N.Tserenbat:  The future of Oyu Tolgoi depends on well educated and skilled Mongolians

The Mongolian Mining Journal /June.2022/

G.Iderkhangai,  editor for The Mongolian Mining Journal, spoke with N.Tserenbat, CEO of Erdenes Oyu Tolgoi LLC.

The members of the working group shared their views on many issues, and some progress is being made

You were appointed by the Board of Directors of Erdenes Oyu Tolgoi LLC (1 October 2021) as the CEO of the company. In the subsequent eight months, shareholders have made a number of major decisions. As a result of the agreement reached between the government working group and the Temporary Committee on one side and the investors on the other side, the Oyu Tolgoi underground mine finally began production after 26 months. As the CEO of a state company that owns 34% of the Oyu Tolgoi project, how would you assess the work you have done in this short period?
Oyu Tolgoi is one of the world’s largest projects that attracts attention of entities working in the copper sector. There was a debate for many years that the Mongolian people should own 34% of this project for free. Successive governments and politicians argued that we paid for assets that should be ours for free. The main achievement of the working group was a final settlement of this dispute. I am a member of this working group. Mongolia’s $2.3 billion debt for 34% share of Oyu Tolgoi project was written off on 25 January 2022. As a director of Erdenes Oyu Tolgoi and a citizen, I am pleased to have been a part of the working group. All CEOs of Erdenes Oyu Tolgoi worked hard for it. In any case, the dispute  was resolved and underground mining operations were launched.

It is a major decision made jointly by the Government of Mongolia, the Oyu Tolgoi project investor Rio Tinto, and the shareholders of Turquoise Hill Resources, a company listed on the Canadian Stock Exchange. Today, the working group continues meeting to discuss the Oyu Tolgoi project with members expressing their views on many issues, some of which are resolved by mutual agreement. Of course, after the official decisions are made, the public is informed and this work is moving ahead step by step.

The Prime Minister L. Oyun-Erdene said that the launch of the Oyu Tolgoi underground mine sent a positive message to foreign investors and revived their interest in investing in Mongolia. What is the attitude of investors?
The Parliament and the Government issued resolutions and decisions related to the Oyu Tolgoi project, which is the first step in implementing Article 6.2 of the Constitution to ensure equal distribution of mineral resources revenues to citizens. On the other hand, even though Mongolia has had its ups and downs with large mining projects, I agree that this sends a positive message to foreign investors by taking our relations to a new level and showing that parties can compromise. The Oyu Tolgoi underground mining operation proves that the Mongolian Government can have equal and mutually beneficial partnership with any country and business entity on strategic and mega projects.

While watching the progress of negotiations, the government indicated that Oyu Tolgoi made a concession. Rather than making compromises, we should negotiate based on business principles to move our large projects forward together, right?
In a letter to L.Oyun-Erdene, the Prime Minister of Mongolia, Rio Tinto Group proposed to write off 70% of the total debt, and informed that some shareholders of Turquoise Hill Resources are opposed to 100% of debt cancellation. The working group, led by the Justice and Home Affairs Minister Kh. Nyambaatar, held several meetings and initially talked about keeping 30% of the total debt or $700 million. However, the parties decided to cancel 100% of the debt after discussing efficiency and missed opportunities. As a result, a strict technological regime was established at the Oyu Tolgoi underground mine for lateral development and continuous operations. 

We heard a lot that the working group successfully negotiated with Oyu Tolgoi investors to start underground mining. Did all the parties to the negotiations work hard?
As a working group, we worked tirelessly to move the talks forward and ensure benefits for Mongolia. It should also be noted that the government hired reputable external financial and legal advisors. However, the atmosphere in the working group has not always been pleasant and open. There were many angry meetings and harsh words. Such meetings are still taking place.

Cancellation of $2.3 billion debt helps Mongolia to become an equal shareholder and benefit from the Oyu Tolgoi project. This is a big success achieved under the 92nd resolution and 103rd resolution approved by Parliament. Now there is still work to do for Mongolia including beginning underground mine operations without delay within the first quarter of 2023, creating no more debt, and not repeating feasibility study errors. How does Erdenes Oyu Tolgoi deal with this issue?
We discussed financial mechanisms and how to avoid creating additional debt by the Oyu Tolgoi project. It is important to move the project forward and raise funds by selling the products in advance, and to make the project self-sustainable. We have a responsibility to fully implement the decisions made by Parliament. We are discussing a scheme to raise additional funding. In connection with the Parliament Resolution 103, we signed a long-term contract to supply the Oyu Tolgoi mine with electricity. The selection of a contractor for the Tavan Tolgoi power plant project will be finished. Electricity generated by this plant will bring to Mongolia $180-250 million annually. Finally, these issues which were discussed for many years have now been resolved.

