The Subsoil Code and a new reality for subsoil users in mining field

Yerbolat YerkebulanovPartner

20/06/2018

CONTENTS

I. Introduction

II. Legal environment for new subsoil users

III. To preserve a Contract or transition to aLicence?

I. INTRODUCTION

1.1. General issues• The Code on Subsoil and Subsoil Use dated 27/12/2017

("Code") comes into force on 29/06/2018.

• The Code replaces the Law on Subsoil and Subsoil Use dated24/06/2010 ("Law"), save for limited exceptions remainingeffective for current subsoil users.

• Every subsoil use contract (“Contract”) concluded before29/06/2018 remains valid, as well as relevant project documents.

• The Code:

a) preserved the contractual regime of granting subsoil use right(“SUR”) for hydrocarbons and uranium; and

b) introduced a licensing regime of granting SUR for solid minerals(except for uranium).

• Term of a licence for (i) exploration – up to 6 (+5) years, (ii)mining – up to 25 years (∞ extensions) (“Licence”).

• Stability clause against further changes of Licence conditions,except for 7 spheres (tax, customs, etc.).

1.2. Simplification of barriers for M&As

• MID – Ministry of Investment and Development, Objects – shares in subsoil users/their parent companies.

Issue Before 29/06/2018 (under the Law)

From 29/06/2018 (under the Code)

Priority right of the State*

Applicable for 62 solid minerals deposits of strategic significance

N/A

Exceptions when no consent of the MID is required

3 exceptions (Article 36.5 of the Law)

14 exceptions (Article 44.2 of the Code)

Consent for pledge over SUR or Objects

Required N/A

Note: According to the MID’s clarification, the above provisions of theCode apply only to transactions, which transfer documents wereexecuted on or after 29/06/2018.

* Yet, a prior MID’s consent is a

must for transfer of

SUR/Objects

1.3. Other issues• Holders of SURs for solid minerals appraise mineral resources

under KAZRC/CRIRSCO standards;

• Holders of Contracts may appraise mineral resources either underGKZ or KAZRC/CRIRSCO standards until 01/01/2024.

• Holders of Licences are exempted from payment for compensationof historical costs (unless their territory was under a Contract before01/01/2018).

• Holders of Contracts/Licences being on exploration stage maydeduct (through depreciation) their expenses incurred from01/01/2018 under their exploration Contract(s)/Licence(s) from thetaxable income under their other mining Contract(s)/Licence(s)(Article 259 of the Tax Code dated 25/12/2017).

• Reports not quarterly, but annually (audited for Licence holders).

• State technogenic mineral formations may be transferred free-of-charge to subsoil users upon their applications filed by 29/06/2020.

II. LEGAL ENVIRONMENT FOR NEW SUBSOIL USERS

2.1. Available information on mineral sites

State Subsoil Fund Management Program (“Program”)Territories under Annexes to the draft Program:

1. State geological survey of subsoil;

2-1. Exploration of solid minerals (“first come, first served” orauction);

2-2. Production of solid minerals (auction until 01/01/2023);

3. Exploration and production or production of hydrocarbons;

4. Reserved territories (specially protected natural areas, etc.);

5. Defense and state security, settlements and water fund lands;

6. Buffer zones (≤ 200 blocks within 30 km from boundaries of miningallotments of town-forming entities) (6 companies may initiateauctioning until 01/01/2023).

Notes:

1. Map of occupied and vacant subsoil sites – gis.geology.gov.kz/geo

2. E-Catalog with metadata for ≈ 130 thou. geological reports – e.geology.kz

2.2. What exploration territory may I obtain?1) New territories under the Program. Applications Date: 15/09/2018.

Not directly:2) Non-Program territories may be acquired by Tau-Ken Samruk or Qazgeologyuntil 29/06/2020. (In practice: Acquisition Transfer of the right as a contributionto charter capital Buy-out of the national company’s shares in a subsoil user bythe partner.);3) Territories of current subsoil users (if M&As are considered)

2.3. Territories to become availableI Stage – 2018-2019 (67,617 blocks, 155 thou. km2). II stage - 2020-2023 – major part (≈ 3,5 times more) of territories after completion ofstate geological survey during 2019-2022 (below map).

Note: Plans to make major part of geological reports freely availableonline by 12/2019 (National Bank of Mineral Resources Data).

