Authors: Peter Leon, Partner and Chair of Africa Practice Group; Ernst Muller, Senior Associate; Matthew Purves, Associate Designate
As explained in part one of this series, the Kingdom of Saudi Arabia (the Kingdom) is implementing a number of structural reforms to the mining sector, which seek to stimulate private sector investment by intensifying exploration, building a comprehensive database of the Kingdom’s mineral resources, reviewing the licensing procedures for extraction, investing in infrastructure, developing funding methods and establishing Saudi centres of excellence.
Key among these reforms is the Kingdom’s new Mining Investment Law, issued under Royal Decree No. (M/140), dated (19/10/1441 AH) (the Law), which came into effect on 1 January 2021. The Law sits at the apex of a detailed pyramid of mineral law reforms, supported by the Implementation regulation of the Mining Investment Law (Regulation) (a comprehensive set of executive Regulations) and Guidelines. As mentioned in our previous briefs, the Regulation came into force on 1 January 2021.
Collectively, the Law, Regulation and Guidelines aim to support Vision 2030’s objective of diversifying the Saudi economy (historically reliant on hydrocarbons) by encouraging and facilitating investment in the mining sector.
In our series of legal briefings on these developments:
- Part 1 examined administration and licensing;
- Part 2 dealt with sustainability (including environment, local communities, occupational health and safety, and mine closure); and
- This Part 3 deals with financial provisions, as well as the enforcement and dispute resolution regime.
Minimum exploration expenditure
Exploration licence holders must meet a minimum annual expenditure requirement.1 The minimum annual expenditure ranges from 750 Riyals per square kilometre (in the first year of operation) to 7,500 Riyals per square kilometre (in the ninth to fifteenth years of the exploration operations).2
Exploration expenditure includes the costs arising from:
- reconnaissance, geological, geochemical and geophysical activities, and aerial surveys;
- all exploration, drilling and testing activities, as well as geological, hydrological, topographical, environmental and social studies;
- administrative costs related to preparing studies and evaluating results;
- costs for accessing the licence site;
- operating expenses required to conduct exploration activities;
- rehabilitation costs resulting from exploration activities;
- costs incurred to evaluate the opportunities of future exploitation, including feasibility studies, closure studies, and environmental impact studies;
- the annual surface rent; and
- labour costs.3
Exploration expenditure does not include fines, penalties, or any expenses incurred:
- before obtaining the licence;
- in relation to the transfer or acquisition of the licence; or
- in relation to the financing of the exploration activities.4
Exploration expenditure may be distributed among multiple contiguous licence sites.5 Any amount exceeding the minimum annual expenditure may be carried forward to the next year.6 Any shortfall will be carried forward, and if it is not met within two years, the Ministry of Industry and Mineral Resources (Ministry) may refuse to renew the licence or cancel the licensee’s exclusive right to obtain an exploitation licence.7
A licence holder may apply for an exemption from the minimum annual expenditure requirements, if:
- additional time is required to evaluate the work performed and plan future work; or
- work cannot be carried out for reasons beyond the licensee’s control (e.g. security, health or environmental reasons).8
An exploration or exploitation licence holder must pay surface rental annually, calculated in accordance with a formula provided in the Regulation:
- for an exploration licence, the rental ranges from 10 to 900 Riyals per square kilometre (depending on the number of years since the licence was granted);
- for a building materials quarry licence, the rental ranges from 10,000 to 25,000 Riyals per square kilometre (depending on the total size of the licence site); and
- for any other exploitation licence (including a mining or small mine licence), the rental is 10,000 Riyals per square kilometre.9
The holder of an exploitation licence for Class A minerals (explained in part one) must pay a severance fee ranging from 1 per cent to 4.5 per cent (depending on the mineral) of the net value of the mineral upon extraction.10 The latter value is determined according to an extremely detailed formula set out in the Regulation.11
The holder of an exploitation licence for Class B minerals must pay:
- for certain minerals (such as low-grade bauxite, dolomite and marble), a fee ranging between 2.5 to 38 Riyals per ton;
- for others (e.g. barite, graphite and talc), 5 per cent of the net revenues derived from disposing of the ore or minerals produced.12
The holder of an exploitation licence for Class C minerals must pay a severance fee ranging from 0.53 to 38 Riyals per ton of ore produced (depending on the mineral).13
An exploitation licence holder may export minerals and ores for commercial purposes after the won minerals and ores are processed by increasing their concentration and remove any impurities. Once the minerals and ore are processed they may only be exported in accordance with the requirements imposed under the exploitation licence in question.
