One of the key objectives of the long-term development policy Vision-2050, which the government has submitted to parliament for discussion and approval, is to put Mongolia among the top ten countries in the world in terms of happiness and freedom from corruption. Among the other goals of what the Prime Minister has called the “most ambitious” roadmap for national prosperity, are expanded use of innovation and technology-based knowledge, economic diversification, green development, raising the GDP by 6.1 times, and taking annual per capita income to $15,000.
If these goals are indeed achieved in the next 30 years, Mongolia would have a seat at the table of the world’s developed countries, of which the top ten today are Singapore, the USA, Hong Kong, the Netherlands, Switzerland, Japan, Germany, Sweden, the United Kingdom and Denmark. According to the World Economic Forum’s 2019 Competitiveness Report, Mongolia ranks 102nd out of 141 countries considered.
Is Vision-2050 all wishful thinking, or is it do-able? For that we have to be clear-eyed about where we stand today and how much and what type of ground we have to cover in the next three decades. This article is only about the situation in the mining sector, as, without doubt, mining holds the key to the national economy, as it accounts for 25 percent of GDP, 72 percent of the industrial output, and 90 percent of total exports, and receives 75 percent of foreign direct investment. Here is a comparison of Mongolia with the world’s leaders in mining resources and output -- China, America, Russia and Australia.
Mongolia’s State Policy on Mineral Resources was adopted in 2014, and over the last four years this has been followed by the Concept for Sustainable Development-2030, the Public Investment Program, and the Three-pillar Development Policy. These provide the key components of our present strategic policy on the mining sector.
Phase I of the Concept ends this year. Its two main objectives were, first, to support development of the geological sector and, second, to encourage transparency and accountability in the extractive industry, and thus improve the competitiveness of the mining sector. The first was to be done by making 1:200,000 scale geological maps covering the full territory of Mongolia, and complete geological mapping and prospecting work on a 1:50,000 scale for 40 percent of the territory, marking ore zones and basins with mineral potential. As for the second, competitiveness was sought to be enhanced by ensuring a stable investment environment for the mining sector, developing environment-friendly infrastructure and transportation network, and setting up a high-capacity power plant in the Gobi region.
No matter how good policies and programmes look on paper, their worth would be judged only from the success of how they are implemented and by their actual impact on the ground. Let us then take a look at what has happened to some geological and mining activities set out to be implemented in the first phase.
First, investment environment and competitiveness. In the past four years, the Canadian company Centerra Gold has sold its business in Mongolia, the ownership of Erdenet Mining Corporation was in dispute in a court of law, a former Prime Minister and others were arrested in connection with some Oyu Tolgoi agreements, deposits have been seized by the state, the Government has announced it would take over a total of 400 deposits, and a number of mining licences have been revoked on flimsy or dubious grounds.
The cumulative effect of all this has been the creation of an uncertain and unstable investment environment. Who would put their money in a place where the government is seen as ‘seizing’ mining assets and invading other sectors of the economy, such as banking, as was shown when it was announced that bonds to be issued to make up for the cancellation of pension-backed loans would be guaranteed by the Development Bank and that the Bank of Mongolia would buy silver from the Salkhit deposit? Add to this the fact that no licence would be issued in 2020 for geological exploration, the only sector that is likely to attract investment. There is no railway to reach the global market and increase export competitiveness, and movement across border ports is still slow. The only bright spot on this bleak canvas is the ongoing construction of the 414.6-km Tavan Tolgoi-Zuunbayan railway, a project whose progress the President is personally monitoring.
Article 1.24 of its Action Program says the Government would “boost the operations of Erdenes Mongol LLC and the Oyu Tolgoi project and start exploitation of Tavan Tolgoi and other deposits of strategic importance”. Let us see what the present position is.
More than 70% of Mongolia’s foreign direct investment is for the Oyu Tolgoi project. Rio Tinto’s sudden announcement that the project’s underground mining costs have grown and that operations would commence later than expected led politicians to demand a review of the Investment Agreement, with some dark hints that it could be scrapped altogether. In the event, all went well, with parliament passing a resolution tasking the Government with ensuring that Mongolia benefits more from the project, and setting up a working group to suggest how all agreements relating to the deposit can be improved. On the ground, construction of the production shaft was completed, marking a big step forward in the underground development.
Two years have passed since parliament passed a resolution on activating the work to put Tavan Tolgoi into economic circulation. The idea of selling up to 30 percent of Tavan Tolgoi at an IPO in an international stock exchange was first mooted almost a decade ago, and now the mining minister has announced that the IPO would most likely take place before the parliamentary elections scheduled for June. We have to wait and see. As for infrastructure development, not a brick is known to have been laid after a formal announcement that a 450-mw power plant and a coal processing plant would be constructed between 2019 and 2021, and these are just two of the 11 projects planned to facilitate comprehensive exploitation of the deposit. There has been no progress in finishing the embarkment work of the Tavan Tolgoi-Gashuunsukhait railway but some redemption came when the Ministry of Road and Transport Development announced that tracks have been laid over the first 1.9 km of the Tavan Tolgoi-Zuunbayan railway, along with its embankment work.
