The Mongolian Mining Journal /July 2020. №140/
The rise in the stock price of mining companies working in Mongolia and registered abroad -- such as Xanadu Mines, Mongolia Energy Corporation (MoEnCo), Mongolian Mining Corporation (Energy Resources) and others -- is a welcome indication that foreign investors expect stability here following the MPP’s return to power after a landslide victory in last month’s election. The highest growth the Hong Kong Stock Exchange was recorded by MoEnCo, and though the others did not match its 400-percent rise on a single day, shares of Energy Resources and SouthGobi Resources (SouthGobi Sands) also have risen by between 32% and 45%. It is now up to the new Government to make sure that investors’ confidence is not misplaced.
The economic front is full of challenges. No one has any clear idea on how to navigate the uncharted waters in which the global economy is floundering because of the pandemic. More locally, Mongolia has to be moved out from the “black” and “grey” lists, and must attract foreign investment, repay sizable debts at a time when revenue is falling, and make some actual progress in the mega projects. One great advantage for the new government is that the ruling party’s massive majority in parliament allows it to implement its policies without undue constraint. The last government did start some cleaning up and this must continue.
The coming four years must see the mega projects developed to generate employment and earn revenue. We need to attract substantial investments to pour money into the cash-starved economy. The MPP’s election platform went beyond the mega projects and stressed the need to develop new mineral deposits and strengthen the mining sector. This article looks at the state of mining and infrastructure projects – mega or otherwise -- that are under implementation as well as those which await investment.
Tavantolgoi: IPO in limbo
D. Sumiyabazar, Minister of Mining and Heavy Industry in the previous government, estimated that when the deposit is fully operational, the economy of Mongolia will grow by 10 percent, export revenue will increase by $2.8 billion, between $0.4 billion and $1.1 billion will be allocated to the state budget per year and about 5,800 workplaces will be created. At the individual level, every Mongolian would be looking forward to receiving regular dividends on the 1072 shares they hold. However, before that stage is reached, there will have to be a processing plant, a power station, a railway and paved roads, and an IPO at an international stock exchange.
A working group headed by the Minister of Mining and Heavy Industry found that all this and other measures to develop the deposit would require a total investment of $7.11 billion. The table below gives details of what was then proposed, but some things have changed since then.
Substantial preparatory work had been done for the IPO planned for this year before the whole thing was put on hold before the election. No very clear reasons were given, but both domestic political considerations and the global uncertainty because of the pandemic must have played a part in the Government decision. There has been no word from the new government on what it plans to do about the IPO or how it expects to finance the development of Tavantolgoi.
The IMF feels the global economy faces a deep crisis and a reasonable recovery will take long. An updated ADB report projects that Mongolia’s economy will shrink by 1.9 percent in 2020 but grow by 4.7 percent next year. If, and when, the Tavantolgoi IPO is held, it would be in conditions very different from what they were before COVID-19.
One way to put money into the economy is to distribute dividends on the 1072 shares and by allowing the shares to be traded. Erdenes Tavan Tolgoi has no debts any longer and has made a profit in the last two years, from sales income reaching $1 billion. Part of this profit was being spent on construction of the Tavantolgoi–Zuunbayan railway, and it remains a priority project, for we need to increase our coal export to offset the loss of revenue this year.
Oyutolgoi: Restoring trust
The underground mine now being developed contains 80 percent of the total resources at Oyutolgoi and when full-scale extraction begins there, some 1.8 million tonnes of concentrate would be mined and Mongolia would receive $1 billion in taxes per year. As much important for Mongolia is that successful development of the underground project would restore the trust of foreign investors in Mongolia. The declaration in the MPP platform that the underground mine would be operational in the coming four years is already a positive message for them as it makes it clear that the Government wants the project to carry on without major political interference or hindrance. This is in keeping with the November, 2019 resolution by parliament to continue with development of the mine as part of the total project, while calling on the government to ensure that Mongolia gets more benefit from it. How to do this has been a matter of negotiation between a Mongolian working group and representatives of Rio Tinto and the new government should carry on with the talks and take them to a satisfactory conclusion.
Rio Tinto has notified that the design of the underground mine has to be changed as the soil structure has turned out to be different from what was thought earlier, and this would make the work take longer and also raise costs. Detailed estimates of both the time and money required are expected in the second half of this year. Work is being delayed as Rio Tinto cannot get its professional personnel into the country because of the coronavirus-induced quarantine. The general expectation, however, remains that the underground mine would be commissioned in 2023.
