“We need a state policy built on national consensus”
5th of 3, 2018
The Mongolian Mining Journal 001.2018
When P.Ochirbat, the country’s first President, academician and mining engineer, speaks, Mongolia listens. In a wide-ranging conversation with G.Iderkhangai, he speaks about issues in the mining sector.
Mongolia had an integrated mining policy during the socialist period, but since then, we have seen no comprehensive approach on how to develop the sector. Instead, the policy changes after every election and new rules and regulations come up. What has been the overall result of this inconsistency? Mongolian mining has a history going back thousands of years. In modern times, we have had three major industrial revolutions and are now getting ready for the fourth. Since transiting to democracy, our goal has been industrialisation, with emphasis on the fuel-energy sector. Our policy has been to combine the development of industrial-scale extraction and processing with that of a diversified and well-structured economy. Sustainable implementation of this policy over the last 30 years has made fuel and energy the base of Mongolia’s development, so much so that the mining sector now accounts for 90 percent of our total exports.
However, as you say, the political attitude and the legal environment in the mineral resources sector have often not been stable. This has been our first, and main, failure. Mining revenues were not used to further development or seen as truly national resources. Their use to fulfil electoral promises, and to meet wrong welfare targets, has been the second mistake. The third was to chase out foreign investors under the name of land protection.
Even then, we have succeeded in increasing production and export of gold, coal, copper and iron ore. This has been made possible largely by expansion of the private sector in the mining industry, even in an uncertain environment. The four years since the State policy on the minerals sector was approved have not seen much change on the ground, with almost no progress on large-scale projects. Now we hear the State policy will be amended. Do you think that is necessary? The State policy must be precise and must consistently focus on the longer-term goals. Unfortunately, in our country, any new parliament and government make it a point to upend previous policies, setting out different goals, mostly unachievable.
The minerals sector is different from many others in that it works on a long-term basis. It needs extensive research and exploration, detailed preparation of production plans, time to develop the deposit, and arranging for transport and sales along with the extraction. In the Mongolian context, sale is mostly export, which means more time and work. Thus, the cycle from getting a licence to selling a mine’s output could take 10 years, maybe 20. We cannot accomplish good results in four years, which is how long any parliament or government usually lasts, and that is why I said frequently changed goals are mostly unachievable.
Even if investors manage to work within the 4-year framework, risks would always be there, and even without them it would be too short a period of time for them to earn enough to recoup costs. Time-bound and populist policies have not led to growth, but have hindered it and, in the process, they have given the mining sector a poor image. People do not understand that short-sighted policies do not allow the sector to work with a purpose and to fulfil its potential.
The government never revealed the logic of the steps it had taken, if it did take any, before formulating the mining policy. Interestingly, six of the eight sections of the policy include sundry references to supervision, indicating that proper implementation of the policy would be achieved by extensive control. This can only be restrictive, interfering with a company’s freedom to function and it certainly is not a proper mechanism of policy implementation. This alone, leaving aside many other reasons, justifies a review of the policy and other guideline documents in the mining sector.
What do you think of the ministry’s intentions to get a fresh national programme to develop the minerals sector enacted before March? Is any such programme necessary? Going for another high-sounding programme when there is already so much uncertainty indicates disorderly thinking. We can only hope that the programme will be well prioritised, and would stress the growth philosophy.
Details of the programme, including the choice of system, the fundamental concept and the strategy guidelines, must be set out precisely and must clearly show how they will further development. The implementation mechanism must be described step by step, all likely external and internal effects listed, interlinking with other programmes explained, and both economic and ecological concerns addressed.
Target programming is a basic tool of modern management practice. It is a holistic method, based on the goal, the time span, and available resources, and clearly revealing who would be responsible for the implementation, and when and where this will be done. Our successful programmes on gold, petroleum products, copper and uranium have all been based on the principles of target programming.
The government is not following the mining policy enacted by Parliament. I wonder about the rationale behind a new national programme when existing ones are not seriously implemented, but since the Government appears determined to go ahead, its actions should at least be consistent with the principles behind the world’s fourth industrial revolution.