One “success story” is that of the State-owned Erdenes Mongol LLC, which has greatly increased its assets, though not through its business acumen but by government decision. The company works under direct government control, and now has 16 subsidiaries in copper, coal and coal seam methane, gold, silver, uranium, rare earth elements and railways. One of these, Erdenes Silver Resource, is preparing to put the Salkhit and Asgat deposits into economic circulation but even before extraction begins, Erdenes Mongol has decided to issue a bond with output from Salkhit as collateral. It is strange that priority should be given to Salkhit, which is not a strategic deposit, while the Government Action Program singled out such deposits to be put into economic circulation first. Nothing has recently been heard of a copper or iron smelter, but Erdenes Gold Resource has taken up a gold refinery project. Information about Erdenes Mongol and its subsidiaries is hard to come by, even though there is widespread curiosity about how it proposes to constitute and operate the National Wealth Fund. All we know is that it is working on the draft law on this.
The Government Action Program promises support for the sustainable development of the mining sector “by enhancing geological mapping, general exploration, geophysics, geochemistry, hydrogeology and geo-ecological studies”. These will also help meet the first goal of the first phase of the Sustainable Development Concept-2030. We have already mentioned the geological mapping targets. MNT24.6 billion from the state budget was spent on geological and research activities in 2019.
Translation of the table:
Another goal is to establish a National Geological Authority and a National Geo-database meeting international standards that would simplify information delivery service, Neither has come up yet, but a draft resolution on this was submitted by the Industry Minister to parliament in early January this year.
One component of the Action Programme, Gold 2, is now in its fourth year. It aims to increase gold output by 2-3 tonnes per year, taking it to 25 tonnes by 2020. That target was close to being realized in 2018 when 22 tonnes of gold was sold to the Bank of Mongolia, but this came down to 15 tonnes in 2019. The Bank has launched a “Mongolian Gold for the Treasury Fund” campaign and in cooperation with the Swiss Development Agency’s Sustainable Artisanal Mining project has established a gold assay laboratory away from Ulaanbaatar, to allow artisanal miners to sell gold locally.
One area where significant progress has been made is in increasing oil extraction and construction of an oil refinery. A refinery is being built in Altanshiree soum in Dornogobi province with a $1.24-billion line of credit from India. The land has been prepared and levelled, and 27 km of railway and 17.2 km of roads with a 100-tonne load bearing capacity have been built, connecting the site to motorways and railways. A 110-kw overhead power transmission line is also ready. Currently, a 550-apartment residential complex is under construction. When commissioned in 2023, the refinery will produce 1.5 million tonnes of products per year.
There is more positive news from the oil sector. Preliminary drill results announced by Petromatad, listed on the London Stock Exchange, indicate that its Heron-1 well has total reserves of 25 million barrels or about 4 million tonnes. That would raise Mongolia’s total oil reserves by 10 percent.
It would appear that the Government’s Action Program for 2016-2020 is not in line with the State Policy on Railway Transportation approved in 2010. The former talks about “putting into operation” the Tavantolgoi-Gashuunsukhait and the Khuut-Bichigts railways, “completing the construction” of the Oyu Tolgoi branch railway and the Shivee Khuren-Ceke border port railway that would branch out from the Tavantolgoi-Gashuunsukhait railway, and “starting the construction” of the Zuunbayan-Khangi and the Erdenet-Ovoot railways, but it makes no mention of the Tavan Tolgoi-Zuunbayan railway, even though it is included in the first phase of the railway policy.
Anyway, it is the one where construction has begun. Commonly called the TT-ZB project, the railway starts from Budran bag of Mandakh soum in Dornogovi province. The construction is being financed by the dividends due but not paid to the 2.5 million Mongolian citizen-shareholders of Erdenes Tavan Tolgoi LLC. Additionally, MNT750 billion of the company’s MNT807 billion profit in 2018 is being spent on the earth work. Russian Railways International is providing technical consultancy services. All going well, the railway would be in use this year.
While construction of another 281 km of railway from Zuunbayan to the Khangi border station, a route added to the railway policy in 2018, is also likely to begin this spring, there is no talk of resuming work on the 267-km Tavan Tolgoi-Gashuunsukhait railway, the shortest link between the mine and the market. Its embarkment work was stopped four years ago after covering 208.5 km, at a cost of $280 million got from Chinggis bonds. N.Udaanjargal, Executive Director of Tavan Tolgoi Railway LLC, has once said that construction would be resumed once a suitable company was found to take up the job. He had also said that construction “was planned to be completed by December 2020”. Nothing more has been heard about the project since then but if, and when, we have the railway, it would be possible to build a link to Oyu Tolgoi.
The Khuut-Bichigt narrow-gauge railway has been relegated to the back burner though a former head of the President’s Office used to emphasize that this would be part of the shortest way to take our coal to several border crossings. The Shiveekhuren-Ceke border railway was expected to be operational last year but is still not ready.