Domestic politics has always played an oversized role in the Oyutolgoi project, to the extent that two former Prime Ministers, S. Bayar and Ch. Saikhanbileg, a former Finance Minister, S.Bayartsogt, and a former CEO of Erdenes Mongol, B. Byambasaikhan were all arrested and put in jail for their acts of omission and commission related to various phases of the project. S. Bayartsogt and B. Byambasaikhan were arrested once again when they had stood as candidates in the last election.
Tsagaansuvarga: Private to public
When production begins at this copper-molybdenum deposit, between MNT200 billion and MNT250 billion would go into the state budget in taxes and fees annually, and 1,100 citizens will find permanent employment. That makes it a significant mining project, but its inclusion in the MPP’s election platform attracted public attention as that put to rest any doubts about the government’s already declared intention to take over this project from MAK, the company that has held its licence and developed it since 2008.
About a year ago, Prime Minister U. Khurelsukh, facing demands for his government to resign, announced in Parliament that Tsagaansuvarga would be nationalized. In a dramatic speech, he warned, “You are one of the 30 families, N. Nomtoibayar! MAK alone possesses 36 licences, among them there is the Tsagaansuvarga Deposit. This is not your family property, but it belongs to the nation. We shall take back the deposit.” Incidentally, N. Nomtoibayar has recently been sentenced to imprisonment for more than five years on charges unrelated to Tsagaansuvarga. A former MP, he was a candidate in the June election but was arrested and not released to campaign.
Some years ago, MAK arranged for a loan of $450 million from the European Bank for Reconstruction and Development (EBRD). Since Tsagaansuvarga was a deposit of strategic importance, the state would own 34% shares in it but that would mean it would also have to bear a corresponding share of the cost of development which was estimated at $1.1 billion. Parliament discussed the issue and decided against taking that risk. In accordance with Parliament’s Resolution #54 the Government signed an Investment Agreement with MAK which guaranteed that tax rates would be stable during the project’s implementation period, and that the company would pay all taxes due to it for 24 years.
When the EBRD withdrew its funding offer citing domestic political disagreement as the reason, the project remained frozen for some time until MAK resumed work with $400 million in loans from international banks and financial organizations. As of today, 50 percent of the work has been completed, which includes purchase of all equipment. Tsagaansuvarga was a good example of how the private sector can develop a mega project without government support, but with changing times, it is now the turn of the government to bear the risks, raise the remaining funds and put a showpiece deposit into economic circulation.
Kharmagtai: Support guaranteed
The share price of Australia-listed Xanadu Mines has been rising since the election as the MPP election platform promised government support for the foreign investor in this copper-gold project. Xanadu’s ongoing drilling programme has shown positive results. The Kharmagtai deposit, including Oyut Ulaan and Shar Chuluut, is within the South Gobi porphyry copper province which hosts Oyutolgoi and Tsagaansuvarga. Its indicated resources will be clear only after completion of exploration and approval by the Mineral Resources Professional Council.
Asgat: Toxic prospects?
Asgat was among those deposits whose mining licence was nationalized by the previous government. When the licence for this deposit of strategic importance was transferred from MongolRosTsvetmet to Erdenes Mongol in 2019, the Government declared it would be put into economic circulation without much delay. Accordingly, the Emergency Management Authority and Asgat Kent Company opened the shaft of the underground mine and took 20 tonnes of samples from there at the end of the last year for laboratory analysis. Nothing more has been heard of the matter.
The results of the analysis are important as Asgat has reserves of 2359.3 tonnes of silver and 356 kg of gold, and also lead, zinc, cadmium, arsenic and antimony. The presence of the last two accounts for the toxic substances in the ores of mixed metals and the deposit has never been mined as the level of this toxicity is more than tolerable, and there is no reliable technology for separating the offending metals from the concentrate. Even if a solution is found to this problem there will be other environmental issues, such as where to locate the processing plant which would produce toxic waste. Another difficulty is that the deposit is partly in Mongolia and partly in Russia, so the international border has to be demarcated first, and this is never easy.
So, despite the Government’s declared intention, seen even then as being more populist than pragmatic, it is unlikely that work at Asgat can begin any time soon, or even during the new government’s term. Speaking at Discover Mongolia 2019, P. Gankhuu, CEO of Erdenes Mongol, said Asgat would require $127 million to be developed, and a feasibility study was being prepared. There the matter rests, and so do the silver and gold, and the antimony and arsenic.
Salkhit: Distributing the skin before the bear is killed
This deposit is a rare example where no extraction has yet been done, but its future output has already been pledged to raise MNT800 billion. The story began in the last days of 2018 when G. Zandanshatar, then Chief of the Cabinet Secretariat, led a team of intelligence, police and army people for a special operation at Salkhit to revoke the licence held by a private company and transfer ownership of the deposit to the state. One wonders if this could not have been done with an executive order, but theatrics add flavor to populist gestures.
