Opinion
Mongolia takes a U-turn
2016-07-01
The Mongolian Mining Journal /2016.may 090
N.Ariuntuya
In a boost to the drooping morale of the mining sector, Mongolia is all set to become a uranium extractor country again. The Executive Director of Mon-Atom LLC, E.Galbadral, told MMJ in April that talks with the French company Areva to put two deposits into the economic cycle were at an advanced stage. The Deputy Director General of the Mineral Resources Authority of Mongolia (MRAM), S.Amarsaikhan, went further in the middle of May when he told media that 95% ground had been covered in reaching a Deposit Development Agreement with Areva Mongol. The rest should be easy going.
Even though the deposits have not been formally identified, talk that the licences of Cogegovi, an Areva Mongol subsidiary, have been recently transferred to Areva Mines LLC provides a hint. This is believed to have been done to allow the Dulaan-Uul and the Zuuvch-Ovoo deposits in Ulaanbadrakh soum of Dornogovi aimag to be put into economic cycle. Cogegobi was granted a radioactive minerals licence over the two deposits by MRAM in June 2015.
The State-owned Areva Group of France has been active in exploration work in Mongolia since 1997 through its local subsidiary Areva Mongol, making it one of the few western companies that have survived in our country for almost 20 years. Under the Nuclear Energy Law any uranium deposit is considered strategically important, no matter how much reserves it has. Accordingly, the State-owned Mon-Atom and Areva came together to form Areva Mines in October 2013, with Mongolia owning 34% of the joint venture. However, Japan’s Mitsubishi Corporation owns 34% of Areva Mongol, so effectively Mitsubishi also has fairly substantial stakes in Areva Mines. Even without official confirmation, it seems certain that the licences now belong to Areva Mines, so Mitsubishi, Areva and Mon-Atom will all be involved in the extraction.
According to the Minerals Council, the two deposits together hold more than 60,000 tons of uranium, with 54,639 tons registered for Zuuvch-Ovoo and 6,259 tons for Dulaan-Uul. This is almost as much as this year’s projected global consumption but that is not saying much. Apart from the reserves being not so large, the uranium content in the ore is also not very high.
‘U’ is the symbol of uranium, and we see this resumption of uranium extraction after very many years, and that at a time when the mines sector is a picture of gloom, as some sort of a u-turn. But there have been other surprising developments in Mongolia’s uranium industry so far this year, and more might have been happening that is kept well hidden from both media and the public.
Minister of Mining R.Jigjid submitted amendments to both the Nuclear Energy Law and the Minerals Law in January. Ostensibly, these were meant to facilitate installing rules on royalty payments in radioactive minerals extraction. But Parliament has gone into recess without discussing the amendments.
Then, a non-regular spring session of Parliament was convened to discuss issues related to Mongolia joining a number of International Atomic Energy Agency (IAEA) conventions, but the discussion did not take place. One can only wonder if this failure has anything to do with the following words of Mon-Atom Executive Director E.Galbadral in the interview he gave to MMJ: “All countries with any project in the nuclear sector have to comply with guidelines issued by the International Atomic Energy Agency. Mongolia is now busy preparing a comprehensive legal framework in the uranium sector.”
The other important development was the closure this month of the 7-year-old dispute with Khan Resources, whose uranium exploration licences had been cancelled. The end of the saga came with the Government paying $70 million to the Canadian company as compensation for its arbitrary action.
A review of the past five months makes it clear that the Government has been focused on making the uranium deposits operational and on smoothing anything that could be perceived as standing in the way. Our claims 5-6 years ago that Mongolia would become a strategic player in the uranium industry were premature but maybe not too wide of the mark, whether we end up building a nuclear power plant or not.
Mongolia intends to process the uranium ore into what is called the yellow powder or yellow cake. Global uranium prices have slumped for quite some time, and this puts a question mark on the economic prudence of beginning extraction now. There are ecological hazards in processing, and the technology, too, is sophisticated but let us, for now, put aside these aspects, and examine our decision solely from the point of view of economic viability.