If Rio Tinto decides to sell its shares to a third party, they must consider the position of Erdenes Oyu Tolgoi

The total debt of Oyu Tolgoi LLC is 9.6 billion USD, of which 2.3 billion USD is accrued interest. Is it possible to reduce the company’s loan interest rate? When does Oyu Tolgoi expect to finish repaying the loan?
      $9.6 billion has been invested in the Oyu Tolgoi project according to the data from last year. The parties are discussing to lower interest rates. Shareholders are demanding that as well. There are various options, such as gradual reduction of interest rates, conversion to another loan, and refinancing. However, due to the COVID-19 pandemic and the Russia-Ukraine war, interest rates in the global financial markets are rising. In terms of required financing and costs, interest rates rose by 1.2 percentage points by mid-June. Such unavoidable and unforeseen costs are likely to increase.

Rio Tinto offered to own a majority stake in Turquoise Hill Resources. In other words, Rio Tinto may own 66% of Oyu Tolgoi. What are the strengths and weaknesses of this situation for Mongolia?
34% of state ownership has two sides. First, if the two parties agree on a purchase agreement, the shareholders will be able to move the project forward without delay. However, if Rio Tinto, which owns 66% of the Oyu Tolgoi project, sells its stake to a third party, it will have to consider the position of Erdenes Oyu Tolgoi. It should be noted that according to the Mongolian Corporate Law states, if 66% of the project is to be sold to others, it must first be offered to the current partner.

Erdenes Oyu Tolgoi LLC agreed to implement Parliament Resolution No. 103 to annul the agreement (financing plan) signed in Dubai. In particular, the parties were given time to reach mutual understanding and agreement regarding the Arbitration Dispute.   It was agreed to settle the tax dispute within six months. How is this work progressing?
The working group is focusing on annulling the Dubai Agreement or the Dubai Financing Agreement in accordance with Parliament Resolution 103. As this is still being discussed, we cannot yet express our position. All members of the working group have a common goal to ensure that Mongolia sustains no more losses and benefits from the project.

Arbitration dispute over Oyu Tolgoi was postponed for six months. It will end in August this year, won’t it?
The parties agreed to postpone the arbitration. My position as a member of the working group is to use this time to achieve a mutual understanding, and resolve our issues without litigation and without harming our business.

The Parliament gave a task to build the capacity of employees of Erdenes Oyu Tolgoi and oversee its operations. Your company hires international mining consultants. Do you see any results?
The Oyu Tolgoi project will be the world’s fourth largest mining copper project beginning in 2028. The company that owns 34% of this large project has a need to improve the efficiency of the project, monitor its activities as a shareholder, and build capacity of the employees. Since January 2022, we have been hiring external consultants to implement project management and conduct project supervision at Erdenes Oyu Tolgoi.

We are also retraining our staff in geological engineering related to underground mining. Our specialists were introduced to similar underground copper mining operations in Chile, USA and Poland. A Memorandum of Understanding is expected to be signed with state copper producing companies from these countries. This will allow our geologists, miners and technicians to get acquainted with world-class mining operations and learn from local experts.

The Oyu Tolgoi project has many advantages and achievements to be proud of. However, there are issues to consider in the company’s operations. To address them, we need to improve our capacity and move forward. We plan to make the Oyu Tolgoi project competitive in terms of management. In this context, it has been more than two months since Erdenes Oyu Tolgoi adopted a modern e-office technology in its operations. Introducing new technologies into the company’s operations will increase work efficiency and productivity.

Erdenes Mongol is being restructured, some of its subsidiaries are being liquidated and made more efficient. How does Erdenes Oyu Tolgoi adapt to this change?
 Erdenes Oyu Tolgoi is a part of the copper group of the Erdenes Mongol company. First of all, we consider achievements and experiences gained by the Erdenes Oyu Tolgoi as an advantage and will introduce them to other companies, members of the Erdenes Mongol Group. By September 1 of this year, we expect to introduce e-office technology to other entities and improve the skills of our experts to provide consultations on a professional level. 

It is expected that the revised draft of the Minerals Law will be discussed in the autumn session of Parliament. The 34% state ownership is likely to change in the draft law. What information do you have about this? 

I would like to express my personal opinion on the revised draft of the Minerals Law. I wish there were no duplicate laws or legal loopholes that might affect the implementation of such large projects as Oyu Tolgoi. 

Mongolia will be more orderly and organized if we have several mega mining projects. Today, the Oyu Tolgoi Investment Agreement and the Shareholder Agreement remain controversial. Also, articles and provisions of the General Tax Law are also problematic. The Oyu Tolgoi Agreement is based on many different definitions and provisions of the Minerals Law.
Many changes have been made to the law since the agreement was signed. The working group, led by the Minister of Justice and Home Affairs, Kh. Nyambaatar, set an objective to improve coordination and address any challenges facing Oyu Tolgoi if they are likely to affect other mining projects. I hope that the new version of the Minerals Law will bring many transparent and positive changes. When I was the Minister of Nature, Environment and Tourism, I required mining companies to fulfill their environmental protection obligations under the Minerals Law and to fully exploit and rehabilitate deposits in accordance with mining technology. I require Oyu Tolgoi to do the same. If Mongolian mining companies comply with this requirement, illegal mining and exploitation will cease.

