By N.Ariuntuya
There was good reason why The Mongolian Mining Journal was among the organisers of “The 20th Anniversary of the Modern Mongolian Mineral Sector” Forum held at the ‘A’ Hall of the Government Palace on November 15.
MMJ had once said: “Over the last decade, minerals prices have gone down gradually from its peak. Ordinary Mongolians watch the movements of this crest-bottom cycle and how they keep their economy swinging, but they can do little to change investor behavior which follows global market trends. Political powers in Mongolia continue to make wrong decisions one after another and as they endlessly debate on how to correct course, the world passes them by.”
Committed to the development of responsible and transparent mining, we at MMJ thought it was time the whole thing, given its seminal importance to our economy, was talked about openly and comprehensively. We should take it out of the confines of the sector, and rope in all related policy makers, implementing agencies, professional associations and companies, and all informed and interested individuals. Let everybody give their honest opinion of events in the past two decades, and let us list our failures and successes, as also, and more important, what we have learnt or could learn from both. As the idea of a forum began to germinate, we sounded others and The Office of the President, the Ministry of Mining, and the Minerals Authority agreed to co-host the event. The Erdenet Factory, Transwest Mongolia LLC and the National Association of Gold Manufacturers of Mongolia enlisted themselves as official sponsors, thus providing financial support.
Any time frame is arbitrary, particularly after the recent celebrations of 90 years of the mineral sector of Mongolia, but the last 20 years, or two decades, were chosen as they have some special meaning for us. We then sought out those in the sector who had suffered firsthand the ups and downs that marked the period. Their experience and conclusions would show us the right way to confidently and successfully face the next two decades, however volatile they may be. The past prepares us for the future. We look back and learn how to look ahead. This was the rationale behind the present forum.
About 120 people attended, including heads of professional associations of the mineral sector, CEOs of major mining companies, MPs and representatives from the Government. To name a few of the representatives of the State, there were P.Tsagaan, head of the Office of the President; D.Gankhuyag, Minister of Mining;R.Jigjid, Secretary to the Minister;D.Bat-Erdene, Advisor to the Minister; the heads of the agencies of the Ministry; S.Lambaa, Senior Advisor to the Speaker of Parliament;O.Chuluunbat, Deputy Minister of Economic Development;B.Tsogtgerel, Deputy Minister of Industry and Agriculture; representatives from the Ministries of Environment and Green Development and of Road and Transport;G.Altansukh, head of the Minerals Authority; the heads of the divisions of the Authority;S.Odontuya, Head of the Working group on the State Policy on Mineral Sector; and several other MPs.
Tsagaan inaugurated the forum. Here is a part of his speech: “The past 20 years have seen two super cycles of mineral product prices. As prices fluctuated, there were lots of changes in Mongolia’s State policy and laws and the legal environment. It is a good thing that in this room, there are representatives of the private sector who went through the good and bad phases of the cycles and also government authorities who basically created those cycles. The State and the private sector need to be partners and work in conjunction. Unfortunately, mistakes were made in the past,mainly because we didn’t seek the views of the private sector and also because we didn’t pay attention to world trends. That is why it’s necessary to discuss what went wrong in the past and create the right political, legal and social environment for us to move successfully into the future. This is what makes this forum significant.”
Delegates sat around a table and discussed the issues for a half day. There were many speakers on a wide range of issues, though only a short period of time had been allotted to each. The speeches can be divided into five general themes.
1. Past, present and future
The first session heard speeches from Minister D.Gankhuyag (“Steps to take in mineral sector policy and planning”) and from Head of the Minerals Authority G.Altansukh (“Current state of the mineral sector in figures”).
Aswidely expected, Gankhuyag talked about the challenges and successes of the last 20 years and also made some general predictions about the coming 20 years. He said, “Both the successes and the mistakes during the development of a country become part of history. I would like to mention a few indicators to prove that our achievements outnumbered our failures in the past two decades. Of the total 200 tons of gold mined in the past 110 years in the territory of Mongolia, 177.9 tons or 89.1 per cent were produced in the last 20 years. Similarly, of the 300 million tons of coal extracted in the last 40 years, 70 per cent or nearly 220 million tons was since 1990. Between 1955 and 1969, 540,000 tons of crude oil was explored from Zuunbayan and Tsagaan Els deposits and a small amount of this was processed. Oil exploration resumed in 1997 and 2.4 million tons or 81.7 per cent of the total have been drilled since then. During this time, 2.3 million tons were exported to China.”