An international seminar on “Uranium Exploration and Extraction -- Positive and Negative Impacts” was held in the spring of 2015. In his presentation there, B.Mendbayar of the Institute of Physics and Technology at the Academy of Science of Mongolia, said his calculations had put the cost/kg of producing the yellow powder in the underground leaching method at $70. At that time its price was $78 in the international market. Mendbayar emphasized that the $8 profit/kg was not worth the bother and the risks. He felt this situation would continue for 5-6 years.
The price has now fallen to $60, and most market research organisations and analysts do not hold out any hope for a rise before 2020. According to the Bureau of Resources and Energy Economics (BREE), the average price of one pound (= 454 grams) of yellow powder will be $31.8 in 2016, and will gradually increase to $39 in 2020, then jump to $44 in 2021.
Not everybody is so pessimistic. IAEA projects a 60% rise in the world’s nuclear power production between now and 2040. According to the World Nuclear Association, the world’s total annual demand today is 78,000 tons of uranium oxide containing 66,000 tons of uranium. JP Morgan estimates the demand will substantially increase as more and more nuclear reactors come up, and with this, the price of uranium oxide will double or rise even more by 2020. Cameco, one of the largest uranium companies, sees the price/pound of the yellow powder reaching $100 or more in 2020.
The general idea, then, is that production of yellow powder will not be profitable until 2020. That suits Mongolia fine, as it will take us a minimum of 2-3 years to start commercial production. Maybe 2020 is actually too early for us to think of exporting.
Some, however, do not rate high our yellow powder export potential. One of them is J.Enkhsaikhan, a former Permanent Representative of Mongolia to the International Atomic Energy Agency (IAEA), whose interview with E.Odjargal in this issue of MMJ makes his position clear.
Russia misses the bus
Even after the end of the Soviet period, Russia, which owns 12% of the world uranium reserves, has kept its eyes on Mongolia’s uranium reserves. Talks on joint activities in extraction of uranium gathered momentum in 2008, when the two governments agreed to establish a joint venture, Dornod Uranium. The Mongolian action to take back the licence of Khan Resources was seen as a move to facilitate Russian control over the Dornod deposit, which has reserves seven times larger than the Russian annual production. However, the JV remained an entity only on paper and did not make any progress on the ground.
Sanctions and falling oil prices have caused serious hurt to the Russian economy. Nobody knows how long the crisis will last, and faced with the uncertainty, Russia has put whatever plans it had with uranium in Mongolia on the back burner. Most likely, it signalled its inability or unwillingness to proceed with the JV, leading Prime Minister Ch. Saikhanbileg to say on 15 April that the licence for the Dornod deposit would now be offered for sale in the international market. There was no other way to put back into the State budget the $70 million that the Government paid to Khan Resources, he said. It is believed that the decision to sell to others was taken only after Russia had expressed its lack of interest in buying the licence, confirming that Mongolian uranium was not its priority at the moment.
China hops into the driver’s seat
Is our southern neighbour not interested? China is changing its energy strategy, replacing its numerous coal-based power plants with nuclear ones. Its present 5-year Plan calls for doubling its nuclear power generation capacity to 58GW by 2020. That would mean setting up 6-8 new nuclear plants every year until 2020 to augment its current strength of 30 nuclear reactors. There will be no let-up after this goal is reached, as China plans to produce 150 GW of nuclear power by the late 2030s. This expansion of capacity means China’s uranium demand will rise to 32,000 tons in 2035, according to CRU, the global commodity market research organisation.
China started stocking up on raw and processed uranium some five years ago, and though precise estimates of its present and planned stocks vary, there is general agreement that these are huge and easily surpass its projected demand. China’s domestic uranium production last year was a mere 1,819 tons. Planning ahead, it started acquiring deposits in other countries years ago. One of them, the Husab project in Namibia, will be ready for production this year, with a capacity of 7000 tU per annum.
