The Mongolian Mining Journal /Nov.2020/
The recently held Discover Mongolia International Mining Investors’ Forum was the 18th in an annual series, and the first since Mongolia had a new Parliament and Government, both committed to enabling and ensuring the return of foreign investment to the country. Despite the fact that the forum was this time held in the backdrop of the global economy – as also the individual economy of each and every country – struggling under the Covid-19 pandemic, participants and speakers kept their focus on the declared motto, “Mining: The Road to Recovery”.
Taking a broad view, they discussed the likely policy of the newly elected Mongolian ruling set-up on the economy and mining, possible countermeasures for the economic recession, the need for a policy shift to revive the exploration sector, the planned amendment to the Mineral Law and its effect, etc., and then, coming to macroeconomic matters, they talked about the short- and mid-term risks the pandemic would have on the Mongolian economy, including on companies, the government and the public, and suggested ways in which the private sector and the government could cooperate to accelerate economic recovery.
All were agreed that mining would continue to be the main, if not the only, engine to pull the Mongolian economy forward. As of the first half of this year, the mining sector alone accounted for 18 percent of Mongolia’s GDP, 94 percent of exports, and 73 percent of foreign direct investment. In the first nine months, mining provided MNT7.3 trillion to the state budget or 20 percent of its total revenue.
During the “Government Hour” discussion, a representative of the Ministry of Mining and Heavy Industry (MMHI) noted that the volume of mineral resources registered in the official database is falling. This attracted a lot of attention, as it could well indicate that the future of the mining sector is uncertain. Only new geological exploration can discover fresh mineral resources. There is scope for this, as at present information on mineral resources is available from only 20 percent of Mongolia’s territory.
The number of exploration licences has been falling since 2013, and that of mining licences rising. The anomaly has become pronounced in the last seven years. The number of exploration licences was 1,717 in 2013, and dropped to 956 in October 2020, while that of mining licences was 416 fewer in 2013, but rising from the 1,301 then to 1,689, it is today 723 more. Following the 2014 amendment to the Minerals Law, calling for issue of exploration licences in areas set aside by the state for the purpose, the government demarcated five such areas between 2015 and 2018 and towards the end of that period, 8.4 million hectares were approved to be offered for exploration. In the five years since October 2015, 45 tenders were announced for 376 areas totalling 2.4 million hectares, and a total of 171 exploration licences issued.
Since last year’s Discover Mongolia, the number of mining licences has gone up while that of exploration licences has decreased significantly. If the trend continues, there might be no geological exploration work in Mongolia once the currently active licences expire in the next 2-3 years. The Oyu Tolgoi deposit was discovered as a result of 11 geological surveys from 1959 to 2008, and today it accounts for more than 70 percent of Mongolia’s foreign direct investment, and is one of the few projects that promote Mongolia’s mining potential to the world and keep alive the trust of foreign investors. Similarly, it took 40 years to put the Tavan Tolgoi deposit into operation. This is why it is said that the geological sector should always stay 20-30 years ahead of mining. Exploration work leads to discovery of deposits, and investment comes only when these are found suitable for mining. We must take active and meaningful steps to attract investment in the exploration sector as only that would allow Mongolia in the long term to increase export and foreign exchange inflow, create jobs, and diversify the economy.
Investment laws in Mongolia promise incentives and exemptions but the experience of most investors has been that these are never actually available. They have also found to their dismay – and cost – that after starting projects fully following the law, they might face unexpected but strong opposition from local communities and civil society organizations. In many cases, compliance with the law gives them no protection if they wish to carry on with their work, and many have ended up leaving Mongolia after spending time, money and energy on achieving little. Ambiguities in the law are often a challenge for the investor. To cite just one example, does “locals” mean those in the aimag or in the soum? In Dornod, community development agreements are to be signed with both the aimag and the soum(s) where the deposit is, but in Khentii, the agreement is solely with the soum(s), while in Sukhbaatar, only the aimag matters. It is interesting to note that some aimags that declare themselves to be “non-mining aimags” and would not allow any mining activity in their territories, have no qualms about receiving their share of the mining revenue from the state budget. Several speakers at the forum also raised issues such as lack of information on licence fees and taxes and on fees mining companies must pay to the local development fund.
G. Damdinnyam, a newly elected member who has formed a Mining Lobby Group in Parliament and is its chairman, said in his address to the forum that mining is the foundation of the Mongolian economy and is also the sector that attracts most investment. He thus finds it strange that the Mongolian government is yet to set up a “single window” system to facilitate interaction with investors and foreign representatives and to increase efficiency through time and cost savings for them in their dealings with government authorities. Instead, he said, foreign trade is under the Ministry of Foreign Affairs, investment is under the Ministry of Finance, and there is, in addition, a National Investment Agency, “making it very difficult for investors to navigate”. He said they were working on setting up a committee to promote foreign trade and investment which would submit its recommendations to Parliament. There should be a permanent agency to promote foreign trade and investment and protect the interests of investors. He also wanted a clearer legal definition of the “local” issue as also of the exact status and nature of mineral resources under Article 6.2 of the Constitution.