One year later – and just months before the election -- the elderly were told that the state would pay back all pension-backed loans they had taken from banks. A sizable chunk of the electorate was made happy but how would the cash-strapped government reimburse the banks the MNT800 billion they had lent to pensioners? The way out was to issue bonds, to be redeemed with the sales proceeds of the Salkhit deposit. The biggest lenders, Khan Bank and State Bank -- bought 88.6 percent of the bonds and seven other commercial banks the rest.
The bonds were named Erdenes Bonds because they were issued by Erdenes Mongol, which would be responsible for the redemption. Now, as a state-owned company, Erdenes Mongol is actually owned by 3.2 million citizens of Mongolia, and it is they who have been made ultimately responsible for paying the banks. Leaving aside the argument that a whole population would have to pay for what benefited just a part of it, it is doubtful if Erdenes Mongol would have the cash to redeem the bonds, as most of the many deposits it now owns, including several that are of strategic importance, make no profit. Interestingly, an updated feasibility study says that even if Salkhit begins extraction and sales, its likely accumulated profits at the time the bonds are due for redemption, would be enough to cover only about 1/3 of the amount needed.
We can only wait and watch the progress at Salkhit, or the lack of it. Its licence is now held by Erdenes Silver Resource which some time ago sold a 47.2-kg bar of silver from Salkhit. If the idea was to convince people of the viability of Salkhit, it was not very successful as no details were given on when the silver was extracted, or where the ore was processed, or where the bar was cast. u
Heavy industry: Oil refinery makes a good start
Work on the oil refinery in Dornogovi aimag, being built with a $1.24-billion soft loan from India, is progressing well and should start production in 2023. Much of the infrastructure has come up and right now 550 family apartments are being built. Construction of the refinery itself has been held up as the foreign experts who are to oversee the work cannot come to Mongolia because of the pandemic.
The refinery is expected to be the base of a diverse petro-chemical industry in Mongolia. As the Prime Minister said in his speech at the ceremony when the foundation stone for the refinery was laid, “This will open up an opportunity to produce everything from lipstick to machinery in Mongolia.” In the socialist era, ten industrial items were produced in Mongolia and now, some three decades later, the Industrial Park is planned to house manufacturing units for some 30 products, but this will require a significant amount of investment.
The MPP plans to construct an iron ore processing plant and a coke plant in the next four years. A plant to process iron ore using a wet magnetic method is coming up in Altanshiree soum, and it should start production next year. It will have an installed capacity of processing 2 million tonnes of iron ore per year, and will recycle 90 percent of the water used in production.
Building a copper smelting plant and a precious metal and gold refinery continue to be under active consideration but no investor has yet come forward.
TT-ZB railway: Making sure its capacity will not lie idle
The ruling party told voters that 730 km of new railway would be built in the coming four years. This sounds a bit too optimistic, given that not one km of railway has actually been built on any of the routes included in the State Policy on Railway Transportation since its adoption ten years ago. However, considerable work has been done on the 414-km Tavantolgoi-Zuunbayan railway, which was not in the Government’s Action Plan but is a pet project of President Battulga. This is expected to be opened to traffic in 2021. Its cost will come to $1.2 billion, MNT750 billion of which has come from the profits made by Erdenes Tavan Tolgoi in 2018, an amount that would otherwise have been distributed as dividend to all citizens.
The railway is connected to the Trans-Mongolian Railway and will be able to carry up to 30 million tonnes of freight per year in both the northern and southern directions. Altogether 37 mineral deposits, including Tavantolgoi, Tsagaansuvarga, Kharmagtai, Manlai, and Kharaat Mountain, lie along the route of this horizontal axis, so it is essential to begin extraction in at least some of them, to justify and utilize its construction. The MPP platform acknowledged the connection, and we can only hope things start moving before long.
The TT-GS railway: 267 km of dream
Erdenes Tavan Tolgoi estimates 30 million tonnes of coal can be exported a year through the Gashuunsukhait border once -- and if -- this railway is built, requiring its present extraction level to be more than doubled. Coal transport costs would come down to 25% of what they are now, saving some $150 million, but rail transport would also minimize possible difficulties such as those posed by the present pandemic. With such advantages, one would expect Mongolia to take up this export railway with the utmost priority, but in practice, political squabbles and repeated rethinks have made sure that no track has been laid in all these years.