2.4. How quick can I start exploration?

* For New territories added to the Program – a new Applications Date to be set out after2 months following the amendments.** Before starting exploration – submit an exploration plan and provide a security forliquidation works (pledged bank deposit, guarantee and/or insurance).Note: From 01/01/2019 – commercial discovery bonus (0.1% of the cost of approvedreserves).

Under the Law Under the Code (for ≤ 200 blocks)

Standard procedure From 01/2015 – Simplified procedure (for ≤ 10 blocks)

Procedure

1. Win a tender2. Coordination of a project document and a contract under a model form

1. Lodge an application2. Direct negotiations and execution of a typical contract.(If other application(s) for certain blocks within 5 business days an auction the standard procedure)

1. Lodge an application for a New territory from the Applications Date*.2.1. If other application(s) for your certain blocks within 1 month auction for such blocks. 2.2. If no other application(s) or after 1 month – “first come – first served”.3. Obtain a licence.

18 months (540 days) 25 business days 10 business days (startingfrom 16/10/2018) **

2.5. Mandatory expenses under an exploration licence?1. Signature bonus – 100 MCI* (≈ $730) (If an auction – 280 MCI)

2. Annual rental payments

3. Minimum annual exploration expenditures

4. Security for liquidation works

For: 10 blocks – 7,200 MCI (≈ $52,472); 50 blocks – 36,000 MCI (≈ $262,363).

Period, years Rate in MCI (USD)

For 10 blocks For 50 blocks1-3 2,300 (≈ $16,762.1) 7100 (≈ $51,743.9)4-6 3,500 (≈ $25,507.58) 10700 (≈ $77,980.31)7-8 5800 (≈ $42,269.7)** 15000 (≈ $109,318.19)**9-10 5,800 (≈ $42,267.7) 19800 (≈ $102,030.3)11 11,500 (≈ $83,810.6) 29900 (≈ $217,907.5)

Period, years Rate in MCI (USD)For 10 blocks (≈ 23 km?) For 50 blocks (≈ 115 km?)

1-3 150 (≈ $1,093.2) 750 (≈ $5,465.9)4-5 230 (≈ $1,676.2) 1150 (≈ $8,381)6-7 320 (≈ $2,332.1) 1600 (≈ $1,093.2)

8 year and further 600 (≈ $4,372.7) 3000 (≈ $11,660.6)

** At extension for 7-11 years: not less than

40% of blocks shall be

returned (save for territory of commercial discovery)

* 1 MCI –monthly

calculation index – in

2018 is KZT 2,405, i.e. ≈

$7.29)

2.6. Mandatory expenses under a mining licence?1. Signature bonus – for auctioned ≥ 500 MCI (without an auction – 50 MCI).

2. Annual rental payments

3. Minimum annual mining expenditures

4. Security for liquidation worksThe amount to cover the estimated cost of works for liquidation ofconsequences of operations both performed and for the forthcoming 3 yearsfrom the date of the last positive integrated state expertise of the liquidationplan.5. Financing tuition of Kazakhstani personnel1% of mining expenses for the previous year (from the 2nd year).6. Financing R&D works1% of mining expenses for the previous year (from the 2nd year).

No. >5 ha 5-8 ha For each further ha within territory comprising >8 ha

1 For native metals, ferrous or non-ferrous ores mined under a mininglicence and mining works plan6,940 (≈ $52,050) 13,740 (≈ $103,050) 720 (≈ $5,400)

2 For other minerals1,160 (≈ $8,700) 2,300 (≈ $17,250) 120 (≈ $900)

Area Rate in MCI (USD)For 1 km2 4450 (≈ $3,375)

III. TO PRESERVE A CONTRACT OR TRANSITION TO A LICENCE?3.1. Right of choice

• A current subsoil user may:1) preserve its Contract; or2) before expiration of the Contract to transition to exploration

or mining Licence(s) upon consent of a commissioncreated by the MID.

• Such a Licence may contain grounds for (i) its revocation or(ii) charging a penalty in addition to standard conditions setout by the Code, as well as extra obligations of the subsoiluser (e.g. liquidation works, etc.).

• Re-registration of SUR from a Contract to a Licence neither terminates the SUR emerged under the Contract nor entails termination of encumbrances (pledge) over the SUR available at the moment of re-registration.

3.2. When may a Contract be extended?• Exploration term may be extended for the time required for appraisal

of the discovery.

• Mining term can be extended for ≤ its initial term (but ≤ 25 years), if soallowed by the Contract.

• If not allowed, the subsoil user has an exclusive right to obtain amining licence.

