A MILLSTONE ON INVESTORS

Once upon a time two ministries decided to share control of subsoil resources. In result the "shadow" of ambiguous and negligently legislation draftedby the Ministries keep subsoil users in a sort of terror up to date.

The whole story began in 2002 when two fundamental laws, regulating subsoil utilization in Armenia, were passed. Those were the Subsoil Code and the Concession Law . The "headache" began after a year when the two laws came into effect and all discrepancies, misinterpretations and inconsistencies became evident to everyone. The initiator of the first paper was the Ministry of Environmental Protection (MEP) and the second one was initiated by the Ministry of Trade and Economic Development. Both Ministries, within a few months, reported on legislation and structural reform aiming, of course, at the country's economic development in order to attract investors, which in fact was not the case at all. If anything, quite simply, one Ministry is responsible for the ecology issues; the other is to regulate business activities, but what really happened was a tag of war between the two ministries over the control over subsoil, which resulted in literal pell-mell.

What price shall be paid by the mining enterprises against utilization of subsoil? The question is not idle or rhetorical at all. In fact, in compliance with the Subsoil Code, organizations shall pay so called nature utilization fees, and as per Concession Law, the royalties shall be paid. It is noteworthy that officials of the one and the same Ministry interpret the law differently and the managers of mining companies prefer not to discuss this matter whatsoever. As we were informed by Mr. Hrant Avetisyan, the head of department of subsoil protection of the Ministry of Environmental Protection, in compliance with the Subsoil Code the mining enterprises shall pay either nature utilization fees or royalties. Though, having some doubts with respect to "either… or ", he added: " They are supposed to be the same thing, but there is a contradiction in the law, in that the two notions are divided by a comma, which leads to numerous interpretations". Therefore, according to him, the comma shall be understood as "or". Another official of the same Ministry, Mr. Marzpet Kamalyan, deputy head of ecologic inspection, thinks that both the nature utilization fees and the royalties should be paid for the resource utilization. To pay the same fee twice is really absurd. The other problem is that the rates for those payments are calculated differently. The Nature utilization fee is 1.5 % of the depleted resources, and the royalty is 1% of the extracted and sold metal. He accepted, though, that certain confusion is still there and informed that a commission with participation of concerned Government Agencies was recently formed to resolve this legislative problem. But while the problem is being addressed by the commission, mining companies shall somehow make payments for subsoil utilization. Moreover, some companies are forced to do it twice! The issue of subsoil utilization since 1998 was regulated by RA Law on "Natural Resource Utilization and Environmental Protection" and by RA Government Decree " # 864 "On the Rates for Natural Resources Utilization Fees", dated 30.12.1998. As per Mr. Mr. Kamalyan, these acts shall prevail over others because in case there are any contradictions in different laws, the one adopted first shall prevail.

In the mean time the Ministry of Trade and Economic Development has a quite different viewpoint with respect to this matter.

The two Ministries keep their own payment statistics, which cannot highlight or display any comprehensive taxation mechanism. Particularly, according to the Ministry of Environmental Protection AMD 2 billion was paid as natural resources utilization fees in 2005.According to the data by the Ministry of Trade and Economic Development AMD 97.2 million of royalty was paid in the same year. As we were informed by Mr. Koryun Hakobyan, the head of the Concession Agency of the Ministry of Trade and Economic Development, this is not a final figure at all, since more receipts are expected from such major mining companies as "Zangezur copper- molybdenum plant", "Agarak GOK" and others.

In fact only two mining companies out of twenty have paid royalties. The majority of royalties, namely AMD 84 million, was paid by "Ararat Gold Recovery Company" (AGRC) for exploiting of Zod and Meghradzor mines, and AMD 13.1 million by "Multi Group" for exploiting Mgart and Lory mines. To sum up, royalties are not being collected and therefore the Concession Law is not working as anticipated.

The mining companies, in turn, prefer not to disclose information on payment of taxes, as if somebody tabooed such queries. We posed to many mining companies single question "What do you pay against utilization of subsoil?" Their answers were really strange. The administration of "Dino Gold Mining" refused to give any information on this matter. That might be possibly justified if we requested to disclose the actual amounts paid, while we were just asking "which taxes are paid". By the way, this company was accused of hiding 22.44 tones of copper. Mr. Mike Sexton, an American who is CEO of "Dino Gold Mining" (former Kapan GOK), also refused to comment on this matter without any explanation. The management of Agharak Copper mine also refused to give an answer, though they mentioned that legislation is not clear on this matter (the same "coma"), and that it creates problems. The management of the biggest mine in Armenia - the Zangezur Copper Mine, declared that they were paying only natural resources utilization fees. The senior officers of many companies stated that payment of the natural resources utilization fee is also problematic, as it is based on the quantity of depleted reserves. As they explained payments based on actual quantity of produced metal is much simpler, because it is quite difficult, and sometimes even impossible to accurately calculate the depleted reserves. In fact calculation of "Depleted reserves" is sometimes undeterminable and is usually based on averaged out numbers. There are also several methods for such calculations, and it is quite difficult to appreciate which method and when should be used. In such calculations, the quantity of metal which may not be extracted due to technical reasons, is not taken into consideration. Meanwhile it is sometimes impossible to prove that some quantity of metal may not be extracted due to this. When defining the depleted reserves the auditors use either the samples available with the mining companies or refer to the reserves approved by State Reserves Agency (GKZ). To put the above in one word calculation of natural resources utilization fees based on depleted metal puts the mining company in a quite "detrimental" position, and any mining company may be easily alleged to be hiding actual quantities of extracted metal.