The Mining Lobby Group will actively press for better and less ambiguous laws governing the mining sector. Loopholes have to be eliminated and contradictions between provisions in different laws removed. For this, amendments would have to be made to the Minerals Law, the Petroleum Law, the Subsoil Law, the Minerals Transparency Law, the Heavy Industry Promotion Law, and the draft law on the National Wealth Fund. These are to be discussed at the autumn session of Parliament, Damdinnyam said.
Mining and Heavy Industry Minister G.Yondon said the Government wants to create a “stable and multi-pillared economic structure by developing transparent and accountable mining and value-added production, and by increasing mineral resources”. With this goal in mind, the MMHI will work with foreign and domestic companies to attract investment in four major and interrelated sectors: geology, mining, oil, and heavy industry. It would also work for a more favourable legal environment, and implement mutually beneficial projects and programmes. The newly created National Geology Office, which has started operating, would help develop the geological sector in ways suggested in state documents.
O. Batnairamdal, Deputy Minister at the MMHI, said that other countries’ experience in issuing exploration licences through auctions was being carefully studied to see how the situation in Mongolia could be improved. The Government was committed to value-adding and the oil refinery under construction, the proposed plants to process copper concentrate and coal, and the iron and steel plants would all help in this. Some infrastructure work has been started and “the next four years will be a period of transition from mining to processing”.
Batnairamdal gave the following timeline for developing the processing industry between now and 2024.
Coal: Of the 50 million tonnes projected to be exported, 30 percent would be processed, more than double the current percentage of 13.7. Erdenes Tavan Tolgoi will set up a processing plant to make this possible. Railways will be built in both directions.
Copper: At present, Oyu Tolgoi and Erdene mines produce 1 million tonnes of copper concentrate every year, while the production of pure cathode copper with 99.99% copper concentrate is 6,200,000 tonnes. Production will go up once the Tsagaansuvarga deposit is commissioned. About 2.5 million tonnes of concentrate will be processed by 2024, with a plant for the purpose built at Oyu Tolgoi joining the existing one at Erdenet. At the same time, production of 152,000 tonnes of pure cathode copper (excluding Oyu Tolgoi) is expected to generate $1 billion in revenue, and will also increase the production of end products such as cables and copper wire, in plants run mostly by small and medium entrepreneurs.
Iron ore: Mongolia consumes 500,000 tonnes of steel products per year, and 16.5 percent of the 278,000 tonnes of armature is made locally. In four years, production of steel products will increase enough to meet 80 percent of domestic demand.
Oil: Mongolia imports all its oil and 98.4 percent of this comes from Russia. Four years from now, the fully operational oil refinery is estimated to meet 55 percent of our needs. In addition, small and medium-sized enterprises of oil industry by-products are expected to come up.
The importance of the gold sector
World gold prices have risen about 25 percent this year and are expected to remain high. The MMHI gives great importance to the sector and its policy is to provide support for development of major deposits. Currently, 11 companies have received a total of MNT107 billion in long- and medium-term loans under the Gold 2 programme.
Jewellery used to account for 40 to 50 percent of the world’s gold trade, but the pandemic has shrunk it by more than 30 percent. Savings in the form of gold coins and bars have become more popular and the purchase of gold as financial instrument has increased dramatically. Whatever the form of use, demand remains constant. Mongolia’s gold reserves total about 2,000 tonnes, half of which is at Oyu Tolgoi, mixed in the copper. Placer deposits hold between 200 and 300 tonnes and the rest are in hard-rock deposits. Of the 538 valid gold extraction licences, 21 percent are for the latter. In the first ten months, the Bank of Mongolia purchased 19 tonnes of gold, increasing foreign exchange reserves by $750 million. The full year’s target is to buy 20 tonnes and increase exchange reserves by $1 billion, the first time the gold sector would generate $1 billion in revenue, thanks to high prices. Earlier, this revenue fluctuated between $400 million and $800 million.
Chairing the “Gold: supporting the economy” session, M. Dagva, CEO of QMC LLC, said even without the added incentive of higher prices, the gold sector must increase production to fulfil its potential to become a $2-billion sector. Projects in the gold district of Bayankhongor aimag have attracted the interest of foreign investors. Erdene Resource Development, the oldest company conducting active geological exploration in Mongolia, is going to put into operation a deposit with its own funds. The company has been operating in Shinejinst and Bayan-Undur soums of Bayankhongor aimag since 2005. In the last 16 years, mineralization has been detected in only 5 of the 115 licences held by it and the company has returned all the other 110 licences. The Bayan Khundii and Altan Nar gold deposits, and the Zuun Mod copper-molybdenum deposit are among the mineralized areas discovered, and gold mining will begin in 2022 at Bayan Khundii. The gold there has a grade three times higher than at the average deposit. The gold content is 3.7 grammes per tonne.