Noting that geological prospecting and mining activities as also petroleum production had been steadily rising in recent years, Gankhuyag admitted that the immediate challenge is that for the past couple of years, prices of our main export products have been low in the international market. The Reform Government has estimated how much minerals will be extracted in the next 20 years from deposits that are operating currently and will be operating in the future. It has also estimated the length of mine lives. A development strategy based on these data is being prepared. The Minister said, “Our forecast is that Mongolia has the resources to extract 553 tons of gold, 2.0 billion tons of coal, 21.7 million tons of copper concentrate, 3.2 million tons of fluorspar concentrate and 1.58 million tons of zinc concentrate in the next 20 years. In the 1990 budget, Mongolia’s total income was MNT5.3 billion which is likely to be MNT6.8 trillion in 2014, an increase of 1,300 times in 24 years.”
G.Altansukh’s speech contained the very latest figures. At the close of November 14, or the day before the Forum, there were 1,293 mining licences covering 919,800 hectares of land and 1,817 prospecting licences covering 14.8 million hectares. This works out to 0.6 % and 9.5 % respectively of the total territory of Mongolia. At the end of 2008, 31.6% of the territory was under licence, but it has since come down by 3 times to stand at 10.1%.
The full text of Altansukh’s speech has been published in the Mongolian-language section of MMJ.
2. “Living” policy
The second session featured speeches from D.Bat-Erdene (“State policy on the mineral sector and new programmes”) and Mongolian National Mining Association President D.Damba (“Issues that must find a place in the State policy on the mineral sector”) and discussions on them. Ms.Odontuya mentioned and explained the changes made to the draft policy.
Bat-Erdene began by recounting the principles guiding the Ministry when it formulated the draft policy, intending it to be the foundation for all activity in the minerals sector in the next 15 years. “We want this to be a “living’ policy rather than a lifeless document”, he said, adding that this draft is different from others of its kind in that it includes implementation measures and expected results also. The Ministry plans to annually monitor the progress of implementation and submit a report to the Government in the first quarter of the next year.
The draft proposes execution of the policy through programmes such as Geological Mapping, Coal, Iron, Fluorspar, Rare Earth Elements, Copper, Common Spread Minerals, and The Legal Environment of the Mineral Sector. Details of these individual programmes are in the last stages of preparation. Around 30 per cent of the members of the working group on each programme are from Government organizations and the rest are representatives from professional associations, researchers and companies.
The following is the implementation phases:
2013-2015: Improve the legal environment and develop
related rules and programmes
2014-2025: Execute the programmes
2020, 2025: General review and revision, if necessary.
Parliament set up a working group to work on the draft. It includes representatives from professional associations, one of whom is D.Damba, President of the Mongolian National Mining Association.He suggested some major changes after the original draft had been discussed in Parliament. In his speech at the forum, Damba noted that it was gratifying to see how the draft was discussed openly in a democratic way and complimented the Working Group on seeking the viewsof professional associations and then incorporating some of their suggestions. He also named some MPs to show his appreciation of the active role they played in the Working Group.
The MNMA President singled out the following article as the most crucial in the draft policy: “Increase State involvement in registration, license issuance and monitoring levels and restrict it in prospecting and mining activities.” Curtailing the State’s role in mining activities, especially in strategically important deposits, was a bold and major departure from past practice, he said, and expressed confidence that this would give a crucial fillip to development of the mineral sector. He was disappointed that Parliament had not agreed to eliminate the term “strategically important”, but expressed happiness that the present list of 15 strategic deposits will not be added to.
Speaking after Damba,S.Odontuya said:“We were to have a discussion on the draft policy in Parliament today, but this was postponed to allow us to listen to the valuable ideas likely to be thrown up at this forum.
“We in the Working Group have done our best to make things easier for investors, Government employees, and local residents and to minimise likely areasof conflict between Government organisations, investors and the local authority. Following a Mongolian principle saying ‘It is better to discuss all together’, we have looked for ways to involve diverse interests. The Ministry of Mining and the Working Group set up by Parliament have frequently met representatives from Government organisations, the private sector, civil society and local authorities. We have encouraged and welcomed everyone who wanted to submit a suggestion to come forward. We have reviewed existing studies in the sector and conducted thorough and expert research on other countries’ mineral policy.
“Some MPs in the Working Group found the draft too long and too detailed and suggested eliminating some provisions, shortening some others, and transferring parts to other laws and programmes.
“Our focus was on getting rid of the endemic instability in the mineral sector. For this, we favoured setting up a Policy Council with wide ranging membership, including major exporters, private companies, scientists and the civil society.
“The draft is unamuously against the State getting involved in business and suggesting putting affairs at State owned companies in order.
“It is important to have a well-defined mechanism to solve conflicts within the mineral sector. A review by the Mining Association of all disputes in the sector since 2006 showed that 70 per cent cases arose because of erroneous actions by Government organizations or individual government staff. Conflicts arise because laws and regulations are not straightforward; because government staff often have poor knowledge of the law and therefore cannot explain it properly, and also because many rules and regulations are contradictory to one another. We need trained personnel, professional economists, qualified arbiters, and skilled lawyers in the mineral sector. This idea is reflected in the Policy document.
