The year that is coming to a close has been a momentous one for Mongolia in that 19 years after its adoption, major amendments were made to the democratic constitution. Issues pertaining to mineral resources dominated the public discourse and rightly so, as mining continues to be our main industry. Since it contributes so much to the economy, it is only natural that political decisions affecting mining would be closely watched and debated.
2019 started with political instability with demands for the government to resign and the Speaker of Parliament to be dismissed. After about six weeks of uncertainty, a new Speaker took over and the Ministers for Transport and Education left the government. At the fag end of 2018 the government had asked the army to seize the licences of large deposits and the PR zeal with which this act of supposed political strength was presented to the nation, along with loud assertions by politicians of their determination to safeguard the people’s natural wealth made it clear that their eyes were set on the approaching elections. The government announced it would not raise public debt. It also set up a Future Heritage Fund, where the profits from our natural resources will accrue, just as in Norway.
There is some question, however, on how much these profits would be. The state is increasingly taking up a bigger role in the mining sector and this is actually scaring away investors, who, in addition, continue to view Mongolia as a state with an unclear legal system, no norms of law enforcement, and no stable policy. The International Monetary Fund’s sixth-stage financing under the Extended Funding Programme has been deferred by a year and it wants the government to complete the financial sector reforms before it assesses the situation again. Japan has suspended its financing and this was announced during our Prime Minister’s visit there.
During the critical days of the discussion on the amendments to the Constitution and approval of the state budget, came the news that Mongolia was once again in the gray list of the Financial Action Task Force (FATF), the international financial crime prevention organization. With this news, the US dollar reached an all-time high of MNT 2725.
The government has announced that it will not award fresh geological exploration licences in 2020, a sector that was expected to attract investment and foreign exchange. Today, Oyu Tolgoi accounts for more than 70% of total FDI. Politicians have repeatedly given dark hints on how they would like to annul or at least amend the Dubai Agreement, and review the investment agreement, sending OT-related stocks on a dive, but this month work on the underground production shaft was completed, making the year one of goods and bads for the Oyu Tolgoi project. Prices of copper and coal, the two minerals which are the main revenue source for the state, continued to be stable throughout the year, and together with increasing exports, this kept the economy going. However, even though coal exports rose for the fourth consecutive year, it did not meet goals, mainly because of China’s green economy policy and Russia’s ambition to target Asian markets.
As for mega projects, the infrastructure building for the oil refinery project, implemented with a soft loan from the Government of India, is complete and work on construction of the refinery has started. Lack of railways has for long hindered exports, and work on the Tavan Tolgoi-Zuunbayan route finally began this year, under President Battulga’s direct supervision.
Both the President and the Prime Minister made several foreign visits, seeking the way out of a single-market dependence for exports. The Head of State paid official visits to China, the United States, Russia and India and established a Strategic Partnership with the US. President Putin of Russia visited Mongolia after five years, and the two countries have advanced to a comprehensive strategic partnership. During his own visit to Russia, the Prime Minister signed a Memorandum of Understanding with Gazprom to explore opportunities for laying natural gas pipelines through Mongolia.
Mining is certain to be the main topic also in 2020, when it is expected to earn MNT3.2 trillion or 24% of the budget revenue. It will also be a year when Mongolia has a respite from repaying foreign debt. A new parliament will be elected.
Licences in the limelight
We give below some of the major political decisions on mining licences taken in the past year.
December 29, 2018. Following the Prime Minister’s direction, the then Head of the Government’s Secretariat, G.Zandanshatar, with intelligence and special local military units, organized a special operation to revoke licences valid until 2043 and 2047 for the use of gold and silver Salkhit deposits respectively in the Gurvan and Saihan soums of Dundgovi province.
January 7. G.Zandanshatar announced that the Salkhit, Asgat and Tsagaan Ergyn deposits had been taken under state ownership and transferred to Erdenes Mongol which had been charged with putting these deposits into economic circulation before the Lunar New Year.
February 27. The Government instructed the Head of the Government Secretariat, L.Oyun-Erdene, and the Minister of Mining and Heavy Industry D. Sumiyabazar to transfer the licences of some strategically important mineral deposits to Erdenes Mongol.
March 6. The government decides to impose a six-month emergency at the Erdenet Factory to implement the National Security Council’s recommendations. The Prime Minister leads the urgently created working group for this, and he and L. Oyun-Erdene visit the plant where, following discussions with the Director and senior executives of the Department of State Property Policy and Regulation, Oyun-Erdene seals 9 rooms and also announces new restructuring measures. Erdenet becomes a state-owned plant. The emergency was extended for another six months and continues to this day.
March 7. The Head of the President’s Office, Z. Enkhbold, reveals that the National Security Council had recommended that all deposits explored with budgetary funds should be returned to the state, in accordance with the Constitutional provision that the natural resources are owned by the people.