The width of the gauge was a recurrent bone of contention. With the previous Parliament deciding on the last day of its last session to build it with the traditional wide gauge in Mongolia, that debate is apparently over, though many remain unconvinced of the wisdom of the decision when China, where all the coal will go, has a narrower gauge. For the moment, dissent would be muted, as one of the foremost proponents of building the railway on a narrower gauge so that it can have quicker, cheaper, and easier linkage with the Chinese railway, former Prime Minister M. Enkhsaikhan, is in prison on charges related to his handling of Tavantolgoi and the railway. Another cause for concern is the 2019 choice of Bodi International as implementer of the project, as it has no previous experience of doing a similar job. Add to this the fact that the feasibility study which is likely to be the basis of the work was done eight years ago and has not been updated, so its estimate of costs might not be valid any longer.
All this makes one wonder if our waiting period is actually coming to an end. Golomt Bank, the parent company of Bodi, has said almost the entire length of the railway would be ready by December, but few take this claim seriously. There are also issues of banking that have to be resolved with China, and Mongolians would not be surprised if the TT-GS railway features on election platforms in 2024 also.
The Nariinsukhait–Shiveekhuren railway: No progress on the ground
Work on this railway was also held up from 2008 to 2018 because the issue of gauge width could not be resolved. Then the project was handed over to the Shiveekhuren Railway Company, a joint venture set up for the purpose, with 51 percent owned by Mongolian Railway and 49 percent by a consortium comprising Osokh Zoos, SouthGobi Sands, and Qinhua MAK, all companies that operate in the group of Nariinsukhait deposits. The Shiveekhuren- Ceke part of the railway was to be ready in 2019 but nothing has happened on the ground until now.
The Zuunbayan-Khangi railway: Gateway to China’s metallurgical hub
Two years ago, this route was added to those included in the State Policy, as both Russia and China were interested in it. Khangi is the gateway to Bugat in China’s Inner Mongolian Autonomous Region. Bugat has the country’s largest steel plant which buys coking coal from Energy Resources. There is immense opportunity for Mongolian coal and iron ore in this metallurgical hub.
President Putin referred to the route during the summit of presidents in Bishkek. When he visited Mongolia in 2019, he was told that a certain part of a promised Russian loan would be used to finance the construction of the railway. When completed at an estimated cost of $1 billion, the wide-gauge railway would be able to carry up to 21 million tonnes of freight per year.
The Erdenet-Ovoot-Artssuuri railway: International significance
This project was also added to the State Policy in 2018. It will take $2 billion and 4-5 years to complete its construction. Australia-listed Aspire Mining plans to build a 547-km-long part of the railway. At the end of 2019, Ts. Tserenpuntsag made an additional investment of Au$33.5 million in Aspire Mining and now holds 51 percent of its shares. He is a member of the new parliament.
In 2016, the railway was made part of the northern railway corridor of the Program for Establishing the Economic Corridor for Mongolia, the Russian Federation and The Republic of China. Russia is interested in connecting the railway to the proposed Kyzyl-Kuragino railway, as this would help it export coal from the Ulug-Khemsk basin in Tuva to China.
Tavantolgoi Power Plant: Bold decision
The Government decision to build the Tavantolgoi Power Plant by itself promises several advantages for Mongolia. Its construction cost will be 30 percent lower than what Rio Tinto offered. This means the 300 mw of electricity generated would be sold at a 50 percent lower cost, allowing running costs at Oyu Tolgoi to be less. This, added to the saving of the construction expenses and of payments to its Chinese power supplier, would let Mongolia receive OT dividends earlier.
Power generation is expected to begin in 2025, but for that to happen, construction has to begin on schedule and continue with no interruption in the cash flow. Will the government be able to keep its commitments, with export revenue falling this year and the global economy in disarray?
Shivee-Ovoo energy export project: Power beyond borders
It is an ambitious project. The proposed plant will generate power from both renewable and non-renewable sources and supply it to southern Mongolia, the Hebei region of northern China, and also to the power energy network of Northeast Asia. The project unit was established at Erdenes Mongol in 2015, and the same year an agreement on preparing a feasibility study of building an energy complex at Shivee-Ovoo was signed with State Grid Corporation of China, a state-owned company which supplies power to 1.1 billion consumers spread over 88 percent of the territory of China. The study was completed and presented to the Mongolian side at the end of 2017. It recommended a 5280-mw plant, with transmission lines, water supply and an open pit mine.
The study estimated that $3.83 billion will be needed to build the plant, $1.59 billion to install the transmission lines, $1.4 billion to develop the coal mine, and $237.4 million to set up the water supply project, making for a total of $7.1 billion, making it the largest investment in Mongolia after Oyu Tolgoi. The Chinese side will have total responsibility to finance and execute the project. With financing assured, sales guaranteed and the MoU on implementation signed, the only thing remaining is to sign an investment agreement. Will that be easier said than done?