Construction of the 574-km Erdenet-Ovoot railway is getting delayed. Aspire Mining, which would own it, has now decided to build a road in the first ten years of its major coal project. Originally, it signed a 30-year concession agreement with the Mongolian Investment Authority in 2015 to implement the Erdenet-Ovoot railway project in a design-build-operate-transfer form. Three years later, the Erdenet-Ovoot route was added to the State Policy on Railway Transportation, and made part of the northern railway corridor of the China-Mongolia-Russia Economic Corridor program: Kuragino–Kyzyl–Tsagaantolgoi–Artssuuri–Ovoot-Erdenet–Salkhit–Zamyn-Uud–Ereen(Erlian)–Ulaantsav-Jining–Beijing–Tianjin.
All told, then, not much has actually been done, even after resolutions were adopted to raise hopes. The Government lacks the financial resources, and several of the projects are not attractive to private investors who, in any case, are wary of our opaque regulatory framework, and an unstable legal environment.
Speaker after speaker at the Mongolian Economic Forum talked about the regular policy about-turns seen in the past 27 years. Around 500 interdepartmental policy documents are there but just about 160 of them are actually applied. “Mongolia is very good in issuing declarations of intent, but the actual work rarely goes beyond the processing stage. There is no real aspiration or inclination to implement a policy,” according to economist B. Tuvshintugs, who has made a study of development policies and their implementation. Indeed, apart from Gold 2, no other program devised for mineral resources such as fluorspar, rare earth elements, and copper have gone beyond discussion and been approved. True, programmes were adopted for zinc, coal and iron but, by and large, they have remained on paper. The government has been issuing bonds and borrowing money for projects almost at a whim, with no prioritization or clear planning. Consequently, Mongolia will have to repay $2.9 billion every year for four consecutive years beginning in 2021. MNT1396 was enough to buy USD1 in 2012 when the Chinggis bond was issued, and today this has gone up to to MNT2750.
Goals are reached by actual steps taken on the ground, and not by the frequency of ambitious policy declarations or by reiteration of “dream lists”. The discovery of the Oyu Tolgoi deposit at the turn of the century made the world aware of Mongolia. Then Mongolia signed its first ever stabilization agreement with a Canadian company, exploited the Boroo gold deposit with western investment, announced a tender for international investors for the Tavan Tolgoi deposit, signed an investment agreement for Oyu Tolgoi, a Mongolian mining company issued an IPO at an international stock exchange for the first time, and economic growth reached double digits, identifying Mongolia internationally as the next Kuwait.
The two major “shocks” that had a positive effect on the Mongolian economy were the exploitation of the Oyu Tolgoi and Tavan Tolgoi deposits. There has to be at least one new ‘tolgoi’, if not more, to keep growth at 7-8 percent and increase GDP over the next 30 years, but how can this new pillar be found when grant of exploration licences has been completely stopped, shrinking rather than opening the geological exploration sector, the one with the most potential to attract investment? At any given time, around $15 billion-$20 billion circulates in the exploration sector worldwide. While countries compete to attract just 1 percent of that capital, Mongolia was able to attract 4 percent of it at one point of time, when more than 6,000 exploration licences covered 44 percent of Mongolia’s territory, and over 1,000 mining licences were issued over 0.2 percent of the land. The number of exploration licences peaked in 2004, and it was as a result of this that the major deposits in the Umnugovi area currently being either developed or extracted, were discovered, including Oyu Tolgoi. These are also the projects that made the world of mining notice Mongolia’s potential and still stir the interest of international investors. If sustainably implemented, these will be our main export sources to support the economy in the future.
This is why geological exploration work should be ahead of mining by 20-30 years. Only one in 1,000 attempts is likely to discover a tier-one deposit such as Oyu Tolgoi. And in its case, nine years passed after its discovery in 2001 before open-pit production started there. In the case of Tavan Tolgoi the period from discovery of the deposit to putting it into operation has been 40 years. These details indicate how much time and money a mining project requires and how much risk there is in it. Many companies came to Mongolia hoping and working hard to find such large deposits but the inward wave is now ebbing.
Investors prefer an economy on the move and see Mongolia as a dead end. But not all is lost, says A.Bilguun, Executive Director of MIBG, who feels more than certain that there are deposits of enormous value in the large Central Asian mineral zone stretching from the southern border of Mongolia and continuing along the frontline of Govi Altai to Bayankhongor, Umnugovi and Dornogovi. He is right to be optimistic as almost 70 percent of Mongolian territory has not been explored even perfunctorily.
Exploration licence fees are low in Mongolia, but in a way this has been counterproductive. Holders hang on to their licence for a long time, without making active use of it. Some suggest that along with opening the doors wide for potential explorers, licence fees should be made very high so that only who mean business would come and once they have paid these high fees, they would try their hardest to make their effort worth the price. Licences are not for trading and to make sure the holder works to find a deposit, land payments should be set high, the minimum mandatory amount of exploration work per year should be increased and the reporting criteria made more stringent. Only that would separate the grain from the chaff. Currently 2,796 active licences cover 4.8 percent of the total territory of Mongolia. Of this, 3.8 percent are covered by 1,126 exploration licenses. The current exploration licences are valid for only the next 2-3 years, and there is a risk that geological exploration would soon be a lost cause in Mongolia.