Rio Tinto and Oyu Tolgoi are working closely with the technical working group established with the Government of Mongolia to approve the Feasibility Study. When will the feasibility study be approved?
The Mongolian government and the public have different understanding about the Oyu Tolgoi feasibility study. The economic significance of the feasibility study varies over time due to rising mineral prices.
At the time when the feasibility study was conducted in 2010, the price of copper was more than $6,000 per ton, now it has risen to $9,000. Even if the ore grade is low, it becomes profitable when copper prices rise. 

However, when prices fall, it affects mining operations. Falling prices have a negative impact on production and lead to waste if copper resources are not used.   The feasibility study needs to take into account mining costs. A feasibility study conducted ten years ago differs from now because of price changes.
Detailed estimates of the mining volume, ore grade, and physical volume are being reviewed by  experts from the Ministry of Mining and Heavy Industry. There are two or three areas in the Oyu Tolgoi Feasibility Study that need to be clarified. We will work with Oyu Tolgoi to make clear the work is carried out in accordance with the technology.

The $50 million investment in Khanbogd soum’s infrastructure development will also leave room for private investment

In March of this year, Armando Torres resigned and the Oyu Tolgoi board appointed Deirdre Lingenfelder as the new CEO. The new director started on May 1. How is Erdenes Oyu Tolgoi working with the new director? What do you focus on in your collaboration?
The new CEO, Deirdre Lingenfelder, will lead daily operations for four years amidst difficult challenges. First, the Oyu Tolgoi project costs went up and operations are behind schedule. The good thing is that some misunderstandings between shareholders have been resolved. The decision of the Mongolian side to support the Oyu Tolgoi underground mine in accordance with  Parliament Resolution No. 103 creates a new situation. The new CEO of Oyu Tolgoi LLC has experience in environmental, social and project management.
We believe that it is important to support and cooperate with her. The Oyu Tolgoi project is like a toddler needing support from all sides to start walking. To achieve this, the Government of Mongolia will work with the new CEO at all levels. She was told that we are open to collaboration. It should be noted that relations improved because the Director of Rio Tinto’s Copper Group B. Bold, Director of Development of Copper Group S. Munkhsukh, and Director of Rio Tinto Mongolia LLC R.Amarjargal managed to explain the shareholders’ position correctly. 

The parties recently signed a master plan to develop Khanbogd soum of Umnugovi aimag into a city by 2040 as part of the “Urban and Rural Revival” initiative of the Government’s New Revival Policy. Oyu Tolgoi agreed to provide $50 million to Khanbogd soum in stages. In general, how should Khanbogd soum develop in coordination with the mining industry?
Urban planning will largely depend on whether the Oyu Tolgoi project will continue for 100 years, or until 2051. If it continues for 100 years, the question is whether employees should be transported by plane as it is today. Mining projects in the world have satellite cities and settlements. This is proof that the shareholders of the Oyu Tolgoi project are confident that Khanbogd soum will be developed into a city. Investment is needed to build a modern residential area and model city.

The $50 million investment in infrastructure development in Khanbogd soum will also leave room for private investment. The private sector is welcome to participate in the construction of apartments and service centers in Khanbogd soum. The first 40 people will live in apartments built by the private sector. The main problem is that soum residents are skeptical of Khanbogd becoming a new settlement area. Mongolia has not established a new settlement in the last 30 years. But if the quality of health and education services are higher than the global and national averages, Oyu Tolgoi workers are ready to move and live there.

 To what should we pay more attention so as to keep the Oyu Tolgoi project running smoothly and sustainably?
 First, a strategic decision was made to transport some of the concentrate by rail to make the project profitable. Second, we will follow strict rules at the border as much as we can. Third, human resources. The future of the Oyu Tolgoi project depends on well educated and skilled Mongolians. Instead of whining about the high salaries of foreign experts, we need to focus on training and capacity building for our employees. Although 96% of the Oyu Tolgoi project staff are Mongolians, there is a need to increase the number of Mongolians working at senior management level. The shareholders of Rio Tinto and Turquoise Hill Resources have the same goal.

We have the opportunity to employ Mongolian specialists not just at Oyu Tolgoi project, but at Rio Tinto’s projects in more than 30 countries. Investors are urging the Mongolian government to build its workforce. In this context, our policy is to provide basic mathematics, informatics and language education to engineers who will work at Oyu Tolgoi. Erdenes Oyu Tolgoi sponsored the 2022 National Olympiad in Informatics, Mathematics, Chemistry and Physics. 

In 2028, the Oyu Tolgoi project will become the fourth largest mine in the world. Copper ore processing will double. There is need for experts in chemistry, physics and metallurgy in future. A copper smelter will also be built. Therefore, it is necessary to train professionals with background in mathematical modeling and programming. It is important to employ mining professionals based on Rio Tinto’s international project network. Let us also introduce the world’s best innovations to the project, increase the efficiency of the project and minimize the cost. 

Thank you for the interview.