascent industry under greater supervision and control.

In April, President Ts. Elbegdorj ordered a halt to
the issuance and transfer of mining licenses until parliament passed a new and
stricter law. Small and unqualified miners were the main target of the new
rules, Eric Zurrin, chief executive of ResCap, an investment bank active in
Mongolia, said. “Too many outsiders were trying to pick up licenses in a
bit of a lottery and trade, and you know what that can lead to. These licenses
need to be properly explored and well thought through,” he said.

The gold projects suspended last week were said to
contravene the country”s new water and forest law, which bans mining activities
in water basins and forests. Mongolia, under pressure to develop its economy,
has sought to open up its mining sector to foreign investors, but it has
already led to a backlash. In September, Mongolian environmental activists
armed with hunting rifles opened fire at the site of a gold mine owned by
China”s Puraam and Canada”s Centerra Gold about 100 km north of Ulaanbaatar,
which they accused of running roughshod over local environmental laws.

But the ambiguities in the legislation are causing
uncertainty, experts have said. Mr. Graeme Hancock, senior mining specialist
with the World Bank in Ulaanbaatar, has said that the law passed last year did
not offer any definition of water basins or forest areas, leaving it unclear
what projects would be under threat. “It was a knee-jerk reaction that
isn”t justified,” he said. “The answer lies in creating a sound
management framework, not in just trying to ban it. The problem now is that by
banning these projects, they will be replaced by ninja miners — and that is a
worse outcome than what they had.”

The government has been struggling to find the
right mix of policies that will enable it to avoid the mistakes made by other
poor but mineral-rich countries, and some of its decisions have caused alarm. A
Mongolian-based mining executive said that a policy allowing the government to
turn any deposit into a “strategic national resource” was especially
worrying. “If the Mongolian government can revoke our licenses with
immediate effect and declare the mines to be a strategic national resource,
where does that leave us?” he said.

Investors said the windfall tax has slowed progress
in Mongolia”s mining sector. “Potential investors have been focusing on
coal,” said Zurrin, referring to a mineral not covered by the tax.
“But the interesting one is the copper-gold belt, where very few are
looking right now. Because of the 68 percent windfall tax investors just said,
“Forget it, I”ll look for coal”.”