Understanding what these are and how we should be part of the revolution would enable us to adopt forward-looking policies. Failure in this regard would leave us with ineffective and outdated policies and strategies. Any attempt to improve the overall policy setting must be based on clear awareness and understanding of the fundamentals. Small cosmetic changes would not really help, but they imply a threat.
If Mongolia continues to buy equipment from the world markets, unaware of how developed countries are popularising the technologies of the fourth industrial revolution, we shall be left with a collection of outdated equipment and machines.
The previous “Gold” programmes, in 1991-1996 and in 1997-2000, attracted investment, improved gold mining and helped strengthen the country’s economic profile. On the other hand, the 68% windfall profits tax, the long-named law and similar moves led to the collapse of the industry. Now that the Ministry of Mining and Heavy Industry has admitted that implementation of the 2017-2020 Gold-2 programme has been poor, how do you think it can be improved? Adequate foreign exchange reserves are a major guarantee of national security. Gold is important for rapid economic recovery. A country’s creditworthiness is evaluated on the basis of its foreign exchange reserves. Gold and coal can accelerate short-term inflows at a time of economic difficulties, as they are easy to extract and sell.
Obtaining copper from its ores consists of a series of chemical, physical, and electrochemical processes, while gold requires just extraction, washing, and refining the ore to make it into 999.9% fine gold. The same is true for coal, though it is better to wash it before selling it, but this would depend on what the buyer prefers.
We must first decide on which mineral products we would supply to the global markets for our best benefit. Then we must make a proper study of confirmed and estimated reserves before adopting the state policy on which minerals to prioritise in which ways and to what end and so on.
Gold is ever a winner. Its value never depreciates and global perceptions of Mongolia’s economic health will depend quite a lot on how well we manage our gold industry. There are some people in the gold sector who spread negative information about Gold-2, boosting the already quite strong public opinion that gold miners are badly damaging the environment and that their activities need be curbed, if not altogether stopped. I think the Government was right in setting up Gold-2 and am confident that its success will lead the gold sector to further growth, as envisioned in the programme.
The first Gold programme, back in 1992, can be said to have inaugurated the gold industry in Mongolia and then developed the new sector. The 68% tax and the long-named law not just put an end to this, but also created social antipathy to gold mining. The newly developed industry collapsed, and production shifted to micro “Ninja”-run operations. Gold-2 has arrested the slide and has given a message to the public that the Government is committed to take the industry back to good days and help it grow.
The President has announced that the Government will stop issuing new exploration and mining licences for gold, so that there is stricter control and supervision on the industry. Will this planned enforcement of government authority be good for gold? This is evidence that there is no cohesive and coordinated State policy. Some decisions are aimed at developing the industry while others seek to put roadblocks on its way to growth. This enormous conceptual and policy mismatch in the government is merely making producers lose faith in the government’s credibility. We shall have to see whether the President’s strategy or Parliament’s decree on gold prevails and wonder why they cannot agree on a cohesive policy.
As I mentioned earlier, gold is a key commodity that ensures Mongolia’s national security. Given this, such conflicting signals affect not just mining, but also national security.
You have said that Mongolia needs a gold refinery with British technology. Could you please elaborate on this? Usually any country producing, say, more than 5 tonnes of gold sets up a refining factory. There are many such plants all over the world. And world markets unhesitatingly accept products made using British technology, while they might double-check others. Procedures to test the gold content are complicated and costly and the final price varies depending on these costs. That is why using British refining technology will help get better prices for our gold, but we Mongolians tend to buy outdated foreign technologies that come cheaper, not realising this is ultimately counter-productive and means loss for us.
Private sector investments, including from foreign sources, in exploration have been shrinking. How then would abandoning the practice of issuing licences on request affect exploration? What is the point of conducting exploration, if we are to halt mining production and curb the industry in the name of protecting the land? The purpose of exploration is to identify resources for mining, so why should anyone waste capital if there is no assurance of getting something in return? Mongolia does not have enough funds to finance its own geological and exploration projects, while foreigners invest to make a profit and not just to help Mongolia.