Class B minerals (explained in part one) may be exported for commercial purposes in unprocessed form, if the licensee:
- pays an export duty of 10 per cent of the net sales; and
- does not export more than 30 per cent of the average annual minerals or ores it produces, prior to processing.14
Class C minerals may be exported for commercial purposes in their natural form (as processed by primary physical methods), subject to an export duty of 10 per cent of the net sales.15
An authorised inspector may enter any licence site at any time, with or without the licensee’s permission, and has wide powers to:
- ensure that the Law, the Regulation, the licence terms and conditions, and Ministry decisions, are being complied with;
- examine and copy books, records, documents, data, or any other document related to the implementation of the Law, Regulation, and the licence terms and conditions;
- assess the general conditions of the licence site, and the licensee’s compliance with the work plan;
- discuss with the licensee, or its representative or workers at the site, any matters related to the implementation of the Law and the Regulation;
- obtain samples of the materials used at or extracted from the site, to ensure the proper implementation of activities in accordance with the work plan;
- measure exploited quantities at the site where mining activities are conducted and review technical documents relating to measurements, and financial and accounting documents to ensure the accuracy of information provided to the Ministry;
- ensure that the activities performed at the site have no adverse impact on safety, security, health, environment or properties, and instruct the licensee to remedy those impacts urgently;
- detect violations and impose penalties of up to 200,000 Riyals per violation;
- detect violations for which the penalty exceeds 200,000 Riyals, and refer them to the committee responsible for violations and penalties;
- seize the machinery, equipment, minerals and ores used at or extracted from the site where violations are detected; and
- seek assistance from security forces, if needed.16
If requested, the inspector must explain the reasons for the inspection.17 A licensee may request a re-inspection from the Ministry if it was not afforded a reasonable opportunity to provide sufficient information, data or reports.18
The following are punishable violations:
- engaging in any mining activity without a licence;
- failure to comply with the Law, the Regulation, or the licence terms and conditions within 60 days of notice to do so;
- failure to remedy a violation of which the licensee was notified, within the period specified, or recurrence of the violation;
- providing misleading or incorrect information to the Ministry;
- delay or failure to provide information or reports requested by the Ministry;
- delay in paying any amounts due under the Law and Regulation;
- delay of more than 180 days from the date of the Ministry’s relevant notice, to take actions to preserve the environment, wildlife, archaeological sites or tourist areas;
- conducting any activity or using any equipment that:
- has adverse impacts on the safety, security or health of employees or any other persons;
- causes damage to the environment or property, an unusual disturbance, or substantial damage to any site.19
In the event of the latter type of violation, the Ministry may request the licensee to suspend all or part of its activities, take steps to remedy the violation, and prepare and implement a corrective action plan within 30 days (to be approved or rejected by the Ministry within 60 days).20
A violation may be punished with one or more of the following penalties:
- a fine of up to 1,000,000 Riyals;
- suspension of works;
- termination of the licence;
- confiscation of equipment used in the violation.21
A fine of up to 200,000 Riyals may be imposed by the Ministry without referral to an expert committee (the committee). If the Ministry believes a violation may warrant a larger fine, it must refer the violation to a committee for investigation.22 The committee may impose any penalty except:
- licence termination, which only the Ministry may impose upon a recommendation from the committee; and
- confiscation, which must be referred to a court.23
If the Ministry intends to suspend works or terminate a licence, it must give the licensee 60 days’ notice to remedy the violation. Failing this, the Ministry will refer the violation to the committee, which will investigate the matter and either suspend the works or recommend that the Ministry terminate the licence.24
A licensee will receive a notice of a penalty, with reasons, and be given an opportunity to object to it within 30 days. Dismissal of the objection may be challenged in the administrative courts within 60 days.25
A licensee whose licence is terminated may not apply for a new licence for three years.26
The Ministry may recover any minerals, ores, derivatives and funds (as well as severance fees) associated with violations.27
If efforts to settle a dispute with the Ministry are unsuccessful after 60 days, the licensee may either approach the administrative courts, or request the Minister to agree to refer the matter to domestic arbitration.28
Empirical experience will determine whether the new mineral regulatory regime fosters the envisaged investor confidence in the Kingdom’s mining sector. As the Regulation in many respects follow international best practice, the law reform process is a significant as much as important step towards realising Vision 2030’s objectives.
- Article 108 of the Regulation.
- Annex 6 to the Regulation.
- Article 108.3 of the Regulation.
- Article 108.4 of the Regulation.
- Article 108.6 of the Regulation.
- Article 108.8 of the Regulation.
- Article 108.10 of the Regulation.
- Article 109 of the Regulation.
- Annex 5 to the Regulation.
- Article 111 and Annex 2 of the Regulation.
- Articles 115 to 134 of the Regulation.
- Article 112 and Annexes 3A and 3B of the Regulation.
- Article 113 and Annex 4 of the Regulation.
- Article 135.3 of the Regulation.
- Article 135.4 of the Regulation.
- Article 138 of the Regulation.
- Article 142 of the Regulation.
- Article 143 of the Regulation.
- Article 155 of the Regulation.
- Articles 151 and 152 of the Regulation.
- Article 56(2) of the Law.
- Article 57(1) of the Law.
- Article 57(2) of the Law.
- Articles 153, 157 and 158 of the Regulation.
- Article 160 of the Regulation.
- Article 25 of the Law.
- Article 56(3) of the Law and article 159 of the Regulation.
- Article 161 of the Regulation.
For more information, please contact Peter Leon, Ernst Muller or Matthew Purves.