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“Only consistency can bring back trust, but it takes time”

7th of 4, 2017
Australia-listed Aspire Mining Ltd, the largest coal tenement holder in the Orkhon-Selenge Coal Basin in northern Mongolia, is also the sole owner of its flagship Ovoot project, the second largest coking coal deposit by reserves in Mongolia. MMJ talks to David Paull, Managing Director of the company, on various issues in the Mongolian mining sector.

How long has your company been operating in Mongolia, and what are the projects you currently have on hand?
We have all our assets in Mongolia. We have been here since February 2010 and have so far raised and invested $65 million in these assets. That’s quite a large amount, but our assets are also large, particularly the coking coal project. We have also been working on engineering and design studies for the northern railway between Erdenet and Ovoot. All the money raised in international markets, particularly in Australia, has been invested in this country. 

What, according to you, are the key challenges foreign investors have been facing in Mongolia and what should Mongolia do to ease the situation?
As you know, just a few years ago, there was a very large resources boom and the price of all commodities went much much higher than the long-term average. The key consideration for an investor in any area, whether resources or telecom or hotels, is how profitable the venture will be. There has to be some reassurance and confidence on that score. Then prices started falling quite dramatically, though they have been picking up of late. It has become important for all resources companies to focus on costs and reduce them to the maximum as only that can cushion their business against the volatility in prices that we have now and will be seeing in the future also. Sustainability in the resources industry in any country now depends on having a range of assets and on staying at the low end of the cost curve. 

Mongolia has fantastic natural resources and most of them are yet to be discovered, but because of historical reasons, there has not been adequate investment in infrastructure, making the cost of servicing the export operations of these products in the north and south of Mongolia very expensive. Coal and iron ore are bulk commodities and require good infrastructure to be moved for export. Oyu Tolgoi is able to continuously ramp up its production, as that mine stays at the low end of the cost curve and even when there is volatility in copper prices, Oyu Tolgoi continues to grow and prosper. Mongolia needs more Oyu Tolgois, and also needs more investment in infrastructure. 

I am talking about good and efficient roads and railway transport systems to move both domestically consumables and export products. I think cost control is the key to make the Mongolian resources industry competitive in the world. And there is no reason why Mongolia should have the dramatic booms and busts it has had in the last few years. 

What should we do to reclaim the confidence of foreign investors?
The government has been doing a lot of right things in different directions in the last two years. When foreign investors compare Mongolia to Kazakhstan or Myanmar or some other place, they look for consistency. They feel comfortable when they know that the rules in force when they decide to invest will be the same after ten years when they may have operations going. This consistency is very important. It is also something which takes time to build, but only this consistency can generate confidence. It will grow over time and that, I guess, is my main response to your question. 

Another thing foreign investors obviously look for is profitability, adequate returns on their investment. Once they are confident that the country’s policy will be consistent in the future, they can calibrate their risks, and decide which ones to take, and which ones not. That sense of confidence will take time to instill among foreign investors. Returning to commodity prices, the prospect of weak prices make a decision to invest more difficult unless you do have very low costs. I also feel that the progress of the Oyu Tolgoi project is very important to improve the investment climate in Mongolia. Every time Rio Tinto issues a public release, it refers to Oyu Tolgoi and now they always refer to it in a positive way. That is very important for Mongolia.
 
While some concerns on the current situation in the Mongolian mining sector relate to laws, some others are about the role and responsibility of local communities? What do you expect the situation would be when your projects start production and sales?
As regards local communities, you must engage with them to have your social licence to operate. That is a given. The community has to be well represented in all discussions with the industry in general as well as with an individual company. There should not be a situation where small groups of local citizens, with their own particular views, would seek to obstruct, if not altogether veto, a company’s plans for development. That, of course, means enormous uncertainty as it gives obstructive power to small groups which never wish to agree to anything. A true balance has to be found between the national interests, the communities’ interests, and the investor’s interests. I think I am wary of legal changes that may put more power into the hands of a local community or a part of it. This is because sometimes they don’t have larger national or provincial interests in their heart. That is one area of concern I would have. Governments who receive taxes and royalties also need to make sure that a portion is returned to that local community. 

