Several agreements relating to the Mongolyn Alt LLC (or MAK, as it is popularly known) were signed in October, bringing hope and cheer to the mining sector.
Among these was the investment agreement – the first under the investment law that came into effect in late 2013 -- between the Mongolian Government, MAK and Erdenes Tsagaansuvarga LLC, signed on 13 October by Mining Minister R.Jigjid, MAK President B.Nyamtaishir, and Erdenes Tsagaansuvarga CEO G.Tsogt. The same day saw another investment agreement, this one on the KhukhTsav cement-lime project, signed by Industry Minister D.Erdenebat, MAK Cement LLC director B.Battulga, and MAK’s B.Nyamtaishir.
Two days later came an agreement on copper sales and purchase between ErdenesTsagaansuvarga, which will operate the Tsagaansuvarga copper-molybdenym project, and Aurubis, as also a strategic partnership agreement (SPA) between MAK and Germany’s Ferrostaal and EuroKhan. The signatories to the first were G.Tsogt for ErdenesTsagaansuvarga, and Tim Kurt, CEO of Aurubis, while the SPA bore the signatures of B.Nyamtaishir for MAK, Klaus Lesker, member of the executive board of Ferrostaal, and Oliver Schnorr, EuroKhan President.
We give below some questions MMJ asked G.Tsogt, CEO of ErdenesTsagaansuvarga, about these agreements and about how the Tsagaansuvarga project will be financed, and his answers.
N.Ariuntuya
What are the main features of the investment agreements with the government, particularly in relation to taxes?The investment agreements on the Tsagaansuvarga copper-molybdenum project and the KhukhTav cement-lime project are the first such to be signed since the investment law was passed in 2013. Earlier, only foreign investors were entitled to certain privileges and incentives but the new law gives domestic investors the same advantages. The only requirement for the state to offer these advantages to an entity is that it should invest a stipulated minimum sum on the project.
As regards tax stability, the rates of income tax payable by the company, VAT, customs and royalties would be unchanged for 27 years. “Unchanged” is possibly not the right word, as the agreement makes it clear that if these rates are generally lowered, that benefit will be passed on to the investor. On no account, however, will these rates go up until 27 years have passed.
MAK must fully invest the amount set out in the agreement and complete construction of the Tsagaansuvarga factory by 2018. It must also fulfil certain social and economic obligations to the soum and the region, such as constructing a new soum centre in Mandakh soum, Dornogobi aimag, and setting up a source of drinking water. It will also resolve all environmental and social issues in consultation and cooperation with local citizens and organizations. The terms of the agreement also make it mandatory for the company to choose domestic companies as sub-contractors and suppliers during the development/consruction stage.
This kind of an investment agreement, stabilizing the tax environment and assuring government support, is very important for attracting foreign investment. In our case, work on the agreement began as soon as the law was passed, with Ch. Saikhanbileg’s Government setting up a working group only for the purpose and asking it to make quick progress.
You have said the $680 million necessary to implement the Tsagaansuvarga project will come from German Government support. Just how will this be arranged?Initially, we established an agreement with EBRD for financing the project but unfortunately this fell through. You all know why this happened and how domestic issues, including politicians’ mistrust of one another, delayed progress in finding finance for the Tsagaansuvarga project. EBRD twice extended the deadline to settle domestic misunderstandings, but we failed.
EBRD had already disbursed $200 million of the $450 million agreed upon and, with no progress in sight, decided to rescind the deal, and we were left to find new funding sources for the remaining $250 million. This meant we had to start from almost scratch again.
We set our sights on Germany. During German Chancellor Angela Merkel’s visit to Mongolia in 2011, the two countries signed an MoU on Germany-Mongolia cooperation in the mineral sector, which provided for German financial support to Mongolian suppliers of certain mineral commodities to Germany. We thought we qualified under these terms, and chose the international consultancy PwC to prepare our case to be submitted to the German authorities.
PwC ran a thorough check on our project and was confident we would be able to source finance, under certain terms, one of them being that we have first to have a contract with a reputable and large German processor company. Accordingly, we negotiated an agreement on supplying copper concentrate to Aurubis, which has its own pyrometallurgical processing plant, that is the second largest in the world, and the largest in Europe. We shall supply to Aurubis, per year for 15 years, 150,000 tons or half of the copper concentrate produced at Tsagaansuvarga.
The next step now is to finalise an agreement with a bank. Once a tripartite agreement – between ErdenesTsagaansuvarga, Aurubis, and the lending bank-- is ready, this will be submitted to PwC. If PwC finds it to be in order, it will place it before the German Government to stand guarantee for the bank loan. We are optimistic everything will go without a hitch, allowing development of the Tsagaansuvarga facility.
Does EBRD still have interest in financing the project?I think they have. You must remember our agreement with EBRD was not cancelled but was only put on hold. Since any bank wants to reduce its risks as much as possible, I think EBRD will be interested once the German Government guarantees the loan.
