S.Bold-Erdene talks to D.Otgonbayar, deputy director at Bold Tumur Eruu Gol LLC.
Tell us about Bold Tumur Eruu Gol LLC. When was it established, and what kind of projects are you currently working on?The company was established in 2007 and exports iron ore after mining it at Bayangol deposit. Last year, we paid a total of MNT 33 billion in taxes and fees, and provided 1300 people with jobs.
All our work has to do with iron ore extraction, processing, transport and export. We use our own funds for all extraction and processing expenses and also to develop adequate infrastructure. Thus we are working on installing a 110-kW high voltage transmission line from Darkhan city to Bayangol deposit to meet our energy requirements. The hardest part of the job, which is putting up the high voltage poles, is already completed, and all remaining work, such as placing the assembled anchors and then commissioning the supply lines, should be finished by the end of this year.
A Ministry of Mining study says transport costs account for nearly 40% of the sales price of mining products. Railway transport will go a long way towards reducing this cost. In compliance with the Government’s Decree No.134 issued in 2008, work on Bayangol Railway began in 2008 and was completed in 2011, but it took long for the State Property Committee to formally accept the facility. This was finally done in October, 2012 and was then commissioned.
This 115-km long railway, connecting Eruu on Ulaanbaatar Railway with Khandgait near Bayangol deposit and built with the module-computer control system technology, is the first to be built in Mongolia in the last 40 years. It runs on the 1520-mm gauge, as in Mongolia and Russia, but we have got wagons and locomotives from both Russia and China. From our northern neighbour we bought 1,000 train cars and 3 diesel locomotives, whereas the southern neighbour sold us 2,003 wagons and 12 locomotives.
Construction of the railway has vastly improved the transport infrastructure in the Darkhan and Selenge areas and thereby increased the worth of mining projects in the region. We are proud that we were able to train 280 young people, mainly in engineering, and finished such a major construction project in a very short period of time, with funds from our own resources.
We have also begun construction of an iron ore wet processing plant and an explosive material plant, both part of the company’s long-term business plan. We also decided to have our own units to produce construction material for these, and a brick making plant is coming up, capable not just of meeting the needs of building the wet processing plant but also for local use. It’s a job as the product must be environment-friendly. People in Khuder, Eruu, Bugat and Selenge aimags are not coal consumers, using wood for fuel as well as for construction. Any change has to be into eco-friendly material, and the brick plant should be ready this year.
How much money have you invested in these projects so far?It requires lots of funds to make and provide everything people need, from cooking pots to room heating equipment to internet connections. If you include the railway, our investment so far has been $1.2 billion. This figure will of course go up as we make progress on the power lines and the wet processing and explosive material plants. Some $460 million was spent on the base for the railway track alone. Recouping such investment takes long. Since we have the locomotives and the trains, we are using this to transport, wherever possible, material and equipment for construction, mining and agriculture. The amount of freight turnover is increasing little by little every year but that has to be 10 times more than it is to recoup the investment in 20 years. We see this railway as something that is necessary for local and national development.
Our deposit is located west of the Khan Khentii mountains. Local goods turnover is increasing with the railway being there, with some clear benefits. First, railway transport is environment-friendly. Second, local residents are beginning to use more and more coal, so fewer trees are being cut in the mountains. Also, during season, locally grown vegetables will be taken to the city markets. In general, agricultural products are quite a part of what is transported.
We are likely to spend $320 million for the 110-kW double power lines. The foundation work is done, and once the whole work is over, this will rank among the major construction projects in Mongolia. It would have been much better if companies operating in this area had joined hands. Last year, Darkhan Metallurgical Plant, a State owned shareholding company, built a 100-kW single power line, at quite some expense. Our power line is only 30 km from theirs, and they could have gone a little further and connect their line to ours, but didn’t. We feel companies need to cooperate more closely for mutual benefit and profit.
Raising this amount of money is not easy. Neither European nor Japanese investors are very enthusiastic. They prefer to do a detailed survey first and then take a long time to come to a decision. It’s actually people in our southern neighbour who make brave moves.
