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Bright Prospects for Domestic Mining Industry - International Law Office

International Law Office

Energy & Natural Resources - Azerbaijan

Bright Prospects for Domestic Mining Industry

December 12 2005

Legal Regime
Future Prospects

For well over 100 years the oil industry has dominated the economy of Azerbaijan, at times almost to the exclusion of all other industries. It is therefore welcome to find attention recently focused on the mining sector in Azerbaijan.

On July 29 2005 Anglo Asian Mining plc was listed on the Alternative Investment Market of the London Stock Exchange. The largest asset of Anglo Asian Mining is currently its 49% stake in a production sharing agreement with the Ministry of Ecology and Natural Resources of Azerbaijan for mining in the western sector of the country, including the autonomous republic of Nakhchivan. The agreement is the only existing mining production sharing agreement in Azerbaijan; however, with increased attention now being paid to the sector and other mining fields being opened to foreign investors, it is highly likely that all future mining concessions will be awarded on the basis of production sharing agreements.

Legal Regime

There are two principal pieces of legislation covering the mining industry: the 1998 Law on Subsoil sets out the basic regime for the exploitation of minerals in Azerbaijan, while the new 2005 Law on Precious Metals and Precious Stones sets out specific provisions relating to the mining and processing of minerals such as gold, platinum and diamonds. The Ministry of Ecology and Natural Resources is the authority responsible for the grant of all subsoil rights, while the State Committee for Inspection of Mining and Inspection is responsible for the authorization of all mine survey activities.

Under the Law on Subsoil, all subsoil rights belong to the state. The law envisages that the rights to engage in mining and related activities will be created on the basis of a special permit issued by the Ministry of Ecology and Natural Resources, which acts as regulator. Applicants must be able to demonstrate documentary evidence of the requisite qualifications and experience in the relevant field. Mining permits are to be granted normally for a term of up to 25 years, which may be extended with the agreement of the ministry. Mining rights come into existence only upon issue of a special permit. The award of special permits is made on the basis of tenders, auctions or direct negotiations; however, to date the Cabinet of Ministers has approved rules only for the award of special permits by direct negotiation.

By contrast, the production sharing agreement regime takes foreign mining companies outside the purview of the ordinary legislative regime. Production sharing agreements are ratified by the Azerbaijan Parliament, giving them the status of laws and providing protection to investors against changes in legislation. Despite their legal status, production sharing agreements are not public documents and the terms of the production sharing agreements are available only to the parties and their advisers. The production sharing agreement regime operated in the oil and gas sector has been widely acclaimed as the cornerstone of western companies' successful cooperation with the State Oil Company of the Azerbaijan Republic. It can be expected that the production sharing agreement regime for mining, which is structured in a similar way to that for oil and gas, will provide a similarly stable operating framework.

Future Prospects

Azerbaijan has identified deposits of gold, copper and platinum, generally in rural areas far from Baku and the known onshore oil fields. The exploitation of these mineral resources will provide a welcome boost to local economies and will make the Azerbaijani economy as a whole less dependent on oil and gas. The shift of focus to the regions is likely to have a positive effect on infrastructure, which to date has been relatively well developed in the east of the country where the oil industry is located, but has generally proved unsatisfactory in other areas of the country.

Ever since the costly border war with Armenia, Azerbaijan has been prevented from exploiting its mineral wealth in occupied Nagorno-Karabakh and the areas of western Azerbaijan surrounding it. The situation has not been helped by reports that foreign companies have been conducting mining operations in the occupied areas. Recent contact between the two states has raised hopes that some negotiated settlement may soon become a reality.

The stability of the regime in Azerbaijan over the past 10 years has helped to attract investors such as Anglo Asian Mining. It is to be hoped that this trend will continue with further mining companies commencing exploration.

For further information on this topic please contact Benjamin Paine or Elchin Mammadov at Ledingham Chalmers by telephone (+994 12 493 6669) or by fax (+994 12 498 7132) or by email (benjamin.paine@ledinghamchalmers.com or elchin.mammadov@ledinghamchalmers.com).

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