There are more than 400 such deposits including Tsagaansuvarga, Salkhit and Asgat. The government is to have a contract with the company that built the mine in the Tsagaansuvarga deposit, under which the state will reimburse the company the costs it incurred for extraction and the deposit will be transferred to the state. Enkhbold also says the same principle will apply in the case of the other deposits.
August 21. Minister of Environment and Tourism N.Tserenbat announces that the Government has decided to cancel 23 licences held by 19 entities that were acting in contravention of laws on the environment. The Government would ask the companies to pay for the environmental damage their work caused, in the way prescribed in law. A working group led by the Deputy Prime Minister will examine the licences to decide on the course of action. He also warns that all licences issued illegally would be cancelled.
December 9. The Supreme Court directs the Cadastral division of MRPAM to revoke four licences originally owned by Centerra Gold Mongolia, ruling that its earlier refusal to do so had no legal basis.
To recall, Toronto-listed Centerra Gold announced on October 12, 2018 that it had sold its business assets in Mongolia to Singapore’s OZD ASIA PTE for $35 million. These included the Boroo Gold mine and processing plant and the Gatsuurt gold project.
December 18. The government decides not to issue any fresh licence for mineral exploration for one year. Also, a 40-member working group led by Deputy Prime Minister O.Enkhtuvshin has been given 100 days to review 2,889 licences and prepare a central database.
Reaction to this has been mixed. B. Ulziibayar, Chairman of the Mongolian Securities Traders Association, told MMJ that all information about companies that are being alleged to have damaged the environment, not conducted rehabilitation activities or not paid taxes must be disclosed. Regretting that the system of the due process of law and unbiased enforcement is missing in Mongolia today, he said the clearest example of this was seen in the way licences are revoked, seemingly in an arbitrary manner. Licences have been cancelled on the ground that a company caused environmental damage when, as a matter of fact, the company was yet to start extraction.
Ulziibayar also wondered why no explanation has been sought from those who granted licences in what is now being said in an illegal way, or from inspection officials on why they never reported cases of environmental destruction as these happened. Why should they not be penalized for not doing their work? Ulziibayar reminded politicians that their actions must be within the framework of the law, not just to please the people. Unilateral cancellation of licences on unsubstantiated allegations is no way to attract foreign investment, he said.
A.Bilguun, Chairman of the Mongolian National Mining Association, has warned that the current exploration licences would expire in the next 2-3 years and a situation is being created where the concept of geological exploration would disappear in Mongolia. He believes that the only way for a mining-based economy to grow is by exporting more, which would increase foreign currency cash flow, create more jobs, and develop other sectors. The way to do this is to encourage investment in geology and exploration.
Projects currently in the extraction or exploration stage are deposits discovered before 2016. Some of these showcase Mongolia’s mineral potential to the world and draw the interest of international investors. If sustainably implemented, they will be the main source of the exports that would feed the economy in the future. This is why geological studies have to lead the mining sector by 10-30 years. Currently 20% of the territory of Mongolia has information on mineral reserves. The results of the exploration work must be good for investors to be aware of Mongolian mining opportunities. In 2010, more than 40 Mongolian mining companies, including MMC, Hunnu Coal, Aspire Mining, Voyager, Wolf Petroleum traded on the global stock exchanges. This was when the Mongolian economy was roaring, with a GDP growth of 17.3%, foreign investment at a record high, and the foreign exchange rate stable.
Hedley Widdup, Executive Director of Australia’s Lion Selection Group, in his presentation at Discover Mongolia 2019 noted that compared to 2016, the global trend of investing in the mining sector or buying shares of companies operating in the sector is increasing. The first phase of the global market growth cycle is ongoing. The demand for raw materials used for batteries and gold production is increasing. Considering his words, during this favourable period for mineral exploration Mongolia has been closing its only sector to attract investment rather than opening it wider.
Our country is short of money. The higher interest rates in the banks and the stronger exchange rates are dependent on the market system and the demand and supply of money. Prices go up if supply does not meet the demand. Money must be poured into the economy to meet demand. We must have foreign investment to implement mega projects that will support the economy.
Oyu Tolgoi is progressing, despite challenges
It has been a challenging but successful year for the Oyu Tolgoi project. The investment agreement signed 10 years ago has always been a divisive issue in Mongolia. A working group was set up in March to thoroughly review the Investment Agreement of 2009, the Shareholders’ Agreement of 2011, and the “Dubai Agreement” of 2015. It has now submitted its report, calling for cancellation of only the last. With almost near unanimity, parliament has approved a resolution saying work on the OT project should proceed with the proviso that the Government must ensure more and better benefits for Mongolia by seeking to improve the terms of the other current agreements.
