THE NEVER-ENDING TALKS WITH COMPANIES HOLDING STRATEGIC DEPOSITS

By A. Khaliun

On May 11, Prime Minister N. Uchral invited the executives of companies holding strategically important mineral deposits to the State Palace to brief them on a new draft law that the government is preparing to submit to Parliament for implementation in the mining sector.

Minister of Industry and Mineral Resources G. Damdinnyam heads the working group tasked with drafting the Draft Law on Determining the State Ownership Share in Strategic Mineral Deposits and Residual Deposits and Allocating the Proceeds to the Sovereign Wealth Fund.

The 16 deposits originally designated as strategic were joined by 39 additional deposits whose reserves were approved under a 2007 parliamentary resolution, bringing the total number of deposits currently classified as "strategically important" to 55.

Although the Law on the Sovereign Wealth Fund, adopted by Parliament in May 2024 established the legal basis for determining the state's ownership share in strategic deposits, Minister of Industry and Mineral Resources G. Damdinnyam remarked that negotiating separately with the company holding each deposit could take as long as 55 years.

The government believes that conducting negotiations with each company individually would cause significant delays and require so much time that neither Parliament nor the government would be able to focus on other work. It therefore considers that the issue can be resolved on an equal and unified basis under a single regulatory framework established by this law.

Prime Minister N. Uchral then presented the government's position and briefly outlined the main content and key provisions of the draft law.

The Prime Minister said that the government aims to establish a stable, clear, and predictable legal environment by resolving long-standing uncertainties without creating additional burdens on the business environment.

The instability of the investment environment has not only discouraged foreign investors from coming to Mongolia but has also steadily eroded investor confidence year by year.

Against this backdrop, he said the state's ownership share in strategically important mineral deposits should be determined in line with the constitutional principle that "natural resource wealth shall be fairly distributed across past, present, and future generations, and the majority of subsoil resources shall be owned by the people of Mongolia," thereby eliminating existing uncertainties.

This draft law, which aims to resolve the issue once and for all and increase the benefits accruing to the public, will be submitted to Parliament shortly under an urgent procedure. Companies will consolidate their proposals and submit them through the Mongolian National Mining Association, working in coordination with the government working group.

The draft law stipulates that no less than 60% of the returns generated from strategically important mineral deposits will be distributed to the public. If the returns fall below the 60% threshold, a balancing payment will be applied. It also provides that the state's ownership share will be replaced by a special royalty regime differentiated by type of mineral resource, with the special royalty set at a uniform rate.

Executives of companies holding strategic deposits had previously expressed their readiness to return 60% of the benefits and signed a memorandum of understanding during the tenure of former Prime Minister G. Zandanshatar.

If the returns fall below the 60% threshold, an adjustment mechanism similar to the agreement concluded with Orano Mining will be applied.

Under the current legal framework, it is not clearly defined what constitutes the 60% benefit, as the law does not specify which taxes, fees, and charges should be included in calculating the threshold.

As a result, negotiations such as those with Orano Mining were not straightforward, with one side claiming that 70% of the benefits had already been delivered, while the other side argued that it had not yet reached 60%.

Against this background, companies holding strategic deposits have been asked to submit their proposals to the working group on which taxes, payments, and fees should be included in the calculation of the 60% benefit. He emphasized that this is the first issue that needs to be clearly defined in the law.

Second, the draft law will regulate the rate of the special royalty. If the state ownership share is replaced by a special royalty and directed to the Sovereign Wealth Fund, the balance in citizens' savings accounts would increase from the current 500,000 MNT.

If the special royalty is set at 3%, individual balances in the Savings Fund could rise from 500,000 MNT to 1 million MNT. The adoption of the law would make this mechanism possible.

The public will be able to see how much each company contributes to the Savings Fund through the special royalty.

This is expected to increase public scrutiny of companies' operational efficiency while also creating a more stable and predictable operating environment for companies.

With the investment climate remaining highly unstable, attracting both foreign and domestic investment has become increasingly difficult. For this reason, the 60% benefit threshold should be enshrined in law.

The rate of the special royalty can then be determined through consultations and set out in law for different commodities such as gold, copper, and coal. This would eliminate the need to negotiate separately with every strategic deposit holder.