By the way, there are many good things in the Mongolian resources sector administration. The online licence issuing system promises to become world class once a few early troubles are eliminated.  Once people get used to the system and are familiar with the process, then those with real technical and commercial interest in development of potential resources will find it easier. We expect to start production only after some more years and by then the railway should be built. Our mining licence over Ovoot carries with it some clear obligations, same as anywhere else in the world, and we shall certainly meet all of them according to international standards.

Where are we in terms of responsible mining and mining governance?
Well, the laws are quite transparent. The ministry and the directorate of mine compliance have the responsibility to oversee the activity of operators to ensure that they meet their health and safety requirements, and also observe the guidelines for environmental protection. And, as I noted, all mining licence holders have many legal obligations.  All these checks and balances should make for responsible mining, but at the end of the day, what matters most is the mindset of the people involved. 

There are always people who try to cut corners and thereby expose the operations to risk, and there also people who are more professional and have a long term view. Mining people, for instance, must let go of their boom-bust mentality which make them work within a short-term time frame for maximum gain. Instead, we should be fully professional, focusing on cutting costs, with efficient planning and proper development of our human resources. That will give us a long-term perspective, committing us to being more responsible about looking after the local community and fulfilling all environment and health and safety obligations.

The last mining boom could not be properly used by Mongolia. What is the lesson from that for us? 
Not just Mongolia. All around the world there are countries which failed likewise. We must remember that what we are calling the super cycle lasted just about four years, from when the global financial crisis started in 2009 to late 2012 or mid-2013. High quality resource development takes ten to fifteen years from discovery to operation, but this super cycle was only for four years. People got excited and money could be easily raised. And easily invested, too, but sometimes not in the right projects. At the end of the day it is again true that quality projects run at the lowest cost are the ones to survive all the cycles and they take time to develop. My point is that large long-term projects take years and I come back to the significance and importance of consistency as it means consistent rules are consistently applied over a ten-year time frame. That brings good results. 

There is one other point I’d like to make about taking advantage of strong market conditions over the short or medium term. You need to have the right infrastructure for this to be successful. Regular investment in quality infrastructure will make Mongolia ready for the next time. If this is not done, we would again be late to grab the chances offered by the next turn of the cycle, when it does come. It will be over before you start construction of infrastructure. Don’t just think of Mongolia, there are many such instances.  Money was hastily found for construction of ports in Australia to take advantage of the super cycle, but by the time the work could be completed, the cycle had turned, and with a slump in prices, there was less business for the ports, causing a lot of financial distress all around. Only well-planned increase in capacity would be the answer to market fluctuations. 

What’s new in your main projects?
We are looking at a joint venture with the Noble group on a small coal deposit to the south-west of Murun, Khuvsgul. It would benefit from the railway when it is constructed, but even before that, it is close enough to Erdenet to supply moderate quantities there by truck. That looks like a terrific little project to start with. It brings coking coal from northern Mongolia to the market. It will help with building our logistics platforms to be able to move products efficiently to customers. Our big project would benefit from this in the future. That’s taking a fair bit of our time. 

We are excited about the northern railway corridor. We see this as being a great legacy to Mongolia, for benefits that will continue well into the future. This is what I mean by improving infrastructure over the next few years so that Mongolia is ready when the next cycle comes. Also, being part of the transit corridor between China and Russia will have a lot of benefit for non-resource industries, engineering and transport services, agriculture etc. Mongolia will earn a lot in transit transport fees. Expanding the railway infrastructure will make a lot of things more competitive and save on costs, both points of major interest to investors. All this will have a long-term positive impact on the Mongolian economy, particularly in the northern part of the country. 

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