The deposit has geological reserves of about 16 tonnes of gold. A detailed feasibility study published in July 2020 determined 14 tonnes of production reserves, in three main ore zones stretching 800 meters from northeast to southwest, and mining will be from the western zone in the open pit method, using new technology adapted to local conditions. The gold separation plant uses 6 l/sec of water, which is 12-15 times less than what similar plants use, and 24 percent of the energy used in the open pit would be solar. The initial investment is $59 million, and in six years of active operation, two tonnes of gold would be mined annually and sold to the Bank of Mongolia. Two years more have been set aside for development and closure.
Right now, the construction design is being finalized, and next year, once the funds are in hand, the company will begin construction which would continue throughout the year. Production is scheduled to begin in the first quarter of 2022. The potential for the reserves to increase and for the mine to expand has been confirmed. In particular, certain results from the Khar Mori and Altan Soum fields, both discovered after the Bayan Khundii deposit, show that they are even larger. The present gold price is $1,900 an ounce, and the value of the Bayan Khundii project was put at $100 million when the price was $1,400/oz.
The Altan Nar deposit was discovered in 2012, and the Bayan Khundii deposit three years later. Altan Nar has not been sufficiently explored, though 18 areas have been marked with a 5.6-km stretch of mineralization, two of which have about 500,000 ounces of gold resources. If new exploration areas and projects such as Altan Nar are put into operation in addition to the Bayan Khundii deposit, Erdene would be producing gold for 12 years. Last year,the company received $5 million as loan from the European Bank for Reconstruction and Development (EBRD), which then became one of the company’s shareholders by converting the loan into shares. In July, Eric Sprott, one of Canada’s largest gold investors, invested $15 million in the project. A.Bilguun, Vice President of the Corporation, believes that these investments will be a major boost for raising the initial funding for the project. Incidentally, Erdene Resources Development is the first company to be listed on both the Mongolian and Canadian stock exchanges.
Steppe Gold was founded in Mongolia in 2016 and has two projects in Dornod aimag. Last year, it raised about $25 million at an IPO in the Toronto Stock Exchange. In December 2019, the Altan Tsagaan-Ovoo project, which it had purchased along with Uudam Khundi in Bayankhongor aimag, was commissioned with a capacity of 60,000 ounces of gold per year. At this early stage of the mine, a heap leaching technology plant is in operation. Another plant will be added in the second phase, to increase production to 150,000 ounces. The proven reserves at Altan Tsagaan-Ovoo are 5 tonnes and the probable reserves are 12 tonnes. Drilling is ongoing to increase reserves, and the first results suggest that a new occurrence could become a deposit. The resources and general survey report of the new occurrence will be announced in the first quarter of 2021. T. Bataa, the company’s President and CEO, said that in January this year, the company received money from the Mongolian National Investment Fund and also attracted $15 million in strategic investment from Canada. In the first seven months, Steppe Gold mined and sold 15,000 ounces of gold to the Bank of Mongolia.
Naran Mandal in Bayankhongor is the first company in Mongolia to use the underground mining method in a hard-rock mine. Michael Fischer, the company’s Executive Director, said the project’s gold lay 2.5 km below the surface, and Mongolia has very little experience of mining below 80 cm depth. Calling it “the first underground gold project in Mongolia”, Fischer said Naran Mandal would be pioneers in using a new new technology in gold mining aimed at getting best results from deep-seated ore bodies.
Ambassadors of countries from where companies have come to implement projects in Mongolia participated in a session called Increase the Competitiveness of Mongolian Business. This is what three of them said.
Ambassador I.K.Azizov from the Russian Federation noted that because of the pandemic bilateral trade would likely drop 21% from last year’s level, and stand at $2 billion. Areas of economic cooperation have been expanding, as shown by the present discussions on building a gas pipeline, but Ulaanbaatar Railway JSC remains the best example. Freight turnover is about to reach 30 million tonnes while the number of containers shipped has reached 2000, “certainly a big jump from the 8 in 2013, when I first came to Mongolia”.
Work on an overhaul of Ulaanbaatar Railway would have begun by now but the COVID-19 situation did not permit engineers and technicians from Russia to come to Mongolia for some time. Then they came, but could start work only after being quarantined for 21 days, followed by 14 days of self-isolation. Once the upgrading is done, freight turnover can reach 52 million tonnes by 2023. Azizov also referred to the Tavantolgoi-Zuunbayan railway, which would help carry Mongolian coal to India through linkage with the Trans Siberia and Baikali-Amul railways. He revealed that these railways are being upgraded to increase their capacity so that they handle the additional freight from Mongolia as it trades with new countries using ports in Russia’s Far East.
