Kazakhstan has made many changes to its legal and political systems since the dissolution of the Soviet Union in 1991, and has made large strides in conforming its legal system with generally accepted international legal principles. As Kazakhstan proceeds through a rapid development stage, the legislation of the Republic of Kazakhstan is frequently amended raising investor concerns about the ability to plan projects and protect their investments. The Government has addressed such concerns by guaranteeing legislation stabilization to investors. Examples of key legislation currently being amended that will directly impact the mining sector include:

• new amendments to the Edict of the President of the RK on Subsoil and Subsoil Use
• a new Investment Law replacing the Law on Foreign Investments, among many others.

Use of the subsoil for exploration and mining is controlled by the Edict of the President, dated 27 January 1996, the Law on Subsoil and Subsoil Use (the 'Subsoil Law'). According to the Subsoil Law, the subsoil and any useful minerals contained therein are owned by the State. The subsoil user obtains rights to explore and mine through a government contract and has rights to own any minerals extracted.

Duties of the state in regard to management of the subsurface are divided into three jurisdictions. The Government is responsible for organizing and managing the state subsoil stock, outlining subsoil allotments, defining the list of commonly occurring minerals, defining the procedures for the conclusion of contracts, approving model contracts, and appointing the 'authorized body' for execution and implementation of contracts. The Authorized Body (currently the Ministry of Energy and Mineral Resources) prepares and organizes tenders, conducts negotiations with subsoil users, signs and registers contracts, monitors compliance with contracts, and issues permits for the assignment of subsoil rights. Local executive bodies grant land plots to subsoil users, supervise the protection of the land, and participate in negotiations with subsoil users for environmental and social protection, among other functions. The terms of contracts depend on the types of subsoil rights granted.

Contracts for exploration may be valid for six years and may be extended for two additional two-year terms. Contracts for production may be granted for up to 25 years and for deposits with major and unique reserves for up to 45 years. Combined contracts for exploration and production are granted for a total of 31 years, which includes any exploration extension terms. Concluded contract may be extended for full development of the commercial deposit. It should be noted that licenses are no longer required to obtain subsoil use rights; the contract is the operative document.

Generally, the terms and conditions of a contract are negotiated between the Competent Authority and the subsoil user taking into account the provisions of the model contract in form and content. Although substantial changes were introduced to subsoil use legislation in August of 1999, the model contract incorporating such changes was only approved on 31 July 2001. According to the contract terms, a subsoil user is granted the right to independently use the contract area, to use at its own discretion the results of its activity including mineral resources, to construct in the contract area structures for production and social purposes, to hire subcontractors, to assign all or part of its rights to third parties with approval of the Competent Authority, to terminate its activities, and to exercise any other rights provided by the legislation. Subsoil users are obliged to operate using the most efficient methods and technologies based on international standards, to comply with all approved schedules and contractual provisions, to strictly comply with Kazakh legislation, to give employment preferences to Kazakh personnel, and to preserve objects of historical and cultural value, among other requirements.

Procedure for Obtaining Subsoil Use Rights

The procedure for the granting of subsoil use right in Kazakhstan is controlled by Resolution of the Government No. 108 dated 21 January 2000 approving Regulations for Granting the Rights for Subsoil Use. Under these regulations, there are two ways to grant subsoil use rights: through a tender or through direct negotiations. Tender proposals should contain basic information about the prospective subsoil user such as information about previous activities of the applicant, sources of financing, plans for development of a deposit, forecast of expenses, etc. The tender commission chooses winner based on the results of the evaluation of the tender bids received, taking into consideration the following factors: the experience and capability of the bidder, the starting date and the planned intensity of exploration and/or extraction, projected rates of return and profitability, the proposed size of initial and future payments to the budget (royalties, signing bonus, commercial discovery bonuses), the size of investment, time period and conditions of financing the project and capital investments, contributions to the social fund and compliance with legislation and regulations.

Direct negotiations can be used:

• if the applicant has an exclusive right for obtaining the production rights on the basis of a previously granted exploration contract;
• in cases where a contract is concluded for the construction and/or operation of underground structures not connected with exploration and/or extraction;
• if the applicant is a national company; and
• in other cases which may be established under legislation.

Subsoil use rights are considered granted from the moment of the conclusion of a contract. The following are the legal bases for initiating contract negotiations:

• a decision of the Competent Authority to conduct direct negotiations;
or
• a protocol of the tender commission declaring the winner of the tender.

Prior to execution, a contract must undergo legal, economic, and tax evaluations and must obtain other approvals by authorities such as environmental, health and safety, etc. Although each ministry has a set period of time to review the contract, in practice negotiation of subsoil use contracts can take several months to complete.

Government Participation in Projects

Amendments to the Subsoil Law in 1999 added the concept of a ‘national
company' to the subsoil regime. While certain national companies already exist, such as Kazakhoil, which operates in the petroleum sector, not all mining sectors have a national company. In spite of this, the Subsoil Law requires that for competitive bidders to obtain the subsoil use rights, the subsoil user must place in its bid the intent to co-operate with national companies in the exercise of the rights to use the subsoil. The Subsoil Law, however, does not mandate that a national company be directly involved in the mining operations.