As communicated to us by Mr. Hrant Avetisyan, before 1998 the natural resources utilization fees were calculated based on produced and sold metal, and then after - based on quantity of depleted metals. As he also stated: "Such legal initiative was aimed to force the mining companies to improve effectiveness of their business and to reduce losses. This statement does not seem reasonable, because irrespective of effectiveness and losses, the companies will pay based on depleted reserves.

As communicated to us by Mr. Marzpet Kamakyan. The Environment Expertise Agency has carried out audits of 17 mining companies within the period 2004-2005 during which it was revealed that only AGRC managed to pay a royalty instead of natural resources utilization fee. Based on this the Agency has issued an Act of Findings and served it to the State Tax Authority. In reality, this statement of Mr. Kamalyan is not fair. Royalties were also paid by Multy Group mining company, and other such companies as the Zangezur GOK, Agharak Copper Plant and others are planning to pay royalties. In the mean time, considering the Act of Findings unacceptable AGRC applied to the court for resolution of this dispute. By the way, the Agency accused AGRC of hiding 605.17 kg of gold, 0.6 t of silver, 0.82 t of selenium and 8.08 t of tellurium. It is noteworthy to mention that the mining license was given to AGRC only for gold, therefore AGRC was not interested in extracting other metals. I wonder what would happen if suddenly at Sotk deposit oil will start gushing. Should AGRC be requested to pay royalty on that commodity also?

Definitely no, as per law, the company would need another license.

It is important to mention that pure gold is not being produced in Armenia. The final product of the company is Dore, an impure alloy having gold and silver mixed together, obtained from the processing of ore. Mr. Artour Ashugyan - head of mining department of RA ministry of Trade and Economic Development, during his recent news conference, declared that such allegations by RA Ministry of Environmental Protection are baseless. As he stated: "In the Mining Industry there may not be any shadow business, because the final product is not manufactured. One can hardly imagine how anything may be stolen here."

It is notable to mention how the auditors calculated the "actual" quantity of depleted metal. It is widely known that the gold in ores is distributed unevenly. Every other mined tonne of ore may contain a different content of gold. So the auditors may take some ore with a low content of gold (e.g. 1 g/t) and announce that as "hidden", while in fact it was not even mined due to technical reasons. The Company does not mine ores with a low content of gold, and this should be considered as eligible loss. At the same time, such declarations by the MEP on hiding gold are absurd, because the company is lawful owner of the contained metal, and it may decide itself to mine or extract it. The Dore is the final product of the Company, and the Company has spent money for its extraction. Therefore it is unreasonable to "hide" it. In the meantime, the subsoil remains property of the State.

It should be pointed out that, after more than two years of extensive exploration of the Central Block of Sotk mine, AGRC managed to revaluate underlying resources and had it approved by GKZ. Revaluation resulted in 5.33 t of increase in total reserves of the deposit. This may hardly be considered as "hiding" 600 kg of gold! In reality, it extremely illogical to increase reserves by 5 tonnes and simultaneously hide 600 kg of gold!

We were informed by the MEP they have audited AGRC twice. First time audit was done in 2004 and then in 2005. In 2004 the actual volumes of metal depleted within the period of 2001-2003 were audited, and AGRC was accused in hiding 2.5 t of gold. Later the MEP accepted that the Final Act of Findings shall be recognized as null and void.

AGRC has appealed against the second Act prepared by the MEP, whereby AGRC was again accused of hiding 600 kg of gold.

When this article was being prepared for publication, we came to know that the court has issued a Judgment in favor of the Company.

The RA Government, admitting the ambiguity of this situation, has finally decided to amend the RA Concession Law. As per the amended law, mining companies from now on will pay royalty at the rate of 0.1% only in the case that their profitability ratio exceeds 25%.

Meantime it is not clear what will happen with the mining companies, which during recent years were paying a natural resources utilization fee or royalty, at their discretion. Will the MEP start pressuring those companies retroactively and try to make them a scapegoat?

Considering that mining industry in Armenia is becoming the leading sector of the Armenian Economy, the MEP shall stop terrorizing the mining companies, which contradicts the Investment Policy proclaimed by the State.

Arthur Ernjakyan,ArmInfo, 30 March, 2006