By applying a single legal framework and resolving the issue collectively, the constitutional principle that the majority of Mongolia's subsoil wealth should benefit its people would be upheld.

The government will support the private sector and businesses, guided by a win-win principle. By adopting this law, both citizens and companies will benefit. It is time to move beyond years of populist rhetoric and focus on the future.

Minister of Industry and Mineral Resources G. Damdinnyam said:

"Frankly speaking, mining companies are already paying taxes equivalent to more than 60% of their benefits. The objective of the proposed law is to establish a clear 60% threshold."

Otherwise, major deposits will not be discovered, and large-scale investors are unlikely to enter the market. In some cases, exploration companies have suspended their activities out of concern that a discovery could later be classified as a strategic deposit.

The working group will gather companies' feedback and finalize the draft in the near future. While recognizing that mineral deposits differ significantly from one another, he stressed the need to clarify state policy and improve the investment climate.

Amendments to the Minerals Law have been submitted to Parliament for the first time in 12 years. The draft includes provisions allowing action to be taken under the Law on Offences against those who obstruct the lawful operations of mining companies.

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The Ministry of Industry and Mineral Resources (MIMR) and companies holding strategic deposits have agreed to work together on the draft law. Below are the views expressed by executives of companies holding strategic deposits, along with the proposals they presented to the government during the meeting.

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G. BATTSENGEL: THIS IS AN OPPORTUNITY TO FOCUS ON DEVELOPMENT

G. Battsengel, Chief Executive Officer of Mongolian Mining Corporation, said that Energy Resources had originally held six licenses in the Tavan Tolgoi coalfield, five of which were returned to the state in 2008.

"We believed the matter had been resolved in accordance with the law. However, following the 2019 constitutional amendments, the issue resurfaced, possibly due to increased politicization. To resolve the deadlock, we have actively participated in the negotiations.

I believe the Prime Minister's decision to regulate all companies under a common framework, without discrimination, is the right approach. This is the proposal we originally put forward. It will bring greater clarity and predictability to Mongolia's investment environment." Battsengel said.

Holding an equity stake does not guarantee returns when copper, coal, or gold prices are low. Conversely, when commodity prices rise, companies are in a position to pay higher royalties. Battsengel therefore supported the proposal to introduce a special royalty with a progressive structure. He also agreed that the royalty regime should be differentiated according to the type of mineral resource.

If the benefit falls below the 50-60% threshold, disputes could be avoided by applying a one-off adjustment payment.

The draft law specifies that the special royalty payment will be directed to the Savings Fund, but it does not define where the adjustment payment will go. It would be appropriate to clarify that the adjustment payment should also be allocated to the Savings Fund. 

There is a prevailing understanding within the industry that the benefits from strategic deposits include all types of taxes and fees, which ultimately reach each citizen through the state budget.

The special royalty is the mechanism through which citizens will directly receive benefits. If the endless political debate over whether the state should or should not hold equity stakes is resolved, companies will also be able to focus on their core operations.

This approach would help bring an end to the long-running disputes surrounding the mining sector, a key pillar of Mongolia's economy, and allow the country to focus on development priorities.

P. TSAGAAN: MONGOLIAN BUSINESS LEADERS ARE NOW CAPABLE OF NEGOTIATING ANYWHERE, WITH ANYONE

P. Tsagaan, founder of Achit Ikht LLC, noted that the Constitution stipulates that the benefits of natural resources must be distributed to the people. He explained that this benefit includes taxes, fees, charges, and royalties.

In other countries, this is often considered as "social benefit," and there is also debate over whether factors such as job creation should be included in that definition.

In mining operations, waste rock, tailings, and other mineral-bearing materials may remain after extraction because they are not suitable for processing under the mine's existing technology. The concept of "residual deposits" emerged in connection with the use of advanced technologies to bring such materials into commercial use.

A legal framework was subsequently established, and more than 40 companies obtained licenses to operate residual deposits. However, these licenses were revoked in 2022.

Later, ahead of the elections, further amendments were made to the Minerals Law, with political debate centering on provisions for the state to hold a certain share in residual deposits. For example, while the royalty rate for copper had previously been 2.5%, it has now increased to 10%.

