S.Bold-Erdene
Parliament is discussing whether or not to make the Gatsuurt gold deposit a strategic deposit. The licence holder, Centerra Gold Mongolia, has offered to the Government free ownership of a certain percentage of shares in it. The Government wants Parliament to approve the draft decree to include the deposit in the list of strategic deposits and to set the State’s ownership at 20%. The deposit was not in the initial list of 15 strategic deposits and was also not among the 39 potentially strategic deposits. People are wondering why it should qualify as strategic now and also why the state should want 20% ownership, and not 34% as it can legally claim.
Centerra Gold Mongolia has been trying to sign an investment agreement on the deposit since 2009, but its location brings it under “the law with the long name” and thus disallows mining operations there. The only way out is to be named a strategic deposit, and this was why the company made a request to consider the deposit a strategic one.
Centerra’s offer is quite generous. It is not demanding any tax benefits and is offering free shares to the Government. This is in sharp contrast to what happened at its Boroo deposit, where the company mined 40 tons of gold in just five years while enjoying substantial tax exemptions under a stability agreement. In an attempt to make over its image before the people and the Government, the company is now building maternity wards etc.
Parliament has the absolute right to fix the percentage of State ownership in strategic deposits, and over a period of time, Centerra has of its own proposed several options. It wants a joint venture with the State to mine the Gatsuurt deposit, and has, at various times, offered to split the stakes (the company’s share first) 95:5, 80:20, 75:25, and 66:34. Each of these options has its own unique feature.
Percentage perceptionsThe 95:5 division was proposed in the very beginning, with Centerra making it clear that the 5% would be its gift to the Government, which would also not have to invest in the mine’s development. Compared to Oyu Tolgoi and Tavan Tolgoi, 5% is insignificant but it is also not 0% like that in Tsagaan Suvarga. However, a working group appointed by the Mining Ministry did not accept the offer and asked Centerra to come up with a fresh one. The company then suggested the three other options.
If the 20% ownership offer is accepted, the Government will have to incur 20% of the investment costs of the project. The other two options also require the Government to invest according to its percentage of ownership and the funding required for such investment is under discussion to be borrowed from investors. However, if the 20% offer is chosen, this loan from Centerra to the Government will be interest-free, making it a tempting deal for the latter.
The catch is that the price of gold may not be rising in the long run as the economies of the United States and Europe revive. In that case, it will take longer to repay the loan, and profits will be less. Another disadvantage will be that a 20% ownership will give less say to the Government in management issues. The influence within the Board of Directors and at the executive management level will be limited as the share of ownership is not 34% as in Oyu Tolgoi LLC.
The 75:25 option is half way between a ‘too small’ 20% and a ‘too ’ 34%. If this is accepted, the interest rate on the loan would be LIBOR+6%. The working group has rejected this option as unprofitable.
The 66:34 option gives the Government the largest stake legally permissible in a strategic deposit run jointly with a private investor. The interest rate for the loan will again be LIBOR+6%, as was the case in Oyu Tolgoi. That agreement has been marked by disputes over the loans from the investor and the interest payable. This must be one reason the working group has been persuaded that 20% ownership with an interest-free loan is more profitable and less risky than 34% ownership with its different conditions. In the case of Oyu Tolgoi, it was said in Parliament, the Government borrowed over $1 billion to meet its 34% share of the initial investment and the stipulated interest rate of LIBOR+6% means the annual repayment amounts to approximately $70 million. With the mine still to run at full capacity and the investment payback period getting delayed, the interest on the repayment puts further pressure on the Government.
Choosing between dividend and taxA decision on the appropriate percentage of ownership can be taken only after carefully considering the expected revenue from the project. Would it be more profitable to receive dividends from the project or to collect more tax? The official calculation at present is that the yield from taxes would be higher, and the final receipts more or less the same, no matter what percentage of shares is owned, 34% or 20%, but the former will mean more interest on the loan.