Mongolia, a geographical neighbour and with considerable amounts of uranium, has certainly been on its radar. A bilateral agreement on cooperation in the uranium sector was signed in 2010. That was an MoU on cooperation in radioactive minerals and the nuclear energy sector between the Chinese National Nuclear Corporation (CNNC) and the Mongolian Nuclear Energy Authority. CNNC already owns the Gurvanbulag deposit in Dornod province, where the previous owner, a Canadian exploration company, could transfer its licence to CNNC before Mongolia adopted the present nuclear energy law.
Interestingly, the 2015 annual report by Hong Kong-listed CNNC mentions a “Mongolian Project”. The report says, “During the year, the Group had negotiations with representatives of the Mongolian Government about formation of a joint venture company to operate the uranium mine in Mongolia The Group is still waiting for feedback from the Mongolian Government. All exploration work of the Mongolian Project has been completed. Progress has also been made with respect to the environment impact report which is still subject to approval by the Mongolian Government.” In the absence of any information from the Mongolian authorities concerned, we can only speculate that the proposed joint venture is about extraction from the Gurvanbulag deposit.
Mongolia depends on its mineral resources to tide over any economic crisis, and it is no surprise that the Government is trying to make use of the uranium deposits. The problem is that the price of uranium ore is low and we do not have the technology to process the ore. So maybe this is not the most opportune time to open up our uranium deposits. But the Government desperately needs money, and needs it in a hurry. That’s why we suspect that it is planning to use the deposits for short-term gains.
The alternative for the Government is to look for more Chinese loans. According to the Mongol Bank, at the end of 2015, the government`s foreign debt stood at $3.649 billion. How much of this is to the Chinese is not given, but we tried to get an approximate idea from Development Bank and Mongol Bank reports. In 2014 the former signed an agreement with the Chinese Development Bank for an eight-year loan of $162 million, of which $149.5 million was transferred to the borrower by the end of 2015. Apart from that, our Development Bank owes a total $300 million to the Chinese EXIM Bank, Credit Suisse, Sumitomo Mitsui Corporation, and Taiwan’s EXIM Bank. How much of this was originally sourced from China is not clear.
The Mongol Bank has got $1.839 billion from People’s Bank of China (PBC) through the swap agreement, which is actually a debt. In the most recent swap, in February, Mongol Bank took $152 million from PBC, according to the World Bank. The central bank’s foreign exchange reserves stood at $1.265 billion in March, showing Mongol Bank as having more debt than its foreign exchange reserve. The country would appear to be surviving on the $1.8-billion swap from PBC. Using such short-term loans to see us through a crisis, when it becomes a habit, makes the Mongolian economy vulnerable, and may even become a cause for its ruin.
Add the Government’s debts to those of the Mongol Bank and you get a whopping $5.4 billion. Of this at least almost $2 billion -- Mongol Bank’s $1.8 billion plus the Development Bank’s $162 million -- are sourced from China. There is more. Parliament recently approved an agreement on another $1-billion loan the Government will take from China’s EXIM Bank, @ 2% per cent interest, and repayable in 20 years.
Not that nobody has noticed how things are going. Our March issue had an interview with D.Shurkhuu of the Institute of International Studies at the Mongolian Academy of Sciences, in which he said, “A thorough review of how much Chinese investment, loans and grants we should have and also of how these are to be best used is essential… Should we just bring in China in place of Russia, and in 20 years be too dependent on China, both for investment and as the market for our mineral products? Should we accept all offers of investment by China, or should we also seek investment from third countries and their participation in our development with use of modern technology?”
Is Mongolia being forced to offer Tavan Tolgoi and its uranium to China in return for these loans? S. Bold-Erdene’s article in this issue on how the Tavan Tolgoi railway has again been left with no financing will surely make readers pause and ponder. Are shortsighted survival decisions taking us back to the days of a barter economy, where we shall part with our deposits in exchange for loans taken without forethought?