The draft law appears to contain elements of unequal treatment, whether intentional or unintentional. For example, there appear to be unclear provisions, with a 10% rate suggested for Oyu Tolgoi and 15% for Erdenet, creating inconsistency. The Minister of Industry and Mineral Resources, G. Damdinnyam, should take this into consideration. It would be preferable to apply a uniform standard rather than differentiating by project.

Achit Ikht is not a beneficiation plant but a processing facility producing final products through environmentally friendly hydrometallurgical technology. The law provides that operations may be carried out on the basis of contractual arrangements rather than a special license, yet royalties are still being imposed.

If the state is going to collect royalties, then the system should revert to the previous model of issuing special licenses. Companies lose significant time negotiating and concluding operational agreements. Licensing should be granted without unnecessary bureaucracy.

Foreign investment has declined and the economic situation is challenging, as the Prime Minister has also noted. At the same time, Mongolian businesses have accumulated substantial experience over the past three decades and are now capable of negotiating and partnering with companies around the world.

"In the 1990s, we were far more inexperienced, but the situation is completely different today. As the Mongolian saying goes, 'rely on your own resources before seeking help from others,' we should support domestic businesses and adopt a more efficient and streamlined approach. If we do so, there would be no need to rely excessively on foreign partners, and we will be able to develop and advance the sector on our own, Tsagaan said.

N. TSELMUUN: BELOW 60% PROFITABILITY WOULD HALT FOREIGN AND DOMESTIC INVESTMENT

N. Tselmuun, President of Mongolyn Alt LLC (MAK) and member of the Policy Council, said she understands that companies holding special licenses for strategic deposits are intended to contribute to the Savings Fund of the Sovereign Wealth Fund, and she supports this objective. She noted that her company has contributed a total of 15 trillion MNT to the state budget over the past 15 years.

If dividends are distributed, they will be deposited directly into citizens' accounts in the Savings Fund. In the case of Norway's Sovereign Wealth Fund, 100% of royalty revenues are allocated to its Savings Fund. In contrast, in Mongolia, such revenues are channeled into the state budget and spent, which has become a key underlying cause of today's politicisation and populism.

As a company that has held a special mining license and operated for more than 20 years, it has been paying a fair and equitable majority share of its benefits to the state budget in the form of taxes. "Fairness," in her view, is close to a 50:50 balance. Whether a 60:40 split can be considered fair, or whether another formulation is more appropriate, remains open to discussion.

There is a proposal to legislate the 60% benefit model previously put forward by former Prime Minister G. Zandanshatar. However, mining projects differ in geological conditions, levels of investment, and profitability. Therefore, it would be appropriate to assess how many of these projects can actually achieve 60% profitability. If they do not reach the 60% threshold, it would mean the projects are not viable and that both foreign and domestic investment would effectively stop.

Under this proposal, up to 60% of benefits would be transferred to the state. In that case, how many of the 55 strategic deposits would be able to continue operating?

Companies may have an interest in attracting foreign investment. Therefore, it is important to consider the overall tax burden. From this perspective, Mongolia is a high-tax country, with an average total burden of around 80%. If the goal is to attract foreign investors, it would not be feasible to operate while also delivering a 60% share of benefits to the state.

The company is ready to enter into negotiations with the Government. It has expressed this intention and, over the past period, has submitted nine letters; however, no substantive response has been received to date. 

Z. NOMUNDARI: AS A CITIZEN OF MONGOLIA, I HAVE NO INTEREST IN TAKING MY COUNTRY TO INTERNATIONAL ARBITRATION

Z. Nomundari, Founder and CEO of Adamas Mining LLC, said her company operates in the uranium sector. Exploration work began in 2001, and since 2005 the company has conducted exploration activities on more than 100 projects in cooperation with the Government of Japan. However, following changes in the law-particularly the decision for the state to hold a 34-51% stake in strategic deposits-exploration activities came to a halt. The company had also conducted exploration independently.

The company is described as holding a special license for the Mardai deposit in Dornod aimag. In reality, it has been waiting for 11 years to obtain a mining license. In 2015, exploration work was completed, reserves were confirmed, and an application for a mining license was submitted, but no decision has been made. The plan was to carry out production on part of the licensed area while continuing additional exploration on another part. As a result, the company's operations have remained effectively frozen for 11 years.