• For major deposits (e.g. >: 250 tons of gold, 5 mln tons of copper, 100mln tons of iron ores, etc. (Article 14.3 of the Code)), if the miningterm is extended for > 10 years, the MID may require that the subsoiluser commits to ensure construction/modernization ofproduction/processing facilities, implementation of an investment orsocial project, supplies of mined minerals to Kazakhstani facilities, etc.by itself/its subsidiary/joint venture. (If no agreement reached, the siteafter expiration of the SUR is subject to auctioning.)

• Mining term may be extended for ≤ 5 years to determine the capabilityto extract useful components from technogenic mineral formations.

3.3. Pros and cons of Contracts and Licences after 29/06/2018

ObligationsContract

(exploration / mining)

Exploration Licence

Mining Licence

Local content in staff + - -Local content in goods (for Contracts concluded before 01/01/2015) + - -

Local content in works, services + - + (≥ 50%)Regulated GWS procurement + - +Tuition of Kazakhstani personnel (=/≈1%) + - + (from the

2nd year)Transfers on social development of a region +

- (unless 1 km from a settlement)

- (unless 1 km from a

settlement)

Financing R&D works (≈1%) + - + (from the 2nd year)

Payments to liquidation fund (1%) + - -Securing liquidation works - + +Minimum exploration/mining expenditures - + +Processing of > 1/2 of mined ore solid minerals with metal content > 30% in Kazakhstan (if feasible)

- - +

Special rights

Retention status - - +Territory transformation - + +Processing agreement - * - +

* Plans to cover

mining contracts as

well

3.4. Retention status and processing agreementRetention statusThe status entitles not to commence or suspend the extraction of ore solidminerals under a mining license at a specified area for a period of ≥ 5 years(+5 years extension).Retention status releases a subsoil user from minimum annual miningexpenditures.Grounds: unprofitability of mining due to market conditions, force majeure,absence of ecologically compliant technology for mining, a court decisionon rehabilitation procedure for the subsoil user.

Processing agreementIf holders of SUR for mining* invest into creation of new, enhancement ormodernization of acting solid minerals processing facilities for the amountof > 7 mln MCI (≈ $51 mln), they may conclude a processing agreement.Potential investment preferences: corporate income tax and land tax – 0%(< 10 years), property tax – 0% (< 8 years), investment subsidy(reimbursement of ≥ 30% of construction costs), release from customsduties and import from VAT, simplified procedure of hiring foreignworkforce, etc.

* Technically, transitional provisions of the Code shall be amended to entitle holders of mining

contracts to such a right.

3.5. Liability under a Contract

Below provisions of the Law remain effective on or after 29/06/2018

No. Grounds for termination of a Contract1 failure to rectify more than two violations of contractual obligations within

the term specified in the MID’s notice;

2 Transfer of SUR or Objects without MID’s consent (where applicable);

3 Execution of < 30% financial obligations during 2 consecutive years.

No. Grounds for termination of a typical exploration contract1 untimely transfer of social payments;

2 violation of the requirements for the minimum amount of costs and types ofwork by years that must be performed within one block;

3 use of the subsoil site not for the intended purpose envisaged by the typicalcontract.

3.6. Liability under a Licence

No. Grounds for revocation of a Licence

1 Transfer of SUR or Objects without the MID’s consent, which caused athreat to national security (term for rectification ≤ 1 year);

2 a breach of obligations to pay a signature bonus, rental payments and/or comply with minimum annual exploration/mining expenditure commitments (term for rectification ≤ 3 months).

The licence terminates within 3 months after the date the subsoil user receives thelicence revocation notice from the MID. It may appeal against the licence revocationwithin 15 business days –> the final decision is taken by court.

Revocation is not allowed if the failure to perform or improper performance ofobligations was caused by force majeure (not including absence of technical and/orfinancial resources, of necessary GWS on the market, or the imposition of anadministrative penalty).

Penalty under a mining licence *

For a failure to:1) ensure a minimum share of local content in works and services – 30% of the

cost of works and services related to the unfulfilled obligation);2) finance either the tuition of Kazakhstani personnel or R&D works – 100% of the

amount of unfulfilled obligations.

* Payment of a penalty terminates the main obligation for the relevant reporting year.

Thank you for your attention

Yerbolat YerkebulanovGRATA Law Firm

Partneryyerkebulanov@gratanet.com

+7 701 7600040

The constantly updated Subsoil Code in English/Russian available at

gratanet.com/subsoilcode.pdf