Looking back at 2017 as a whole, one sees it as a year of both positives and negatives for the country’s development, and also as a period when the mining sector was kept busy throughout. The export market for all the main minerals was up, and the sector continued to be the main driver of economic growth. It was not smooth sailing all the time, though, with problems and disputes cropping up ever so often, as this overall survey will show.
The year ended with a suspension of coal exports, but this is expected to be a temporary measure, and all told, 2017 offered quite unexpected gains for Mongolia’s coal export. The beginning of the year did not look promising but unforeseen circumstances led to a price rise and exporters’ hearts also rose. A tornado in Queensland, Australia’s main coal region, at the end of March damaged the rail network, severely curtailing supplies, and thus raising prices to a rare high. This was only the fourth time in the past 15 years when the price crossed $300/t. With Chinese demand undiminished, it was a lucky break for Mongolian exporters. Interestingly, it had been the same story in 2011, 2015, 2016 and 2017 -- Mongolian export increased when supply from Australia dropped. It is a reactive surge, not proactive.
The price level hovered around $300 for less than a month, but stayed sufficiently high after that, thanks to growing Chinese steel production, and that country’s domestic policies and regulations. Mongolia’s coal export reached its highest level, giving an unexpected lift to the economy for long in crisis.
Unfortunately, the smile lasted for just about three months. Exports fell sharply in July, dropping to less than 50 percent of the previous month’s, and never went near the earlier high again. The reason is as much economic as political, like many of our issues with the southern neighbour.
The increased output from miners’ hard work was stuck in long queues on the road to the border, as inexplicable delays hit clearance work at the port. Coal truck drivers were forced to spend many days on the road, which led to various problems. The situation has not changed yet. Clearance points like Shiveekhuren have also been hit by Customs delays but Gashuunsukhait, which handles over 60 percent of our coal export, has been affected the most, leaving exporters ruing the loss of opportunity after just three profitable months.
Mongolian authorities were aware of the implication of these delays and right from July, Deputy Ministers and Ministers began meeting the Ambassador of China and asking for steps to improve the situation. Numerous requests to China went out from the Ministry of Foreign Affairs also. The Chinese have been consistent in their response: the issue will be studied and resolved in the best way. This has been going on for all of six months, and a recent visit of Foreign Minister D.Tsogtbaatar to China achieved nothing more positive. With almost no option of their own, Mongolians have been trying their best to come up with a solution. They set quotas for individual exporters, prohibited transport by dirt roads, and finally ordered temporary suspension of export. None of these was expected to make any real difference and none did.
Coincidence? Maybe, but, more likely, not
China is our only export market, and it may or may not be a coincidence that some “surprise” development always seems to crop up whenever international coal prices increase and Mongolia exports more at these high prices. This is especially true of the past two years when artificial difficulties have come up every time Mongolian coking coal exporters were hoping to gain from a market recovery.
Remember 2016? Mongolian coal exports were doing well in the second half of that year and just when prices were at their peak in November, China imposed charges on all mineral products coming from Mongolia through any border port. These included CNY3 for each tonne of coal, a fee equivalent to 0.2% of the price for copper concentrate, and different fees for zinc, iron ore, fluorspar and all other minerals.
On the day Erdenes Tavan Tolgoi set their sale price at $50/t, China announced another levy on its imports through Gantsmod port. It can again be a coincidence, but was it? China’s official explanation was that it needed the money for improving facilities in the port, but the common belief was that the Chinese decision was linked with the Dalai Lama’s visit to Mongolia. There can never be any absolute proof in such matters, but you connect the dots, and get this sequence of events. Our southern neighbour’s habit of such sudden imposition of fresh regulations might not change but there are other, more predictable, things our coal sector should worry about.
A senior executive of Fenwеi Energy told MMJ in September, “The Chinese Government is taking steps to restrict coal import through its north ports (which is where all coal from Mongolia enters China) as part of a policy to keep down excessive increase of coal demand, in its bid to regulate domestic coal supply.”