Is Bold Tumur Eruu Gol a 100% Chinese owned company?No. If it was, there would have been 1,000 Chinese employees here, not Mongolians. No Chinese would spend nearly $2 billion to give employment to Mongolians. Individual or institutional shareholders change all the time, and this is what assures the cash flow. If more Mongolians had the money, they would surely have bought shares. Currently the shareholding percentage is 51:49, after some stock movements. We must understand that the shareholders will not take away the mining constructions, power lines and railway infrastructure. They will remain here and continue contributing to local development.
What is the planned capacity of the wet processing plant, which would be the first processing plant in Mongolia?It’s planned to produce up to 7 million tons of wet concentrate a year. There are some such plants elsewhere in Mongolia but they are all much smaller and our technology is much more advanced. With processing plants, one has to be careful about their negative impact on the environment. Because of the terrain, our iron ore has high sulfur content, so this has to be eliminated first. Sulfur is hazardous to the environment and has little industrial use, leading to problems with its disposal and that is one reason why many countries choose not to build wet processing plants. China has about 40% of the total iron ore in the world but is not so keen on them, and neither is Australia, which supplies 25%-30% of China’s total import. Australia dry processes its ore, with China trying to persuade it to build wet processing plants, so that the ‘dirt’ does not have to be transported all the way to China. Australia is the main iron ore supplier to China, Japan, South Korea and USA, and has so far resisted pressures from all to build wet processing plants on its territory.
Right now, global demand for iron ore is on the rise, and this is good news for us, as Mongolia has more than 40 iron ore deposits with reserves already estimated and totalling about 1 billion tons. Ten out of these 40 are . In comparison, Kazakhstan has 51 deposits but 60% of them are already being operated, so they will be exhausted before ours.
However, the future is uncertain, with one school of experts saying iron ore extraction will decrease in three or four decades from now as technology will be developed to recycle iron waste. When a building is torn down, its steel framework will be recycled. Same with cars. That is why countries like Australia and Kazakhstan are rushing to export their iron ore to China as long as the demand is there.
What do you think of the present Government policy in the iron ore sector, and what are the changes you would like to see?We need a forward looking policy that properly evaluates the merits of conflicting demands. Some people want us to begin producing steel without delay. Japan does not have any iron ore so has always imported a lot for use by its metallurgical plants. But now it has problems finding a market for the steel left unsold domestically. If Japan has that problem, will Mongolia, with a much lower internal demand, be able to sell its excess steel? You know how the Kobelco excavator got to be invented? A Japanese iron and steel plant called Kobe Steel faced serious problems with its growing unsold stock and this finally led to the production of excavators, something that requires the most iron.
Go around Chinese construction companies, and you will find they all use Chinese steel. No different with Russians. Big companies are unlikely to change over to Mongolian steel, so what do we do? Any decision here has to be based on two related facts: Mongolia has a small population and low domestic demand. We don’t have to build sky high buildings seen in south-east Asian countries. In 2011, Mongolia’s annual steel consumption was 360,000 tons. This may go up to, say, 500,000 tons when processing plants come up at OT and other major mining projects. However, there are studies showing that to be commercially viable, a steel plant has to produce at least one million tons a year. This being the case, Government policy should be well thought out and forward looking.
What about plans to build an industrial complex and ferrous metal plants? Do we really need these?Every country would like to have a heavy industries complex but many things have to be taken into account, such as demography, and consumption and sales potential. We must have a long-term perspective at least when choosing the location. With foreigners showing serious interest in Mongolian ecologically and organically grown food, raising its export potential, should we have a ferrous metal plant in Darkhan or Selenge, where such food is mostly produced? Any such plant will have sulfur waste. This is in addition to the present concerns about lack of water and infrastructure.