Since you are committed to completing the plant by 2018, when do you expect the financing issue to be resolved?We hope to have a deal this winter which will let us start work in the spring.
What is the present status of implementation of the project?Let us say it is now 47-48 percent complete. We have already bought surface mining equipment and they are on the mine site. Almost all equipment for the processing plant is also in place, and we are ready to start construction. We are using beton concrete which is heavier and so the work takes longer. Some 30,000 cubic meters of beton concrete is ready and we are waiting to make a small foundation on the ground on which to build the plant with no gaps.
What will be your selling rates to Aurubis?We have not reached that stage yet. Our agreement so far is only about long-term sale to Aurubis of half of our output, a condition for the German Government guaranteeing the bank loan.
Many things have to be considered when fixing prices, but the international copper trade follows certain standard practices and norms, which would make the negotiations less complicated.
Once we start producing copper concentrate and sell 150,000 tons annually to Aurubis, we shall still have to find a buyer for 160,000 tons more. Since our country has no smelting facility, we shall sell it to anyone, in China or Germany or anywhere else.
Now let us turn to your strategic partnership agreement with Ferrostaal and EuroKhan? What does it cover? And while EuroKhan is well known, what about Ferrostaal?As a matter of fact, Ferrostaal is one of the most notable industrial service providers in the world, with decades of experience in project development, financing and industrial plant construction. As a so-called “owner’s engineer” it stands at the client’s side and ensures that industrial plants are completed on time and on budget. It is a large group based in Germany, with constituents from mining production companies to manufacturers.
Our strategic partnership means it will cooperate with us in many directions, for example, in the 1-million-ton capacity cement production facility which will be started next June. It will use 140,000 tons of limestone per annum. The limestone mine is 12 km from the facility, and transport by conveyor will considerably reduce operating costs. The initial outlay is large, but it is economical in the long run and has the advantage of flexibility. It can be stopped in winter and operated in the summer. The strategic partnership will be implemented in that way.
Has any investor shown interest in holding shares in your project?So far, no bank has talked about shares as collateral, and no investor has expressed any interest. We have no plans at all to dilute our ownership.
How did you raise the previous amount of $340 million? And how did you spend it?Of the total, $200 million was from EBRD and the rest was our own. There was no other investor.
Very efficient use was made of this $340 million. Our purchases include 13 Belaz dumps of 220-ton load capacity for the surface mine, 5 Bucyrus excavators, 5 Atlas Copco electrical drilling machines/rigs, 2 Caterpillar bulldozers, and the gest loader in Asia. We also paid for 94 percent of the equipment cost for the concentrating plant. Construction work was started, and the water study completed. We hired a project management consulting firm which prepared the major agreements.
What other problems are there besides the financing?There is the power supply issue. Our plans to put up transmission lines got stuck for lack of money. Transmission lines for electricity with voltage higher than 110 kW must be under state ownership, but this is in the concession list.
We shall need approximately MNT50 billion to build 158 km of transmission lines of 220kW with two circuits. We have so far spent MNT18.8 billion to dig holes and build the foundation. We ordered poles and have already paid for them. It now remains to erect poles,bring insulators and hangers and connect them.
We also have to repair 50 km of paved road, but this is not difficult work.
EBRD finance would have come with strict environment protection conditions. Even if another lender is not so stringent, what environmental precautions does your company plan to take in Tsagaansuvarga?It was all set out in the agreement for $450 million from EBRD, and we shall not change anything.
Mongolian regulations call for too much paperwork on environmental and land condition assessment, audit etc., and almost everybody in the environment ministry wants to enforce something. Their real game is to force us to hire a company run by someone close to them to get the assessment done. This is an open secret.
On the other hand, EBRD has just one comprehensive document on environmental, social and economic assessment, but this is prepared in a really useful manner, incorporating relevant and practical details and actually implementable conditions.
The EBRD document includes details of the land, animals and plants, water, air, people’s living habits, livestock management, quality of pastureland, economic features of the soum etc. Much careful study was done on them, and EBRD was convinced that implementation of the Tsagaansuvarga project would in no way make a harmful impact on the region’s ecology. There is, however, one issue of some concern.This is about khulan takhi (the wild horse), even though no horse is exactly there.
As for the ground, we followed the foreign practice of building a paved road first, before taking up any other construction work. Mongolian companies usually erect a building and cause enormous land degradation by the heavy traffic in men and material. We have also built all the planned roads inside the plant and the open squares, giving the soil time to return to its previous natural form.
Some people are convinced that in our project to extract copper, we shall be destroying Tsagaansuvarga mountain. The fact is that the mountain is 7 km from our mine site at Seruunsukhait. We are as concerned as anybody else about keeping the mountain in good health and have asked for it to be included in the local special protected area, to keep it safe from any future predation. The Civil Representatives’ Khural in Mandakh soum is expected to take a decision on this.
As for water, its source is quite far from the Naranbulag project. Foreign and domestic experts are agreed that operation of the project poses no threat to the environmental balance.
