Foreign investors cry foul as Mongolia revokes mine licenses

ULAN BATOR (Reuters) - Mongolia has annulled more than 100 exploration licences as part of an investigation into mining sector corruption, raising further concerns among foreign investors about the risks of doing business in there.

Mongolia-focused Kincora Copper said on Thursday that it had received a letter from the Mineral Resources Authority saying that two of its licenses had been revoked following a criminal investigation into former government officials accused of illegally issuing a total of 106 exploration licenses between 2008 and 2009.

All of the 106 licenses have been cancelled.

Kincora Copper said the move, which will affect the licenses of an estimated 11 foreign and 67 domestic firms hoping to explore for a range of minerals, highlighted the uncertainty facing a growing legion of foreign investors.

"Security of tenure and a transparent legal system are key cornerstones for both domestic and foreign private sector investment," said Mr Sam Spring, president and chief executive of Kincora Copper, in an e-mail message.

With legal proceedings already underway, the company suspended exploration activities on the two properties, known as North Fox and Tourmaline Hills, at the start of the year.

Mongolia's Ministry of Mining could not immediately be reached for comment. Representatives of the Mineral Resources Authority were also unavailable.

Mr Surenjav Odbayar, head of research at Ulan Bator-based brokerage National Securities, said the case related to two government officials caught up in a crackdown on corruption that was launched ahead of Mongolian President Tsakhia Elbegdorj bid for re-election this year.

Mr Elbegdorj won a second term on June 27 and there have been no more additional allegations against the officials since then, she said.

Foreign companies in Mongolia have long expressed concern that a populist, resource-nationalist streak amongst lawmakers could put their operations at risk, with legislators routinely complaining that Mongolian resources - including the flagship Oyu Tolgoi copper mine run by Rio Tinto , are being sold on the cheap to overseas interests.

Business confidence was hit further by an unpopular 2012 law restricting investments in "strategic" assets like mining, and foreign investment in the first half of this year dropped 43 per cent on the year. The law has since been replaced.

Another Canada-based explorer, Khan Resources, is suing the Mongolian government for US$326 million (S$405 million) in damages after the Mongolian government refused to reissue its licenses for the Dornod uranium property in 2010.

The International Arbitration Tribunal will begin a five-day hearing into the case on Nov 11 in Paris, with Khan accusing Mongolia of breaking its own licensing laws in order to accommodate a uranium development deal signed with Russia's AtomRedMetZoloto (ARMZ) in January 2009.

Kincora's Spring said arbitration for his own company would only be a last resort, and that they would first seek to resolve the matter directly with the government.

He said Kincora acquired the licenses last year following a takeover, and while it could still reclaim them, it would have to participate in a competitive bidding process, even though it had already spent heavily on developing the properties.

"While the majority of the 106 license holders would much prefer not to engage in legal proceedings, further court action would obviously not be good for the government, either financially or reputation-wise, given the current environment."