On the ground, completing work on the production shaft by the end of the year is seen as an important milestone for the underground mine construction. In July, Rio Tinto announced that the previously estimated $5.3 billion of capital expenditure would increase by $1.2 billion-$1.9 billion and the planned date to start underground production of copper would likely be delayed until 2023.
Coal exports up but below estimate
Final figures for December are not yet in but it seems coal export would be around 5 million tonnes less than the 42 million tonnes estimated in the 2019 budget, though more than the 36 million tonnes exported last year. China’s import restrictions in the last quarter is one reason for this. Lee Jungmin, Vice President of the China Shipping Association, has said China is likely to keep its 2020 and later imports at this year’s level, so if Mongolia cannot maintain its own level and also capture some of the Chinese market supplied by other countries, its exports will again fall short of the estimated budget figures for 2020, which stays the same at 42 million tonnes.
Can Mongolia do this? Australia’s exports to China are on shaky ground but if this creates opportunities for Mongolia, it does so for Russia also. Weng Yile, an analyst at S&P Global Platts, sees Mongolia’s chances being affected by logistics problems. Mongolian border ports’ throughput capacity has not increased, and Russia is an ambitious and aggressive competitor.
When he was in China and Russia this year, President Battulga familiarized himself with conditions in the sea ports of both countries and explored the possibility of Mongolia using them to export coal to third markets. The feasibility study of a project on the joint construction of a coal terminal in the port of Zarubino in the Russian Far East was handed over to him in Vladivostok by the Russian company Fesco. This envisions setting up the first phase of the terminal in 2022 with a capacity of handling 6 million tonnes of coal, which two years later would go up to 10 million tonnes.
Tavan Tolgoi IPO
On July 9, the government took a decision to set up a new daughter company of Erdenes Tavan Tolgoi, and to name it Erdenes Tavan Tolgoi Mining. It will operate in the eastern part of Tsankhi, which contains 795 million tonnes of good quality coking coal. Erdenes Tavan Tolgoi will own no less than 70% of the subsidiary, and the rest will be on offer at the long awaited IPO.
ETT Mining presented a report on its progress so far to the government in the first week of December, after which a new team under Executive Director Kh.Narankhuu has been put in charge of fully completing all preparatory work on the IPO by February 2020. The Mining Minister has reported on the ongoing successful preparation for the IPO and on the selection of financial, legal, technical and marketing consultants. Currently Merril Lynch, Credit Suisse, and Nomura of Japan are the three banks chosen to work for the IPO, and regular progress is being made to meet stock market requirements.
Erdenes Tavan Tolgoi, which is 85% government-owned, made a profit of MNT807 billion in 2018 and expects this to go up to MNT1.1 trillion this year. It is one of the assets of Erdenes Mongol, which operates under the direct management of the government and now has 15 subsidiaries. In 2019, it acquired 100% ownership of the uranium miner Mon Atom, set up Erdenes Gold Resource and Erdenes Silver Resource, and also a rare earth element research unit.
The President has highlighted the importance of building the 414.6-km Tavan Tolgoi-Zuunbayan railway to reach third markets and also to increase the number of export gateways. The decision on construction of a railway from Tavan Tolgoi deposit to Zuunbayan in Dornogovi province was officially made in April. The President is personally interested that the railway is built on schedule and since the time work began in May, he checks out its progress every month. The railway is likely to play an important role in his re-election bid, giving him an opportunity to erase the memory of how he had used up $280 million on embankments and such for the 267-km Tavan Tolgoi-Gashuunsukhait railway.
Also closely watching would be the 2.5 million Mongolians who were not paid any dividend from Erdenes Tavan Tolgoi’s profits last year as the money is being spent on the railway construction. This is also the first time Mongolians are building a railway by themselves. Technical consulting services are being provided to Ulaanbaatar Railway JSC by RZD International of Russia. The railway will be operational by 2020. Apart from increasing coal export, it is expected to bring a group of deposits located along the railway into economical circulation.
The oil refinery is coming up in Altanshiree soum, Dornogovi province. Infrastructure work including 27 km of railway, 17.2 km of roadway able to carry 100 tonnes of load and connected to the national road network, and 100-kWt overhead transmission lines has been completed. Foundation work and leveling work of the plant is also done. Currently, 550 living units for the plant’s workers are being built.
The refinery financed by the Indian government will be capable of producing 1.5 million tonnes of products per year according to the pre-feasibility study. With the successful completion of the project in 2023, Mongolia will not have to import fuel, saving precious foreign currency. Local budget revenue will be increased by $150 million and 600 new jobs will be created. The refinery will be the basis of a potential petrochemical industry in Mongolia and also of an industrial complex, which would include the iron ore processing plant with wet magnetic separator currently under construction in Altanshiree soum.