This domestic policy to keep demand from rising, and then to support local suppliers against imports will certainly lead China to reduce coal imports from Mongolia. Its serious and strict efforts to combat air pollution are also a warning to Mongolia’s coal exports.
In the face of all these challenges, Mongolians have a tough job ahead of them to retain their position in the market. They have to make concerted efforts to establish a reliable supply network in the Chinese market, ensuring export space and stable demand. This is topmost priority for an economy that is so highly dependent on raw material exports.
End of an era, but for good or bad?
The Government decision in 2017 to change the norms of granting licences could totally change the course of Mongolia’s mineral exploration, and thus the future of the minerals sector. Exploration licences will no longer be granted on application, but only through the auction or the selection mechanism. The same is the case for mining licences also, except when it is issued to companies who ask for converting their exploration licences into mining ones.
Only time will tell if these are the right decisions, but such radical policy changes should have been taken after discussion within the sector, and not by way of amendments to the Mineral Law when passing the Budget Law, as was done. The rationale behind giving up the application process is unexceptionable. The chaos around mineral licences had to end and the trading in licences stop. Now a tax will have to be paid on any licence sale to be legally recognized. The selection process is also expected to make exploration work undertaken more seriously and more professionally, not to forget that auctions will bring in more money.
The first-come-first-served practice was in force in Mongolia for 20 years. It had merit as a mechanism that encouraged investment in a generally undiscovered and unstudied place, was simple and took little time. It was quite effective on many counts but over the years became flawed. Its end was signalled when the then President, Ts.Elbegdorj, suspended all licence grants, which remained effective until the end of 2014. Finally, the old order was changed in 2017. Many see the 2010-2014 period as one of stagnation in the exploration sector, but also a time when trading in licences showed an increase. MMJ wrote about how only local companies were left to carry on exploration work, with almost nil foreign investment after years of robust exploration.
One thing the experiment showed is that a complete ban on anything cannot be all good, so this time also, it would have been better if the Government had looked for ways to modify the application process before so unceremoniously and totally rejecting it. We do need professionals in exploration but currently Mongolia does not offer too many areas likely to have quality reserves, so will there be enough applicants ready to bid for them? Only 10.2 million hectares is on offer under the selection process out of the total 41.4 million hectares opened for exploration in the spring of 2017. Also, those coming through the selection process will end up spending more on their exploration work.
Instead of leaving everything to the private sector, the State itself must make substantial investment of money and resources in the geology and exploration sector. The present budgetary allocation for geological studies is quite small, more so when seen against the practice in some other countries with a mining-based economy. A comparative study made by The Australia Mongolia Extractives Programme concluded that Mongolia has to spend $16 million on such work, while the allocation for both 2017 and 2018 has been MNT13.3 billion. For all its smallness, however, it is a big leap from the minuscule MNT1.6 billion in 2004.
Sustainable mining development can come only when there is continuous increase of extractable reserves. This requires better and wider exploration, and for that we need to provide potential investors with comprehensive information. This is now being done in a big way, but the results of all these policy changes will be known only after years of work. u
Erdenes Tavan Tolgoi is debt-free, but is it worry-free?
Increased exports at a time of price increase have allowed Erdenes Tavan Tolgoi to clear three domestic and foreign loans. The $350-million Chalco loan dated from July 2011 and was used by Su.Batbold’s Government to pay a cash handout of MNT21,000 to every citizen. It has now been repaid, earlier than expected, thanks to the price of coal rising gradually, from $27/t to ultimately $73.1/t, and to start of mining in West Tsankhi.
The second loan was for $200 million, from the Development Bank. Half of this was repaid in the beginning of November, again before the due date, and the company has made provision to repay the remaining $100 million in the first quarter of 2018. The company has also repaid $64 million due to TTJVСо, an extraction company that worked on contract at East Tsankhi. All these years, whatever was earned from the extracted coal went to meet the repayment obligations. At times, operations had to be halted for lack of money. Now that the burden is gone, the company is in the black, posting a profit of MNT340 billion in the third quarter of 2017. This is a historic achievement and the profit amount would have been greater if delays at the border had not affected export revenue.
