The Mongolian Mining Journal /Jan.2022//
The mining sector is preparing to celebrate its centenary this year, as it was on 25th December 1922 that the People’s Government had decided to nationalize the Nalaikh coal mine.
The last thirty of these 100 years have been epoch-shaping. This followed Mongolia’s transition to a market economy which led to the privatization of state property and emergence of private companies. However, Mongolia did not have sufficient domestic resources to invest in this capital-intensive industry. So, it had no choice but to create an investment-friendly environment, and seek foreign investment. Most of Mongolia’s foreign investment has been made in the mining sector.
As N. Algaa wrote in his book “Will Mongolian Mining Sector Retreat or Move Forward”, geological expeditions, and a few wolfram and tin mines owned by the state were privatized. However, gold mines were excluded from the privatization list. With the break-up of the Soviet Union, Mongolia’s completely neighbour-dependent economy collapsed: inflation reached 325% and the country brought in food rationing. Saving the economy became the national imperative.
One measure taken was the “Gold Program”. Under this, the government offered special support to gold mines which helped to increase hard currency revenues. Shortly afterwards, the Law on Foreign Investment, and the Law on Minerals were passed by Parliament in 1993 and 1994 respectively. These laid the foundation for developing the mining industry. Previously, Mongolia used to extract less than 500 kg of gold per year from placer deposits. However, 775 kg of gold was extracted during the first year of the Gold Program in 1992, 8.7 tons in 1997, and 11.4 tons in 2000.
By 2020, the mining sector accounted for 22% of GDP, 71% of total industrial output, 71% of foreign direct investment, and 94% of exports. The mining sector has generated the bulk of export revenues during the transition to a market economy, and that situation continues.
In addition to the historic 100th anniversary of the mining sector, this year will mark a turning point towards the next stage of development. This is constituted by the legal reforms taking place. They include four new laws: the revised Minerals Law, the Law on the Sovereign Wealth Fund, the Law on Mineral Commodity Exchange, and the Law on Heavy Industry. With the exception of the Minerals Law, these are primary laws. According to Minister G.Yondon, the Ministry of Mining and Heavy Industry wants to pass these four laws this year to ensure the transition of the mining sector from “mining to processing”.
Most of the draft laws are still under development. The autumn session of the Parliament, which ended on 18th January, supported the discussion of the draft law on the Mineral Commodity Exchange. This means that it met the conditions for final approval at the spring session of the Parliament, which begins in April. The objective of this law is to attract greater investment into the mining sector,and expand it’s contribution to the country’s economic growth. This will happen through organizing fair, open, and transparent trade in mineral products, providing opportunities for setting fair market prices, and implementing a unified exporting policy.
The law will also provide a legal framework for the establishment of a mineral commodity exchange in Mongolia, create a solid system for connecting suppliers and buyers of mineral products, help to set a fair market price, and share commercial and contractual information with international market players. As a result, potential investors will receive accurate and reliable information, and the competitiveness of Mongolia’s mineral products should be strengthened.
The Minister explained that transparency of prices and sales amounts of mineral products will set the conditions to impose reasonable taxes and fees, increase state budget revenue, ensure the fulfillment of contractual obligations to supply mineral products, reduce the risk to traders, and create a favorable investment climate.
The fact that the revised Minerals Law and the Law on the Sovereign Wealth Fund are included in the discussion list at the spring session of the Parliament next April significantly raises hopes and expectations.
The revised Minerals Law contains legal provisions that address a wide range of issues such as establishment of a transparent system capable of monitoring all stages of mining operations, from exploration to closure; increasing public participation; strengthening a transparent and accountable mining system based on international best practices; geological surveying, prospecting, exploitation, processing, sales, environmental protection, rehabilitation, mine closure, labor safety, mining risk management and local coordination.
Other aspects of law changes are included. First, mining sector institutions will be strengthened by establishing mining research and development centers and local mineral resources units.
Second, the evaluation of mineral resources will be improved. It is important to improve the methodology for asset valuation of mineral deposits and make it more realistic. The value of mineral deposits is constantly changing, and this valuation is very important for mining companies to be listed on foreign and domestic exchanges. There is also a tax on the transfer of mineral licenses. Property valuation is also important in tax collection. This relationship has not yet been specifically regulated and is being assessed in accordance with the assessment procedure approved by the General Department of Taxation.
Third, the regulation of rights and responsibilities will be clarified. It is necessary to reconsider the responsibilities of the organizations that regulate the activities of the mining sector. The question is what responsibilities should be given to the government and what should be given to the private sector.
Fourth, the main amendment concerns mine closure and a closure guarantee fund. It includes regulations that cover all processes, from geological exploration to closure. Mongolia has the concept of a “strategic deposit”. However, from the international point of view, there is no such thing and, instead, a concept of “strategically important minerals”. The main consideration is then about what products are in demand on the world market and what are the requirements for the search, extraction and processing of raw materials for those products. Markets and products change. Thus, it will become a requirement not to open a mine, if you are, one day, unable to close it if required. This brand new concept should enable Mongolian mining companies to reach a new level of development.
Mongolian mining has come a long way over its first century of development. The next century promises to be equally exciting, if the sector grasps the opportunities on offer with good governance and prudent management of the undoubted risks it will encounter along the way.