Issue 1, 2012. February-March

   

WALKING ON GOLD

New reforms in Georgia's mining legislation could help open the country to investment from gold exploration companies who believe there could be bullion buried beneath our feet.

Molly Corso

A soviet-era mining code could be preventing Georgia from cashing in on its gold. Concerns about fees and the licensing process, which depends on auction, have complicated the sector, say mining professionals.

While the government is in the process of reforming the law, however, investors like Tim Coughlin, the president and CEO of Lydian International, believe Georgia is at risk of losing potential investment to neighboring countries.

Coughlin followed an ‘arc' of volcanic ash- a geological sign of possible gold deposits -from Turkey into Armenia and Georgia. While he already struck gold in Armenia, the convoluted process of navigating Georgian mining laws has taken a lot longer.

It took just one year for Lydian to go from exploration to hitting gold in Armenia: it entered the market in 2005 and discovered a vein of gold, a reported 2.5 million ounces(worth USD 4 billion at today's prices) just one year later.

In Georgia, however, the first team came in 2010 but it took an entire year to obtain licenses for the site they discovered in Adjara, a southern region of the country that borders the Black Sea.

"I've spent my career in just about every country in South America, worked in Eastern Europe, Turkey, Russia, Armenia, Africa - now in Georgia. The Georgian mining law has got to be pretty close to the bottom of the list," Coughlin said in a phone interview from London.

Giorgi Tatishvili, deputy head of the Agency of Natural Resources at the Ministry of Energy and Natural Resources, agrees that reform is needed.

Tatishvili inherited the mining law, along with the forests and other natural resources, when the portfolio was shifted from the Ministry of Environment to the energy ministry in March 2011.

While Tatishvili said it is too early to specify what changes would be addressed by the reformed code, he stressed that the agency is serious about exploring Georgia's potential to attract gold mining companies. Research is already under way into codes from a variety of countries with strong mining sectors, including South Africa, Canada and legislation in Colorado and Wyoming, he said.

Concerns about the law, and its effect on Georgia's ability to develop its mining sector, have prompted the World Bank and the European Bank of Reconstruction and Development (EBRD) to work with the government to improve it.

EBRD is also an investor in Lydian International's exploration projects in the region.

"There is nothing wrong or dubious [about the law] - it is just inadequate. But in the case of the Georgian government which is looking for foreign direct investment, in such a potentially promising sector inadequacy must be urgently dealt with," insisted Paul-Henri Forestier, the EBRD director of the Caucasus, Moldova, and Belarus.

A top concern is the character of the licenses, since they combine exploration with extraction - two very different processes, which, in other countries, are licensed separately. By combining the processes, exploration costs are much higher in Georgia than in other countries. For instance, one hectare of land costs 500 lari (approximately $300) a steep investment when it is unclear if the land holds viable deposits or not.

Major mining countries like Australia charge a fraction of that, said Professor Alexander Tvalchrelidze, deputy general director of Georgian Minerals, Ltd. He noted that even the United States, considered one of the most expensive in the sector, charges just $20 per hectare.

In practice, that makes it too expensive to explore for new gold deposit sites, he said.

Other issues include how the license cost is calculated, and the lack of any guarantee that companies which find gold will win the right to explore and extract the site: since the Georgian government issues licenses through an auction, the company that discovered the stake has no guarantee that it will receive the right to develop it.

Mining countries like Chile have moved away from the auction process in mining sectors like gold because the act of calling for an auction for extraction rights undermines the confidentiality of a new find.

A major hurdle is the auction process itself, remarked Tvalchrelidze, the deputy general director of Georgian Minerals, Ltd.

"It is the hugest obstacle because ...no one will invest in exploration if they have no guarantee that they will ultimately acquire the license," Tvalchrelidze said, noting this issue has hurt the sector's development in Georgia.

"That is why only little dots are licensed now and nobody is performing huge, country wide exploration."

These types of "inadequacies" in the law cause unnecessary uncertainties for investors, said Forestier.

"The resources are in the ground. No one can challenge that. The only issue is how you are going to convince people to come and extract them," he said.

"Armenia's code, which was actually approved very recently, appears to be more ...adapted to what business is looking for. It is not a question of being more generous, it is a question of knowing exactly what you get for what. In the extraction industry, whether it is mining or oil or gas, you basically have two phases; one is exploration where you are taking a huge risk, and the other is development, where you are making a huge investment."

Coughlin believes that many other potential investors have walked away.

"There are plenty of people who have looked at Georgia," he said. "In Turkey there are copper ore deposits which extend right into Georgia... [but] the mining law just doesn't work for exploration. It has closed the door for a lot of people."

Other issues with the law include a formula that allows the government to reassess the cost of a mining license if a serious find is discovered.

Forestier explained that potential investors are looking for stable conditions when they invest in exploration, a risky and expensive enterprise that may leave the company with nothing.

"If the odds of hitting a commercially viable deposit are one in ten, then you want to make sure that your investment in achieving this is commensurate with the expected find," he said.

Tatishvili noted, however, that despite issues with the mining law, interest in Georgia's potential gold deposits has been high.

During the last four months of 2011, the agency issued licenses worth a total of over 100 million lari. Two more auctions have already been planned for 2012, one for a small plot in Racha and another for a large plot in Kakheti.

"We have some prospective areas, but without exploration work, without drilling, without some analysis it is difficult to say now about the prospects for the industry," he said, noting that the government will have a "clearer picture" of possible deposits once new license holders' submit their reports.

"We are just now in the process... [of] working with experts; World Bank experts; EBRD experts. Let's see [what happens]."