Saudi Arabia: The Saudi Arabian Mining Code

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Gulf Practice/Mining, November 2011

It has been well publicized that it is the intent of the Government of the Kingdom of Saudi Arabia (KSA) to establish mining as the third pillar of the Saudi economy alongside hydrocarbons and petrochemicals. While a key champion in this effort is the Saudi Arabian Mining Company (Ma'aden), the landscape remains open for other mining companies to take advantage of the significant opportunities that exist in the KSA mining sector.

In addition to such drivers as the potential offered by the under-explored and under-exploited Arabian Nubian Shield, strong existing infrastructure and attractive energy costs, a further key stimulant is the existence of a progressive legal regime governing mining activities in the KSA. In an effort to encourage participation and investment in the mining industry, the KSA liberalized its mining and mineral resources laws in 2004 by adopting the revised Mining Investment Code (the Mining Code) and the Mineral Resources Executive Regulation (the Regulations).

The following is a discussion of certain noteworthy provisions of the Mining Code and Regulations, with emphasis on the licensing scheme, but is not intended to be a comprehensive summary thereof.

Overview

The reforms introduced by the Mining Code have, among other things, streamlined procedures, established a more competitive tender selection process and provided new incentives for investors.

Whereas in the past companies were required to first apply for a licence to explore, and then separately apply for a Royal Decree granting a lease to exploit, the Mining Code now authorizes the Ministry of Petroleum & Mineral Resources (including the Deputy Ministry for Mineral Resources) (the Ministry) to issue mining licences without need of a Royal Decree. While not conveying ownership of land, a mining licence permitting exploitation activities enables its holder to obtain title to minerals extracted within the "licence area" for the duration of the licence. Applications for licences under the Mining Code may be made by individuals and juristic persons, whether Saudi or non-Saudi (although foreigners are also subject to the foreign investment licensing requirements administered by the Saudi Arabian General Investment Authority).

Licence Categories: Exploration and Exploitation

Currently, seven types of mining licences exist that allow licensees (who may hold multiple licences) to undertake, broadly speaking, activities related to non-exploitation/exploration and exploitation. Of importance to foreign participants, all non-Saudi applicants for licences under the Mining Code, except those applying for reconnaissance licences, must establish domicile in the KSA. The establishment of domicile is demonstrated by, among other things, a permanent address in the KSA and the presence of a licensee's delegate or agent within the KSA.

Non-Exploitation

The "non-exploitation" grouping includes licences for:

  1. Reconnaissance – to survey and investigate a licence area for a period of two years (renewal possible for a single additional two-year period subject to certain requirements) and granting a non-exclusive right to examine the licence area for minerals and samples collection.
  2. Exploration – to engage in detailed scientific and technical activities with the aim of discovering natural deposits of metallic or non-metallic ores in addition to the exclusive right to explore for all minerals specified in the licence in an area not exceeding 100 sq km for a period not exceeding five years (renewal possible for a period not exceeding five years subject to certain requirements.
  3. Material Collection – to collect materials (limited to specimens, decorative work or materials for similar purposes) specified in the licence, without the use of power tools and equipment, on a non-exclusive basis.

With respect to the "exploration licence" category specifically, it should be noted that if such a licence holder proves the presence of exploitable minerals, and assuming all other obligations under the Mining Code are met, an automatic right exists to obtain an "exploitation" licence within the effective period of the exploration licence and within the exploration licence area. Obligations of exploration licences include, among others, minimum exploration activity expenditure (varying between Saudi Riyals (SR) 750 and SR 7,500 per sq km a year), notifying the Ministry of the location of field teams, submitting half-yearly reports on the progress of work and a comprehensive report on the expiry of the licence, and delivery to the Ministry of technical records, samples and any drill cores obtained from the licence area upon the termination or expiry of the licence.

Exploitation

The "exploitation" category of licences includes four kinds of licences that are differentiated by (i) type of mineral permitted to be extracted (as classified in Article 3 of the Regulations), (ii) duration of licence, and (iii) size of licence area:

  1. Exploitation Mining – specified class 3 minerals; initial duration of up to 30 years (renewal possible for up to 30 years subject to certain requirements); licence area not to exceed 50 sq km.
  2. Raw Materials Quarry – specified class 1 and 2 minerals; initial duration of up to 30 years (renewal possible for up to 30 years subject to certain requirements); licence area not to exceed 50 sq km.
  3. Small Mine – specified class 1 and 2 minerals; initial duration of up to 20 years (renewal possible for up to 30 years subject to certain requirements); licence area not to exceed one sq km.
  4. Building Materials Quarry – specified class 1 minerals; initial duration of up to five years; licence area not to exceed 0.25 sq km.