The mining sector cannot grow without undertaking exploration work. If we are to produce 50 tonnes of coal a year, we must prepare 100 tonnes of coal reserves. Similarly, if we want to produce 20 tonnes of gold, we have to increase our reserves by 40 tonnes. This is the proper way to balance exploration and production and to lay a solid base for further growth of the industry. Even more educated and well-informed people are talking about placing limits on this growth, without understanding that there cannot be any growth without exploration.
What do you think of the claim by the Minister of Mining that foreign investors have shown their preference for the selection mechanism as this gets them exploration licences at a low risk? This is hard to believe. Geology and exploration licences are usually issued for an area on 1:50.000 scale, which would be an area where certain minerals have already been found and where further mineralisation is a strong probability. This standard practice is no longer being followed, and investors are now offered areas where 1:50,000-scale studies have not been done.
Companies take a big risk if they explore an area that does not contain any information on or evidence of minerals. The selection system thus only builds more walls for foreign investors by adding to risks. What are your thoughts on the proposed law that would regulate all mining phases -- from geological studies to factory closures -- and also inter-relations within the industry? I have not seen the draft of the law, so I cannot make any comment on specifics. However, I have long believed that there should be such a law. Actually, I included my ideas on this in my doctoral dissertation, and have continued to explain them in several articles and books. I have also made a comparative analysis of laws on mining in the US, China and Russia.
Mining has always been dangerous work and deaths at work were common even not so long ago. But nowadays companies and governments lay great stress on the safety of both humans and the eco-system. So I feel Mongolia does need a comprehensive mining law that clearly defines what is acceptable and what is forbidden in mining and enforces compliance. Such regulations, with the force of law behind them, are essential in any society that values human rights and a healthy environment. There are people who believe that the Government must have a role in setting up mining mega projects, while others want everything to be left to the private sector. I wonder where you belong. Implementing mining mega projects will always need government involvement. Only a government can issue exploration and mining licences, and only Parliament and the government can create the legal environment. Our government collects 17 types of taxes, payments and fees from mining companies, and in Mongolia only the State, represented by the government, has the right to own, and to use, mineral deposits. These rights give the government the legal authority to let foreigners and non-residents to use a deposit for a certain period of time for a fee.
There are many financial options for the use of these deposits. If Mongolia has sufficient capital, it is best that it builds its own mining production factories. If it lacks the money, Mongolia can go for joint ventures with foreign and domestic investors. The government should borrow to pay for its share of the investment, and pay off the debt when the plant starts making profits. This is what was done at the copper-molybdenum deposit of Erdenet. Setting up the mining and processing factory there cost 595 million roubles, to be shared equally by Mongolia and the Soviet Union. Mongolia borrowed the amount of its liability from the Soviet Union at 2% interest. Repayment was made from its share of export income.
What about Oyu Tolgoi? I would like to make several points here. First of all, Oyu Tolgoi is 66% foreign-owned and the other 34% is owned by Mongolia, which paid for its share of investment expenses by taking a loan at 14% interest. Many self-styled patriots have always claimed that this way of theirs was the only way to save our country.
I would say it was unnecessary and unwise to borrow at such high cost, which has created a huge debt burden for the nation. The company should have been left 100% foreign-invested. The government could have collected 17 types of taxes, fees and commissions, imposed higher rates for using natural resources, and enforced tighter supervision on environmental, technical and economic aspects. This way the project might have brought to Mongolia the equivalent of as much as 50% of the annual total profit. We published well-researched studies to show people how this would have been a better option for us, but the “patriots” paid no attention.
Second, some concessions were made to attract more investment to improve Mongolia’s chances of economic growth and socio-economic development. Similar concessions were made to the Soviet side in the case of Erdenet also. Third, we have made sure that 90% of the employees at Oyu Tolgoi must be Mongolian.
Fourth, there have been many benefits such as more than 800 Mongolian enterprises are supplying products and services to Oyu Tolgoi. Fifth, after long negotiations, just when the project was about to collapse, we managed to save the day by reaching an agreement on developing the underground mine at Oyu Tolgoi, which is where 80% of the total deposits is. This, too, was greeted with denunciations.