The loan has been repaid, but the contract with Chalco is still in force, and ETT has to sell to the Chinese company 80 percent of the coal extracted from East Tsankhi at an indexed price for the next five years. Mongolia’s repeated requests to review these terms have fallen on deaf ears. However, at the moment there is some relief. The prevailing high price of coal has led to the temporary shelving of the indexed pricing system and ETT is selling its coal to Chalco for $59/t, which is not bad.
Clearing dues is fine, but another problem has come to the fore for Erdenes Tavan Tolgoi. Its extraction is reaching the 0 layer soon. According to the feasibility study, that is the time when the extracted coal has to be washed, but in a display of lack of planning and maybe of political considerations trumping commercial priorities, no arrangements for that are as yet in place, even though the Energy Resources washing plant is there to be used.
Most important is that the fundamental questions relating to the huge deposit are still unresolved, despite loud pronouncements of intention by successive governments: How will Tavan Tolgoi be developed and who will do it? No comprehensive plan for the first seems to have been prepared, and it is also still not clear where negotiations with the Shenhua-Sumitomo-Energy Resources consortium stand. We are also in the dark about the power plant, which would light up much of the southern Gobi as also serve the coal export railway.
No golden future likely for Gold-2
Approved on 18 January, 2017, the two-stage Gold-2 programme is part of the Government’s Action Plan 2016-2020 aimed at national economic recovery. The target is to raise annual gold extraction by 2-3 tonnes every year, to reach 25 tonnes by 2020. Earlier Gold programmes were generally successful. Gold-1 during 1991-1996 did attract investors, and annual extraction rose from a mere 700 kg to 11 tonnes, as private investments put placer deposits into economic circulation. Unfortunately, this growth was marked by complete ignorance of and unconcern for ideas of rehabilitation and conservation, contributing hugely to the poor image of the mining sector in popular perception.
During Gold-2 in 1997-2000 the total amount of gold extracted reached 24.1 tonnes, higher than ever, 40 percent of which came from the primary gold deposits. Then came the controversial windfall profits tax, followed by the “law with the long name”, and the two together pushed the sector to the edge of bankruptcy. Gold mining began to be seen in a better light from 2014, as innovative changes were made in the legal environment, adding transparency to the shadow gold economy, and increasing gold sales to Mongolbank as a result of the royalty rate being lowered to 2.5%.
But, whether Gold-2 in 2017-2020 will achieve its goals is very doubtful. It had a brisk beginning but things have been quiet since the departure of the government that had approved it. With gold placer reserves now depleted, Gold-2 is to focus on primary deposits, on the assumption that extraction can be increased there and in other gold-containing metal deposits. All efforts will be made to raise extraction capacity, including financial support for extractors, study of special purpose areas to see if gold extraction can be done there, detailed nationwide assessment of gold prospects, provision of funds for gold prospecting and further studies with State funding.
There has been little progress in the gold sector this year. It is true that Mongolbank purchased 19.1 tonnes of gold until the end of November, a record high, but this is not linked to the present Gold-2 in any big way. This has more to do with the decision taken in December 2016 to buy gold at the world market price.
Many trace the apparent stalling of the programme, and doubts about its future, to a statement by President Battulga, in which he asserted that “Mongolia’s wealth will keep flying out without giving benefits” to Mongolians as owners of their resources, “if we don’t stop the new gold exploration and mining licence grants”. He also called for stronger State control in the sector and wanted gold extractors to sell all their gold only to Mongolbank, promising to “soon introduce these changes in a draft law to be sent to Parliament”.
On both previous occasions gold production rose as the sector was opened up. Support was given to both geological exploration and extraction, regulations were eased, and no differentiation was made between international and domestic companies and investors. The grant of a licence came without restrictions. All this was to correct the mistakes made by abruptly changing rules. We thought we had learnt our lessons the hard way.
The fate of the present Gold-2 will depend on the provisions of the law to be initiated by the President. His words “It is imperative for the State to take up exclusive control of the gold sector” sound ominously like an effort to turn the clock back, making foreign investors and private companies unwelcome. We have to wait and watch, but for the moment a big question mark hangs over the gold sector.
