Gold sector needs both State support and self-support

1th of 3, 2018

The Mongolian Mining Journal /002.2018/


Some long-awaited amendments to the Mineral Law on 24 January, 2014 finally brought cheer to the gold sector. Royalty rates were reduced to 2.5 percent, the system of progressive royalties was withdrawn, and Mongolbank was made responsible for refining and exporting all gold mined in Mongolia. These amendments are to be in force until January next year, and it is now a good time to assess how beneficial they have been for the sector. On that evaluation will depend whether the amended regulations and practices should continue.

That all the gold produced in the country is now sold to Mongolbank, has made our foreign exchange coffers fuller. Before the amendment, under the stabilization agreement with them, the two major producers -- Boroo Gold and OyuTolgoi -- were free to themselves trade the gold from their mines. The term of the agreement with Boroo Gold ended some time after the amendments became effective, and from then on Boroo’s gold was also deposited with the central bank. Only Oyu Tolgoi has continued to be untouched by the new regulations. How much gold has been coming to Mongolbank in the last five years is seen below.

Mongolbank’s gold purchase /by tn/

Year                        2013    2014    2015    2016    2017
Total purchasing         6.0    12.7    15.1    18.3    20.01

Source: Mongolbank, 2017

This legal compulsion to sell to Mongolbank all gold mined in the country has put a stop to smuggling and is arguably the most important fallout of the amendments. Not just formal miners, individuals have also found it more profitable and convenient to sell gold to the central bank, where the transaction is faster and also offers a tax discount. Actually citizens now sell more gold than corporate entities.

Entities’ and citizens’ gold sale to the central bank /by kg/

                    2014    2015    2016    2017
Entities        9455    8093    7273    7352
Citizens       3249    6991    11029    12661

Source: Mongolbank, 2017

It is interesting that of the bank’s record purchase of 20.01 tn gold in 2017, 66 percent was sourced from citizens and just 34 percent from entities. This indicates how the overall gold sector is dominated by artisanal and small-scale miners (ASM) known more commonly as ninjas. It is also significant that since the time when royalties were reduced to 2.5 percent, gold purchase by Mongolbank has been increasing every year, but gold sales by entities has also been falling every year. In 2013 only 8 individuals sold gold to the central bank as against 120 entities, but there has been a complete reversal since then, so much so that until 21 December, the figures for 2017 showed 117 entities selling 7.2 tonnes, while 216 citizens sold 12.4 tonnes.

These citizens are not just any individuals. They are agents permitted by law to buy gold and then sell it to Mongolbank. They collect the gold ASMs have dug up, and also buy from small mining entities which want to avoid paying the 25 percent corporate income tax. This easy way of tax evasion has meant that even as Mongolbank buys more gold, there is no corresponding increase in the Government’s tax receipts.  

Gold tax revenue to the state budget statistics /billion tugrug/

Year                        2013    2014    2015    2016    2017

Gold tax revenue      98.7    51.6    33.0    44.9    49.0

Source: Mongolbank, 2017

In an interview in this issue of MMJ the Executive Director of The Gold Producers’ Association, which has a membership of around 100 domestic companies, makes clear that they want the present regulations, particularly the royalty rate, to continue, but the association also wants the sourcing of  gold to be made more transparent.

The association needs to answer one question about its own performance. Five years ago, when they were lobbying hard for lower royalty, they promised that the money they would save would be put into exploration. Have our gold reserves been increased? Has output risen?  What, then, have the amendments done for the nation?

The 2014 amendments were made in the hope that they would help change the popular bad image of domestic gold producing companies as just another kind of ninja. The companies should be asked if this has really happened, if the amendments have served their avowed purpose.

There is no denying that many of the problems in the gold sector can be traced to misguided policies, poor decisions, and weak implementation. But those in the sector should well know that they cannot put that forward as the whole story. Do they think they have done their bit? State support will never be enough if gold companies do not make concerted efforts to put their sector firmly on its feet.

The post-transition history of the Mongolian gold sector is a chequered one, full of highs and lows. It did lift up the economy during the deep crisis of the 1990s, but it is also true that this one sector has brought the reputation of the whole mining sector down, by its irresponsible manner of operation and, particularly, its gross failure in reclamation work.

We are now seeing the third gold related programme since the 1990s – Gold-2 (2017-2020). The two earlier programmes brought in big changes to the sector, both good and bad. They drew investment, foreign and domestic, placer gold deposits were extracted with private sector money, and production reached 24 tonnes (in 2005), over 40 percent of it coming from hard rock deposits. Most of these pluses were lost in the grab made by the windfall profits tax, and the later “long named law” was not just ineffective, but positively harmful, not only for the economy, but also for the environment, as it led to a wide expansion of ninja mining. Myopic decisions by policymakers who cannot take a long view have caused enough trouble and we can only hope Gold-2 does not suffer from too many of these.

In this last year of the present regulations, and with two years remaining of Phase-1 of Gold-2, a new voice is heard, that of President Kh.Battulga, who wants to stop issuing new exploration and extraction licences, and also to bring the whole sector under state control. Whatever happens, the ultimate goal should be to have a strong and thriving gold sector serving the interests of the nation. For that, we need healthy discussions leading to a non-partisan consensus.

The February issue of the Mongolian Mining Journal is focused on the gold sector. Among what you find inside will be the position of gold companies on issues in their sector, as expressed by the head of the Gold Producers’ Association, and how Centerra Gold is optimistic about progress at long last on its Gatsuurt project. In addition, the Mongolian section gives the latest thinking on a gold refinery plant, and current information on the supply chain in the sector, and much else to interest and inform our readers about the gold sector in Mongolia.  


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