Gatsuurt is the second gest gold deposit in Mongolia after Oyu Tolgoi, but going by data in the feasibility study, the net profit from mining here would not be as high as one would expect. The amount of gold to be extracted has been put at 42 tons, from a total reserve of 70 tons. The total investment will be approximately $320 million, with a mine life of 12 years. The amount invested will be recouped after 4 years and 3 months. Assuming the average price of gold will be $1300, the expected total revenue is $1.1 billion, of which Mongolia will receive $400 million in tax. There will be no tax relief, and the investment agreement is likely to ensure that most taxes would remain stable.
$108.8 million of the total investment of $320 million will be spent on raw material, equipment, infrastructure and a concentrating plant. The last is a matter of argument. The concentrating plant at the Boroo deposit, set up at a cost of over $100 million, will be used as the cost of relocating it to Gatsuurt is too high. Instead, ore from Gatsuurt would be transported to the plant at Boroo, and, for this, a 55-km-long road has been constructed. Since the existing plant is to be used, the Government will surely demand removal of the cost of building a new plant from the feasibility report.
A redeeming messageThe remaining $200 million of the projected investment will be spent in the next two years. If Parliament approves the 20% ownership plan, Mongolia’s share of the $320-million investment will be $64 million. The entire amount will come from Centerra Gold Mongolia as an interest-free loan, to be paid back from dividends. How much the dividend will be is uncertain, but the net profit has been estimated at $170 million or MNT350 billion. That is not so high, but a major fall-out of any agreement with Centerra will be the reassuring message sent out to foreign investors.
The major imperative behind the haste to start work at Gatsuurt is directly related to the state of our foreign exchange reserve. The gold from Gatsuurt will be sold directly to Bank of Mongolia, raising its reserves by 40%-50% at a time when they are being depleted fast. The central bank hopes to purchase 10 tons of gold from miners this year. The average annual output at Gatsuurt will be 4-5 tons, which means this project alone will help the central bank’s foreign currency reserves to rise by anything between $250 million and $300 million. Apart from this, the coming two years will see over $200 million of direct foreign investment and some 50 companies will get business as subcontractors for the Gatsuurt project.
If Gatsuurt is made a strategic deposit, a message will be sent to foreign investors and investment consultants that the Government can, and does, work with foreign investors. Foreign investors held back by the prolonged dispute with Rio Tinto on the Oyu Tolgoi project will see it as a project-specific dispute, and not a matter of general policy. A joint venture with Centerra Gold at Gatsuurt will lift investor confidence, even as failure to reach an agreement there will seriously damage the reputation of Mongolia among foreign investors.
The likely deposit extraction agreement on Gatsuurt will be the first such agreement since the revision to the Law on Minerals, and is expected to pave the way for many more. As of today, there are few differences of any real import between Centerra Gold Mongolia and the Government, raising the hope that the Gatsuurt agreement may become the model of those that will follow. Once Parliament decides on the ownership percentage, work will begin on formulating the terms of reference for the joint venture and final talks on the deposit extraction agreement start.
The Gatsuurt depositThe deposit is a major deposit discovered in the North Khentii gold zone by the Mongolian gold metallogen subdivisions. It contains ores with relatively high percentage of gold and there is a potential for the deposit reserve to increase in the future. A few local companies have been mining at the gold placer deposits of Gatsuurt since 1992, and it was during these operations that the main gold deposit was discovered in 1997. Centerra Gold Mongolia says it spent a total of $49.7 million on exploration work at Gatsuurt between 1997 and 2006. Gatsuurt is located on the famous Noyon Mountain, an important and valuable historical heritage place where the tombs of Khunnu-era kings and lords were found.
Centerra Gold Mongolia is a company with experience of working on the Boroo deposit. The company reports that it mined around 1.5 million ounces of gold from the Boroo deposit between 2004 and 2013. It also owns the Kumtor gold mine in Kyrgyzstan. Of the total 9.2 million ounces of gold mined at Kumtor between 1997 and 2013, 600,000 ounces were extracted in 2013. Kumtor is approximately 12 times ger than Gatsuurt and it is the gest foreign invested project in Kyrgyzstan with a huge impact on its economy.