Referring to UK companies working in Mongolia, Ambassador Philip Malone reminded his audience that Rio Tinto, which operates the Oyu Tolgoi project, is both a British and an Australian company. Great Britain is involved in the renewable energy sector, and has invested in the construction of the solar power plant in Sainshand soum, in Dornogovi aimag. In the oil industry, a joint project with Petro Matad has started. Pandrol, which manufactures rail track systems, has been actively involved in the Tavantolgoi-Zuunbayan and the Tavantolgoi-Gashuunsukhait railway projects. There are companies who have invested in education, food, auditing services, and trade. Bilateral trade turnover has been on track for growth.
Malone said UK investors eyeing to do business in Mongolia “expected foremost a stable and transparent legal environment here, and also a transparent, rational, and principle-oriented judiciary in resolving business disputes”. The mining sector was the destination of big investment and “Mongolia should be innovative when pitching for such investment”. Considering the big potential for Mongolia to export its products to big markets beyond Russia and China, the Ambassador expected Mongolia “to attract investors to help it in finding new export destinations”.
India has provided a soft loan for building the oil refinery at Altanshiree soum in Dornogovi aimag and its Ambassador, M. P. Singh, revealed that this was the biggest single development aid project financed by India. When running to capacity, the refinery would meet 80% of the domestic demand for oil and petroleum products, and Mongolia would thereby save a considerable amount of money. The first engineering team from India arrived in October but was still in quarantine. The COVID-19 situation has led to delays in floating international tenders. After construction is completed, the Indian government would be responsible for maintenance of the refinery for one year.
A major component of the project is the pipeline to bring crude to the refinery. Its construction is to be funded by Mongolia and Ambassador Singh was confident that the working group set up by the Mongolian government and led by the Deputy Prime Minister would resolve all related issues. Singh felt that Mongolia can be a leader in exporting Triple C products -- cashmere, coal, and copper – once it improved its transport infrastructure.
Imagining infrastructure in 2024
The need to develop infrastructure, especially to transport mining products, came up again and again in the conference, and there was agreement that progress in this continued to be unsatisfactory, barring work on the Gashuunsukhait road.
Things should look up by 2024. The Tavantolgoi-Zuunbayan and Tavantolgoi-Gashuunsukhait railways should be operational by then, and construction of other arms of the railway transport network, such as the Sainshand-Baruun-Urt-Khuut, the Khuut-Bichigt, and the Zuunbayan-Khangi railways would also have begun. Public-private partnerships working on the Build-Operate-Transfer principle would start constructing a road network, including the Tsagaan-Uul border (270 km), Tavantolgoi-Gashuunsukhait (250 km), and Tavantolgoi-Khangi (478 km). There would be terminals for various mining products at the Gashuunsukhait and Shiveekhuren border ports and a logistics centre for various Tavantolgoi products. Representatives of government agencies told the Forum that upgrading and increasing handling capacity at borders -- Gashuunsukhait, Shiveekhuren, Zamiin-Uud, Altanbulag, Bichigt, and Burgastai – would be a priority
J. Zoljargal, Executive Director, Mongolian Coal Association, felt that building infrastructure solely for the needs of coal export would be wrong. The Chinese coal market is limited, and “we would never export there more than 70 million tonnes of coking coal a year”. Building a road as also the railway might be an overkill. It is crucial, he said, to take other export goods into account in planning border capacity, prioritizing infrastructure projects, and in drawing up implementation schedules. The transport cost now for one tonne of coal along the Gashuunsukhait road is $40, but this would be $8 once the railway is commissioned, and road transport on this route would not be competitive any longer.
N.Udaanjargal, executive director of Tavantolgoi Railway, also does not understand why the government has been trying to attract investment from the private sector to build the parallel road in the direction of Gashuunsukhait knowing the project would be unprofitable. For buyers in central and northern China, Mongolia is the nearest source of coal while Australian coal, with transport costs of $5/tonne would be the most viable option for manufacturers in southern China, Japan, and India. He thinks that taking Mongolian coal through the Gashuunsukhait border to any third market will not be competitive as transportation costs will be too high.
There was consensus in the conference that geological exploration work must receive more attention, to keep the mining sector as the main pillar of the Mongolian economy. There was also recognition that Mongolian export has been so badly hit by the pandemic because there are no reliable means of transporting mineral products. While Mongolia has been trying to solve the old problems in the same old ways, other countries have taken digital leaps, and are being propelled by innovation and technology into a post-COVID-19 era. China, the main coal market of Mongolia, has promised to become a “carbon neutral” country by 2060.
Is Mongolia listening?