Critically, the various exploitation licences confer upon holders an exclusive right to extract minerals, as per the licence terms. If a licensee discovers any minerals not covered by the terms of a licence, the licensee may apply to the Ministry in writing within 90 days from the date of such discovery for an exploitation licence for these additional minerals.

An exploitation licensee, however, is not permitted to commence any development or mining activities in the licensed area unless a feasibility study has been submitted in acceptable form to the Ministry. Such study must include information regarding capital and operating costs of the project, expected rate of return on investment and proposed mining methods to be used. In addition to the feasibility study, an exploitation licence holder (with the exception of building materials quarry licences) must, during the term of the licence, furnish the Ministry with an environmental study prepared by a specialist. Such study must include a rehabilitation plan specifying how the licensee, at the end of the licence term and at the licensee's expense, will rehabilitate the exploited area.

Furthermore, the proverbial "use it or lose it" obligation applies, such that if an exploitation licence relates to more than one mineral, a licensee must exploit all minerals stipulated in the licence. Failure to do so may result in notification from the Ministry requiring exploitation thereof. If the circumstances relating to such notification are not cured within 90 days, the Ministry may then terminate the licence with respect to the subject mineral and grant an exploitation licence for that particular mineral to another applicant in a manner that will not substantially interfere with the operations of the original licensee.

Although the scope of the following provision and its application retroactively is as yet untested, the Mining Code does stipulate that the KSA shall have priority in purchasing from any licensee the quantity of mineral production it requires, on the conditions and at the prevailing prices for such minerals, unless a licensee has prior commitments to sell such production to a third party. Therefore, to mitigate potential risks associated with the application of this right, off-take arrangements should be considered by exploitation licensees well in advance. In addition, the Ministry has the ability, and has in practice exercised such prerogative in certain instances, to specifically mandate within the terms of an exploitation licence that the extracted minerals be sold to specified domestic buyers applying set pricing formulas.

Competitive Bidding and Transfer of Licences

In certain limited circumstances, licences are granted on a competitive basis: (i) where the Ministry delineates a licence area as one requiring competitive bidding for the award of an exploitation licence in the form of a public tender process, and (ii) where more than one applicant applies for a licence over the same area. In such cases, the winning applicant is determined on the basis of evaluating factors such as the respective technical and financial competence of the applicants, the proposed technical work program and commitment to the training and employment of Saudi nationals, with each of the respective criteria being given a weighting as set out in the Regulations.

After having been granted an exploration or exploitation licence, a licence holder may transfer such licence to another party who possesses the technical and financial capability and adequate experience to fulfil the obligations of the licence and who would also be qualified to obtain a similar licence under the terms of the Mining Code. For such a transfer of licence to be effective, a written request in the prescribed form, along with the payment of a transfer fee, must be made to the Ministry. It should be noted that although the process is clear, the test of being qualified to "obtain a similar licence" can be applied stringently by the Ministry, and the ability to transfer the licence should not be treated as a foregone conclusion.

Fees and Taxes

The mineral resources licensing process in the KSA entails paying certain fees relating to matters such as licence application submission, licence issuance, renewal and extension, and licence transfer, and such fees vary in amount between the different types of licences. In addition, unless relating to privately owned land that is exempt, exploitation licences are charged a yearly surface rental fee of SR 10,000 per sq km.

Licensees are subject to (i) KSA income tax, or (ii) if income tax is not applicable, a severance fee representing 25% of annual net income or the equivalent of the income tax, whichever is lower, with any applicable Zakat being deducted from this amount. The current applicable income tax rate for mining activities in the KSA is 20% and an additional withholding tax of 5% is applied against distributions to shareholders outside of the KSA.

Conclusion

It is important to consider that much of the foregoing discussion of mining licences is a description of the black letter of the Mining Code and Regulations. However, in practice, the Ministry retains a significant amount of discretionary power over the scope of licences and the process of licensing, and particularly so in its ability to incorporate specific terms and obligations into a mining licence. Therefore, to have a definitive understanding of the nature of the obligations to which a licensee may be subject, particular attention must be paid to the detailed terms of each individually issued licence, as many are bespoke. With respect to exploitation licences for example, it is not uncommon to see terms such as requiring the licensee to preserve local water sources and the environment and to protect wildlife, to execute specific agreed upon work plans within a specified time period, and to give local service providers preferences in contracting. These caveats are not unique to the KSA and simply highlight the importance of being actively engaged with the Ministry, and specifically the Deputy Ministry for Mineral Resources, to proactively negotiate and work collaboratively to agree to licences on commercially reasonable terms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
David G. Glennie
Carlos Cerqueira
 
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