“In one major change, the original article reading ‘The State will support individual mineral explorers following State policy in their work’ has been changed to read, ‘The legal environment for working as a legal body will be developed and illegal activities will be restricted or banned’.
“We have also made the system of registration of licence and monitoring their transfers better and stricter.
“We received several suggestions regarding the proposed mineral exchange. Many do not find it necessary. Maybe this forum will discuss this issue.
“A whole chapter was added to the draft by MP S.Ganbaatar and political party groups on development of local areas and protecting residents’ interests. This deserves careful understanding and consideration. Manifold problems arise when local residents and investors try to come to an agreement. We thought the policy could suggest some guidelines. Some articles in the Minerals Law could also be useful. It is often seen that local residents put undue pressure on investors by making too many demands, discouraging them. Maybe at such times, the draft suggests, local governing authorities should step in, explaining to residents the significance of the project and its likely economic benefits to the region, including how much tax the company will be paying and how many jobs it would create.
“The document also calls for mandatory State and private sector financial support for scientific organisations and academies to conduct research of help in formulating and executing long-term strategic policies.
“A Working Group proposal to formally name the mineral sector as leading the Mongolian economy and to allow it to regulate policies of other sectors such as transport and logistics, was not accepted by the Standing Committee. As of today, railway and energy policies put obstacles on the road to developing the mineral sector. I would like to hear from professionals on this issue.”
3. Post-boom mining
It was the turn of two companies, one from the private sector and the other State owned, to speak in the third session. How are Mongolian companies,especially coal miners, doing in the post-boom season of falling prices? How have they adapted their management methods to changing times? We had suggested to Energy Resources LLC that its representative speak on “Post-boom mining management and its lessons”. The company started life when the coal price was at a peak and has since then seen prices falling unchecked from 2012.
D.Enkhtuvshin, CMO, said, “For now we don’t have anything that we can call income. So our main focus is on cutting costs, increasing efficiency, and operating at the lowest possible loss without stopping operations. Transport costs have been brought down by 20 per cent and processing costs by 38 per cent. We have laid off 10 per cent of the employees. During the boom, we invested in all kinds of improvements whereas now it is a matter of survival.”
The party is over. What Enkhtuvshin said candidly is the reality in the coal sector of Mongolia.
Getting a share of the market and then retaining and strengthening that position against competition greatly depends on the general national policy and on the state of the infrastructure. Political wrongheadedness kept dragging Mongolia’s coal sector down. It has lost its competitive edge because of a suspect railway policy and ever changing decisions. Lack of infrastructure development means prohibitive transport costs. Today this affects the coal sector but tomorrow it would be the turn of heavy minerals like iron ore trying to take off.
B.Namkhainyambuu, Deputy Head of Corporate Development at Erdenet Mining Corporation, spoke on “The present and future of the Erdenet Mining Corporation /GOK/”. This was perhaps the first time that Erdenet was seen taking an active part in any public event in the mineral sector, and even giving a speech, a sort of report on itself. Many attributed this “opening up”to a professional now being director there.
Erdenet has for long been Mongolia’s flagship project and Mongolians are well aware of itspast and present. So interest was focused on what Namkhainyambuu would say on what lies ahead for the project. The text of the speech is posted on the MMJ website, but the following were its central points.
• As per the current development plan, the company intends to increase annual output to 35 million tons from 2015 by upgrading equipment and adopting environment friendly and low energy technology. Cost per unit of production will come down and value-added final products made. All this will extend mine life by 18 years. Re-estimation of the reserves has shown extraction to be viable until 2056.
•The amount of the reserve will increase by 526 million tons and the presence of copper in the concentrate by 1.7 million tons as the deposit’s borders are extended and the Central deposit is exploited.
• Between 1995 and 2013, Erdenet paid MNT3 trillion 542 billion in taxes, of which MNT1 trillion 530 billion was the windfall profits tax.
• A working group has been set up to prepare a feasibility study on establishing a copper smelting plant, using the TSL technology of Australia’s Ausmelt Co.
• The company is working on developing a mine closure management policy.
GOK had opened up but not much was revealed. There was no mention at all of anticipated challenges ahead.
4. Urgent issues in gold, iron and geological prospecting
The fourth session belonged to professional associations. Speeches by the head of the Gold Miners’ Association, T.Ganbold, (“Policy on the gold sector, State and private sector cooperation”), the CEO of the Mongolian Metals Manufacturers Association, L.Bayaraakhuu, (“Export potential for iron concentrate”) and Ch.Enkh-Amgalan (“Geology-prospecting:Past-Present-Future”) offered their views on the urgent issues facing each sector, future possibilities and solutions.