"The investor side often refers to the possibility of international arbitration. I own 50.2% of the company and am a citizen of Mongolia. I have no interest in taking my country to international arbitration. I have consistently taken the position of reaching mutual understanding and resolving issues through dialogue. However, the situation is becoming increasingly difficult to endure.

Our company works with a number of foreign-invested companies. For large-scale projects, it is difficult for domestic companies to participate on their own. Therefore, unless the 60% benefit requirement is clearly defined, it could discourage foreign companies from entering the market." Nomundari added.

D. NATSAGDORJ: COAL MINES CANNOT SURVIVE WITH 30-40% ROYALTIES

D. Natsagdorj, General Manager of Finance and Accounting at South Gobi Sands LLC, explained that the company is publicly listed on the Hong Kong and Toronto stock exchanges. The Minerals Law contains a provision allowing the state to acquire up to 34% ownership once, based on its investment. This provision has been communicated to the company's shareholders in Hong Kong and Toronto, and regulatory changes are regularly explained to investors. He stressed that legal amendments should be understandable and acceptable to investors.

Secondly, there is concern that excessive pressure on the mining sector, which underpins Mongolia's economy, could pose significant risks. Without policies ensuring stability and efficiency, weakening the mining sector could have serious negative consequences for the national economy, potentially leading to broader economic instability.

Thirdly, royalties are calculated based on benchmark prices set by the Ministry of Finance. However, mining companies are not able to sell their products at these benchmark prices. Coal produced from mines is treated as a single category at the national level.

In China, coal is classified according to detailed quality standards, and prices are adjusted accordingly. This level of adjustment is not applied in Mongolia. An attempt was made to mitigate this risk through exchange trading, but coal is not purchased through the exchange. As a result, the company continues to sell coal to its traditional customers.

Royalty rates could potentially increase further in the future, which represents a significant risk. In such circumstances, coal mines may have no option but to cease operations. Royalties are only one part of the overall tax burden, with many other taxes and charges also applying. This is a factor that decision-makers should take into consideration.

D. TSERENBADAM: THE CRITERIA FOR INCLUSION IN STRATEGIC DEPOSITS SHOULD BE CAREFULLY ASSESSED

D. Tserenbadam, Chief Executive Officer of Boroo Gold LLC, said that the company supports the Prime Minister's position on royalties and progressive royalty rates for strategic deposits. Boroo Gold was established in 1997 and has been operating for 29 years. Between 2003 and 2013, the company had already exhausted its economically viable reserves. The main reason it continues operations today is the rise in global gold prices. At the time, it was processing ore with an average grade of 3.2 grams per tonne, while the cutoff grade was 1.2 grams per tonne. Due to the increase in gold prices, the company is effectively surviving by processing progressively lower-grade material.

The company employs 704 people and has no foreign specialists. It operates across the territories of three soums in two aimags. If gold prices fall, the company would no longer be able to sustain its operations. This is well understood by the Mineral Resources Professional Council. 

Under the 2007 resolution of the Mongolian Parliament, the company was included in the list of strategic deposit holders. The criteria for determining which deposits qualify as strategic should be carefully reviewed and reassessed.

Secondly, there was a company called Centerra Gold Mongolia, listed on the Toronto Stock Exchange. This company discovered the Gatsuurt deposit, which is a fully defined, development-ready ore body.

If Boroo Gold's processing capacity is assumed to be 1.7 million tonnes of ore per year, this deposit alone would provide sufficient reserves for approximately 15 years of continuous operation.

The reason for referring to Centerra Gold Mongolia is that these are two separate companies. Boroo Gold has processing facilities and skilled personnel but had already depleted its ore reserves. As a result, it had to purchase ore and continue production by processing externally sourced material.

The company operates with notifications submitted to the Ministry of Industry and Mineral Resources, the Mineral Resources and Petroleum Authority, and the Environmental Police Department.

"At a time when the Government is discussing the development of strategic deposits and the expansion of the Sovereign Wealth Fund, I would like to ask the Prime Minister to pay attention to and review the ready-to-develop Gatsuurt project. Mining operations would require approximately 6-9 months of preparatory stripping work.

The Boroo mine has contributed a total of 2.5 trillion MNT to the state budget over its operating history. Processing plants and beneficiation facilities are fundamentally different. We hope that value-added industries will be supported," D. Tserenbadam noted.