“Nationalisation” of Erdenet annulled; the price of folly?
The “mining dispute of the year” ended on December 7, leaving the Government with a black face, with the Supreme Court ruling that its nationalisation of the 49% stake in the Erdenet Mining Corp. held by the Mongolian Copper Corp (MCC) was illegal, and effectively restoring to MCC the stake it had bought in 2016. The Saikhanbileg government had announced the $400-million sale by Russia’s state-controlled Rostec to MCC just before parliamentary elections in 2016, lauding the purchase as it put greater control of the country’s natural resources in the hands of Mongolians.
Saikhanbileg’s Democratic Party lost the election, and the new parliament, dominated by the Mongolian People’s Party, voted in February to confiscate MCC’s holding after a working group it had set up found the sale unconstitutional, because it had been made without parliament’s approval. It also took a decision to transfer the 49% stake to the government, thus effectively nationalising the iconic copper mine and plant, as the Mongolian government already held 51% share in it.
Erdenet Mining Corporation was then listed as a 100% State-owned property and in late March the State Property Committee replaced the existing board of directors, formed after the share purchase by MCC, with a new one. In a burst of populism so common in Mongolian politics, Parliament promised to distribute its freshly acquired 49% stake in Erdenet equally among all Mongolians, just as had been done with Tavan Tolgoi. This announcement came on 4 July, right before the presidential election but if the goal was to influence voters to support the ruling party’s candidate, the ploy was not successful.
MCC brought a civil case against the State Property Committee at the Sukhbaatar district court asking for reinstatement as 49% shareholder at EMC. This court and, later, an appellate court both ruled in favour of the MCC claim, and now the Supreme Court has upheld the lower courts’ decision. MCC will now be registered as holding 49% share in the company, whose State-owned status is also voided. The Supreme Court ruling also annuls all decisions, including appointment of directors, taken at the board meeting in March. The MCC board members would reclaim their positions.
There is no appeal possible against the Supreme Court judgement. MCC has said it will seek compensation for the government’s alleged breach of international rules on investors’ rights and has assembled an international legal team for the purpose, in the event of a failure in talks with the government. There has so far been no hint on the quantum of compensation it will demand, or on what the Government’s stand would be, but it seems the new year will see a lot of taxpayers’ money wasted because politicians and members of parliament, misguided by their populist fervour, did not pause to think what their folly could cost the nation.
Long gestation should produce a strong new law
There has long been a consensus that the Mineral Law is not comprehensive enough to regulate the mining sector in its totality and diversity, because of its widespread ambiguities and numerous loopholes. Such lack of clarity often proves to be stumbling blocks on the way to the industry’s development. The Ministry of Mining and Heavy Industry was thus given the responsibility to prepare a new law that, together with the present one, will cover the entire mining process.
The Ministry duly came up with a 72-page draft, with 14 sections, providing changes in regulatory norms, installing specialised systems and coordinating them with one another, and setting out detailed and specific closure rules. It gives more teeth to feasibility studies and environmental impact assessments, and ensures that they are prepared honestly and professionally. Simply speaking, the idea was to have a law to ensure that professionalism and responsibility would be the two guiding principles in everything to do with mining.
The draft was offered for comments and suggestions from all stakeholders several months ago and once these all come in and are reviewed, the draft will be revised to incorporate the suitable ones among them. We may thus well hope to have a Mining Law in 2018, with comprehensive and best-practice regulations, geared to the sector’s development, and promotion of equitable distribution of the benefits received from the mining sector. It will also unite people in the sector and outside it.
Investors and others directly involved in mining operations are usually averse to any change in rules and regulations and fear any move that might affect the stability of the legal environment. However, laws must evolve with time. Since 2006, there have been 30 amendments to the Mineral Law -- including the three major ones in 2010, 2014 and 2017 – and these have changed around 300 articles and provisions, in small ways or big. The final draft of the new law will show how much influence stakeholders and sector players have on those who frame and pass laws.