Ganbold said, “At a time when the world mineral market is facing a crisis, countries have been seeking succour from their gold sector and adding to their gold reserves. Even those with convertible currency are raising their gold stocks. We would like the State to pay more attention to creating a mechanism and a legal environment that would allow it to buy all the gold mined in Mongolia.” He also wanted policy makers to be more pragmatic and less short-sighted. For example, he referred to the many MPs opposed to bringing down the royalty on gold from the present 10 per cent to 2.5 per cent, refusing to understand that the immediate loss of 7.5 per cent will be more than offset by a boost in output. “We want the decision makers to look at it from the point of total economic benefit,” Ganbold noted. He also regretted the crisis businesses have to go through every time there is a change of government, and detailed several grouses of gold miners.
Bayaraakhuu said the most urgent need in Mongolia’s metal sector is for processing or value adding facilities. Mongolia’s iron reserves are the 14th largest in the world but this brings little income as the sole buyer, China, takes only the ore, enriching it at home. Iron ore has a stable future, growth prospects and a secure market.Companies in this field have been waiting indefinitely for better infrastructure and setting up of value added industries.
“Once a viable railway link to inland China is available, Mongolia can export 10 million tons of ore a year. But why should we be content with exporting ore and not 10 million tons of dry processed or semi processed iron?” asked Bayaraakhuu.
Enkh-Amgalan said, “Geological work always has a strong element of risk. Not every prospecting licence would discover a viable mineral deposit. By now, 43 per cent of the total territory of Mongolia is closed to prospecting. With no new prospecting licences issued, investment has dried up. Both foreign and local investment in geology and prospecting are waiting to flow as the shortsighted policy is ended. Let the State decide where it will allow prospecting and where not, but let prospecting resume on these terms even,” he pleaded.
Enkh-Amgalan also thought it is a mistake to have separate authorities for minerals, petroleum, nuclear energy, etc. They are all under the same scientific discipline and the same scientific methods are applied to their study. He suggested establishment of a National Geological Office that would be in overall charge of framing policy for all our mineral wealth.
5.How to build a mega project and how not to build a mining railway
Without disrespect to anybody else, the most well-received and interesting speech at the forum was from the Head of the Tavan Tolgoi Power Plant Project, M.Enkhsaikhan(“Mega projects and mining”). Defining the term in the title, Enkhsaikhan said the word mega is usually added to projects that require investment of more than $1 billion. However, a project’s remote location and major infrastructural challenges may also make it a ‘mega’ project. With such inherent problems,a mega project needs more careful and thorough planning, with its end visualised at the very beginning, and nothing left to be resolved as one goes along. Problems which would be minor elsewhere, could lead a mega project to fail, Enkhsaikhan began.
“Both Erdenet and Oyu Tolgoi qualify to be seen as mega projects. Both are of a high quality and both were built in a short period of time. Their date of construction, location, ecology, environment and infrastructure are vastly different, but they share one feature – their high cost. Both lay claim to a mega status because of this expensiveness and because of their impact on the nation. It is not yet so apparent in the case of Oyu Tolgoi but once it is fully operational it will mean as much to our economy as Erdenet. It is in the best interest of Mongolia that the OT project proceeds,” he said.
MMJ published the full text of Enkhsaikhan’s speech in the Mongolian-language section of its November issue.
The speech by the head of the Mongolian Railway Engineering Association, L.Purevbaatar, (“Transportation infrastructure in mining”) commanded attention as it revealed several fault lines in the railway policy. It was also a blunt professional’s views on how a primarily mining railway should be planned and built, keeping the demands of both local development and international trade in mind.
His main points were:
• The flaws in the railway policy relate as much to technical things like tracks and gauge as to a failure to understand geopolitical and geo-economic realities.
• Mongolia has put itself in adifficult corner because it did not consider the importance of following global procedures when building an international railway.
• The current policy fails to link our northern and southern exits, and will eventually prevent us from connecting to the east and west, making us a landlocked‘island’.
• The railway heading south should be technically aligned with the railway coming from the south.
• The way building and operating the new railway is being planned gives no indication that it is in all respects a mega project.
• The technical, operational, and organisational demands of a mining railway should be different from those of a general-use railway.
• The interests of companies operating in Tavan Tolgoi should be the top priority when building the railway towards the south.
One participant later said that with railway professionals speaking out he now felt optimistic about prospects of the railway.
After the speeches, there was a session for questions and answers.
In February, 2013, the President of Mongolia had called for creation of“a file to document the lessons learned from the mistakes in the mineral sector”. The forum was planned to formulate recommendations for future action after assessing the mistakes of the past and noting the points of success. Another article in this issue lists these recommendations arising fromthe forum that the Mongolian Mining Journal has forwarded to decision makers.