We wish to reassure everybody that our project will not do any serious harm to the environment, but that is not where we see our responsibility end. We shall also plant trees to grow into forests in that region, construct green buildings, create a forest line in the gobi region, supply grass and nutrients to livestock during a zud and in a dry summer and more such positive work.
Talking of water, how much do you have and how will you use it?We have discovered an underground water deposit in NarangiinKhooloi which is 15 km from the mine site, and have drilled 27 holes. More work remains, such as building wells, but we are certain that there is enough water there to meet our operational needs. Oyu Tolgoi is 28.6 times and Erdenet 7.2 times ger than Tsagaansuvarga in terms of deposit reserve and production capacity. Our water needs are correspondingly smaller. Besides, we shall reuse water.
Following changes installed in the waste recycling plant, almost 92-93 percent of the water used can now be used again. The present technology is the same as pressing cheese by putting it between two stones. Our Bumbat facility also had a pressfilter, and we are studying how effective larger vareties of pressfilters have been elsewhere in the world. Optimal functioning of the waste recycling plant will mean considerable water saving. There will be no problem like Erdenet’s white dust. We shall end up with round cake-like pellets, which could be laid on the ground and covered with black soil. Reclamation is just a matter of time.
How do people in Mandakh soum view the Tsagaansuvarga project?They have been hearing of it for almost 50 years and expecting it for some 15 years. We are grateful for their patience and confidence that the project will be successfully implemented.
We got our licence in 2001 and conducted exploration for almost 10 years. No matter how competent exploration work was in Soviet times, it cannot meet present standards, and many exploration cores had already disappeared. So we had to several things afresh, and had to use significantly advanced technology. It was hard work, and it was long work, totally contrary to the uninformed perception that all we did was to redo what had already been done and to start a project that should have been done by the state a long time ago.
How do you prepare the human resource?It is Mongolians who are operating OT and Erdenet. It will be the same work at Tsagaansuvarga but on a significantly smaller scale. Wide ranging training programmes preceded the development of OT and they are still in place. The Dornod polytechnical college offers a course on the needs of a copper concentrating plant.
Besides, we shall not be hiring 1200 people at the same time. We have made a detailed schedule of taking in people in stages, as the facility develops.
We shall need some foreign professionals to get the thing going and to lay the groundwork for maximum performance. One good thing about the FLSmidth company is that they do not leave as soon as the facility is built. They stay on to watch how things go and take corrective measures if there is any problem. Even after they leave after making sure that everything is working reliably and efficiently, both our cement plant and the Tsagaansuvarga facility will be constantly under their radar, with the operational technology being remote controlled from Denmark.
Our cement project is now almost 90 percent complete. The administrative building is now coming up and various kinds of equipment are being installed.
Have you been able to keep to your estimated costs for developing the Tsagaansuvarga project?We are still constructing, and so it is too early to calculate this. All I can say is that we are working according to our feasibility study.
If the project had not got stalled, it would have started to work this year. How much money do you stand to lose because of the delay?We are aware of the accumulating loss but it is difficult to give you any specific figure. Equipment and machines are still kept in the countries where they were bought and we have to pay high storage charges. We can bring them here only after funds are available. People hired at high salaries have been sitting idle for two years.
When do you expect to recoup your investment?According to the feasibility study, this should be in 6.7 years. However, this expectation is based on copper price at $5511 per ton, while today’s price is $5200. These adjustments have to be made, and of course we hope that prices will go up by the time we are operational.
Is there an anomaly in that the investment agreement keeps four kinds of taxes stable for 27 years, but your feasibility report puts the mine life at 18 years? Do you plan to make further exploration to see if more copper is found?The feasibility study was made based on use of only one mining licence, but we have other exploration squares, and so it is likely we shall be able to expand our reserve base.
Other companies holding licences in the region of Tsagaansuvarga are talking to us about getting their copper ores processed in our concentrating plant. All this indicates that work at Tsagaansuvarga will continue after 18 years.
How does Mongolia benefit fromTsagaansuvarga, in basic terms?Our estimate is that the project will every year pay MNT251 billion in taxes to the state and local budgets. The ger benefit, however, is the boost to the national sense of self-confidence once it is seen how Mongolian engineers and others can build and operate such a facility. Once we start construction, there will never be any compromise with standards. When another deposit is planned to be developed, local investors will say, “If MAK could do it, so can we.” This feeling of independence, of fulfillment of professional potential is what will benefit Mongolia most in the long run, and MAK is proud to be a pioneer. It is a major accomplishment for a company.
It is a constant learning process for us, but the people who are gaining the experience will not repeat their mistakes here in their next assignment. That is how a nation develops.
Once the project is started, you will see many surprises, such as the addition of new features to make the traditional flotation technology in our concentrating plant more efficient. We have watched how the OT facility came up and learnt what mistakes to avoid. OT has 56 flotation machines, but in place of so many smaller machines, we shall use just six, each with 300 cubic metre space. Incidentally, these were the world’s largest when we ordered them, though now still larger ones are on sale.