THE PROS AND CONS OF MONGOLIA'S NEW MINERAL ROYALTY RULE

By Ts. Elbegsaikhan

At its cabinet meeting on the 20th of August, 2025, the Government introduced a new procedure for calculating the mineral resource utilization royalty (commonly referred to as the mineral royalty). This change is expected to have a positive impact-first and foremost- by reducing operational costs for mining and export-oriented companies.

According to the Minister of Industry and Mineral Resources, G. Damdinnyam, under the previous system, the benchmark pricing method used to calculate royalties resulted in significantly inflated rates: 22.6% higher for processed coking coal, 54.3% for fluorspar, and 26.6% for iron ore.

As outlined by the Ministry, under the new procedure, if exporters sell at least 25% of their total product through the exchange, the royalty for the entire volume will be calculated based on the exchange price. This change is also expected to benefit the Mongolian Stock Exchange, which oversees the trading of mining products. The logic is simple: increased trading volumes will lead to higher commission revenue for the exchange.

However, it's not only the stock exchange that stands to benefit. Ore beneficiation and processing plants are also expected to gain from this change. According to the Ministry:

-The raw material supply issues for 47 beneficiation and processing plants, which had come to a standstill due to conflicting regulations between the Law on Mining Products Exchange and the Minerals Law, have now been resolved. Previously, when state-owned companies-such as Erdenes Tavan Tolgoi JSC, Darkhan Metallurgical Plant LLC, or Erdenes Critical Minerals SOE-supplied raw materials to processors, the processed products were blocked from export. Authorities refused to register contracts or issue laboratory assessments, resulting in significant financial losses for the companies involved."

For example, a pellet feed plant located in the Altanshireet Industrial and Technology Park (ITP) was forced to shut down for two years due to this policy flaw. Now, however, the opportunity to export $100 million worth of products under 55 contracts involving more than 30 enterprises has opened up.

The "bottleneck" referred to here essentially describes operational disruptions and stagnation caused by financial and tax-related regulations. In other words, although these plants were fully operational, equipped with modern technology, and had export contracts in place, they were forced to operate at a loss-or halt operations altogether-due to the structure of the previous mineral royalty system.

Take this example: a coal washing plant would purchase relatively low-grade domestic coal at $50 per ton, wash and enrich it, and then export it for $100 per ton. However, the royalty was calculated

based on the international benchmark price for premium coking coal-$150 per ton. In this case, the tax burden exceeded the company's actual profit, rendering the business economically unsustainable.

In addition, the government has introduced new regulations requiring state-owned and locally owned enterprises to sell their domestic production through the exchange. Amendments to the Law on Mining Products Exchange are also planned to reinforce and support these changes.

ANOTHER PUSH, THE MONGOLIAN WAY

Under current law, mineral royalties are calculated based on the sales price, with a base rate depending on the type of mineral-5% for gold, 5% for coal, for example-plus a tiered surcharge tied to increases in global market prices. While this system has been in place for years, it has drawn considerable criticism for its inequitable application. Nevertheless, the government had not made any substantial reforms-largely because changes would significantly impact revenue collected by the state treasury.

As previously mentioned, the export benchmark price for any mineral product- such as the London Metal Exchange price for copper concentrate was multiplied by the export volume, and a royalty of 5-10% was imposed, regardless of the actual contract price or the company's real revenue. 

This approach led to significant discrepancies in the system, as outlined at the beginning of this article.

Globally, however, there are numerous well-established models for calculating mineral royalties. For example, in New South Wales, Australia, where the majority of the country's mining exports originate, royalties are based on actual sales revenue. In other Australian states, royalties are linked to profit levels. In Russia, royalties for minerals (excluding oil) are calculated based on the contract price minus transport, insurance, and other associated costs.

By comparison, the so-called "Mongolian approach" may appear overly simplistic and lacking in sophistication. China, on the other hand, takes a distinctly different approach: for minerals other than oil and gas, a fixed fee per unit is levied. Unlike Mongolia's model, this system is easier to administer and more transparent for both tax authorities and companies-regardless of price fluctuations.

Industry stakeholders have raised concerns about Mongolia's royalty structure for years and repeatedly called for reform. However, all attempts to amend the Minerals Law in the past decade have failed. This time, however, there seems to be renewed momentum, and the new regulation appears to mark the beginning of serious efforts toward reform.

State-owned enterprises (SOES) play a central role in Mongolia's mining sector, the backbone of the national economy. Among them, G. Yondon, CEO of Erdenet Mining Corporation SOE, has been one of the most outspoken advocates for meaningful and justified amendments to the Minerals Law. During his tenure as Minister, he consistently defended his positions on royalty reform and fair wealth distribution, often using Erdenet Mining as a transparent case study to help the public understand the implications.

He has repeatedly pointed out that imposing royalties on the by-products of copper and molybdenum concentrates leads to unjustified additional costs, and that large discrepancies in royalty assessments place significant financial pressure on Erdenet. These financial constraints are particularly challenging given the company's plans to build a copper smelter and develop an industrial park.

The Erdenet Mining Corporation is also arguably the most appropriate and perhaps the only-company capable of selling copper concentrate through the exchange. Under the new regulation, it appears that Erdenet stands to gain the most. Consequently, the royalty on copper concentrate exports will be calculated at the same price, whether sold through contracts or other off-exchange arrangements.

UNCLEAR CALCULATIONS

Minister G. Damdinnyam stated that "with increased trading on the exchange under the new regulation, approximately 100 billion MNT in additional revenue will be generated for the state budget." However, the basis for this estimate remains unclear, and there is no indication of how much overall royalty revenue might decline as a result of the changes.

One key concern is the clause stating that if 25% of total production is sold through the Mineral Products Exchange, a unified royalty rate will be applied to all sales. This could prove to be a major loophole in the regulation. It raises questions about whether the policy will truly encourage greater use of the exchange. In practice, there is often a large gap between actual sales prices and benchmark prices. If the goal is to boost exchange-based trading, why not apply the new royalty scheme exclusively to volumes actually traded on the exchange?

The current low volume of exchange trades suggests a lack of buyer participation. The regulation does not address key risks such as whether companies might manipulate the system by executing artificially low- priced trades to reduce tax liability, whether buyers are genuinely willing to purchase through the exchange, or how royalty obligations would change if major exporters like Oyu Tolgoi LLC sold their copper concentrate via the exchange. These and other uncertainties remain unresolved..