Personally, I think wet processing plants should be built. It would be even more profitable if we could then combine iron ore with coking coal and produce what are called “ammites”. This will be the main raw material for the metallurgical plant. When it is put in the furnace, the coke will burn fast and smelt the iron quickly. It will be a value added product so it will sell for more than the raw mineral. We can export this material to countries that have metallurgical plants. Another advantage is saving on transport costs, as instead of 10 trains of concentrate it will be only 4 trains of ammites. Mongolia has the coking coal and the iron ore and I am confident such a plant would serve us well. It can be set up in Baganuur, Choir or Sainshand.
What’s your opinion on the legal environment, the Government’s requirements and monitoring environment for the iron ore sector?The legal foundation is getting stable after the new State policy on the minerals sector and amendments to the Minerals Law will make them more so. Another positive development is how the Government is implementing programmes such as Mongolian Gold, Mongolian Copper, Mongolian Iron and Mongolian Coal., involving professional associations and entities.
But I cannot say all is well. The Ministry of Mining wants revenue from iron ore exports to contribute 11% of the State Budget receipts in 2014. That goal can be achieved only under a proper legal environment, and when all parties in the sector know their responsibilities and are able to increase the competitiveness of their products. China’s industrial sector will remain stagnant for some time, and its negative impact on the sector will persist in the near future. Both demand and iron ore prices are going down not only in China but globally.
If this is an external factor, there are internal ones, too. The Ministry of Finance has set royalty rates and other charges too high for iron ore exporters. Things are worse as these are fixed in USD and that is getting more and more expensive. Entities that cannot make a profit will eventually stop production. The arbitrary manner in which Decree No.402 of the Customs Authority has set the rates in coal and iron ore are only adding to the pressure on companies in the sector.
There is a misconception that companies extracting so much iron ore must be making tons of money. In fact, the quoted value is determined without considering all the factors and it causes the royalties to go up. The quoted value should be the one set out in the export agreement, and the transaction can be monitored at every stage by the border and customs authorities. Iron ore plants are fast becoming unviable because of this. We have presented this reality on the ground to the related ministries.
Iron ore needs more money to extract than other minerals, because of its natural composition. Low sales price and high transport costs compound our problems. Even when it is clear that the world market price keeps falling and the actual price set out in sales agreement is also getting lower, royalty rates continue to be kept high. The only option for many companies is to shut down.
Let me give you another example of how operating an iron mine has its special features. Equipment such as excavator chains, buckets and bucket cogs have a longer life in other mines. No matter how a coal chunk is, excavators are capable of crushing it with its chain. But it’s different with iron. Moving vehicles are depreciated easily. Usage cost is four times higher than in the coal sector. Bucket cogs of an excavator need to be replaced every 10 days. And it’s not just the cogs, the buckets themselves also break easily. In coal, you only need to replace the cogs, but for us, the whole bucket has to be new.
Unlike many other deposits, we do not work with contracted companies, as that would eat deep into our profits. Instead, we do everything on our own, including equipment repairs, transportation, and even preparing the food. Many others leave such jobs in the hand of contracted companies. Most iron ore companies do like us, but even with such savings, some of them fail to make a profit and have to stop operations.
Our company is also faced with a severe profit crunch. If the price per ton falls below $59, we may also have to stop, putting 1300 workers out of unemployed. The railway income will drop by 25%. Ancillary companies that supply fuel, parts and explosive material are already feeling the impact. The Government has now decided to calculate coal royalty on the basis of the price quoted in a sales agreement, and we are hoping the same will be done in the case of iron ore.
Iron ore companies have now formed an association. What result do you expect from this move?We were among the 10 or so companies that came together to form the Mongolian Metallurgical Association. Now, almost every iron ore company in Mongolia has joined it. Ours is an organisation that aims at furthering the interests of members in many possible ways, and seeks stronger cooperation among them for the overall development of the iron ore processing and ferrous metal industry. While we protect every member’s individual interests, we also stress unity in the sector in facing issues. The Association’s activities will gradually cover a broader area, and, as is said, “If we are in unity, there is nothing impossible.”