Sixth, the Oyu Tolgoi agreement can certainly be revised and improved, but instead of rushing things, we should wait until they finish building the factory. The original Erdenet agreement was amended five times, to give more benefits to the Mongolian side. It could be the same with Oyu Tolgoi, but the priority should be to complete the construction work and get a fully functioning mine, which is what we did earlier at Erdenet. Surely, the amendments can wait until then. Delays in increasing production, and negative rumours about the company would merely lead to a fall in its share price.
In my opinion, Mongolia should sell its 34% ownership of Oyu Tolgoi, increase royalties, collect all the taxes due, and let the mine operate under strict oversight.
What would be the best way for Mongolia to sell its 34% share? The then Government insisted on holding 34% shares of the company to assert Mongolian ownership of the deposit. This was quite unnecessary as according to our Constitution, the deposit can never be but 100% property of Mongolia. If we had sufficient capital, we would have developed the mine ourselves. As we did not have this, again following the laws of Mongolia, we lent our deposits to foreign investors for their use for a certain period of time. We have the rights to own, possess and use, and can legally transfer only the last right, but only for a certain period of time and on payment of a fee.
This 34% ownership is of the using entity, as the deposit is solely and in perpetuity owned by the people of Mongolia, represented by their Government. I hope this makes it clear how owning a deposit and owning a part of a company that operates the deposit are two separate things altogether.
In Oyu Tolgoi we became 34% shareholders, but did not have the financial resources to pay 34% of the investment costs, so we had to borrow the money. We could have approached international banks, investment funds and many other lenders. We chose to borrow from our fellow shareholders, at 14% interest, later reduced to 11%. The total price paid for owning 34% of Oyu Tolgoi shares was $1.7 billion.
This is a huge amount and we shall be in debt for years to come. I feel it makes far more sense to sell the 34% shares immediately and pay off the debt. We could increase royalty or commission rates, impose over 10 different taxes, and levy fees. These would bring us almost 53% of the profit made at Oyu Tolgoi every year. Some react to any talk of selling the 34% ownership of the company as if we would be selling or gambling away part of our land. It is not possible to sell territory and keep it a secret, nor have marauders arrived from outside to rob us of Oyu Tolgoi. Trade deals are not transferring sovereign rights, and they are very much a part of modern economic life.
Barring OyuTolgoi, no other mega project has made any visible progress. What is the reason why there is no information about talks on them even? It is an example of the absence of state policy and also a legacy of a few persons’, so-called politicians, impudence. In putting their personal interests ahead of national development they made sure the progress you talk of would not be made. As for the Tavan Tolgoi deposit, it was such a wrong move when the government kept 96% of it as its own and gave the private sector only 4%, while, in fact, the private sector originally had the licence to own and use 100% of the deposit.
If the Government had kept its hands away and allowed the private sector -- for instance, Energy Resources -- to develop the mine, it would by now have been listed on the international markets just like Ukhaakhudag. The Government would have earned revenue from the project and people could own a share.
Shares in companies are not supposed to be given away free, but they should be bought for money that would go into the company’s growth. Owning a share is thus an investment. Many Mongolians, as active shareholders would have participating investors in a project that would have been society’s Tavan Tolgoi. It is not clear what is happening to the section of the deposit that the Government owns. Operator companies were employed, and that left us with debts. Surely in 95 years of formal and modern mining, Mongolians have learnt how to mine coal and transport it, and do not need others to do such work for them at high rates.
We have to get the Tavan Tolgoi mine into economic circulation immediately. If the government has the money, let it say that it will fully own the company to develop it. Otherwise, let it allow companies to bid for shares. They will then invest in developing the infrastructure around the project. Work on the Gashuunsukhait railroad should also start in the very near future.
A Chinese railroad line runs from Gashuunsukhait to a seaport, and is likely to be the one Mongolian coal will use before starting its seaborne journey. Keeping that in mind, our railroad to the border should be narrow-gauged, so that the coal does not have to be unloaded before being reloaded on Chinese trains. The volume can be large. China has agreed to let us use seven of its sea ports for coal export.
We also have to rush the construction of the Tavan Tolgoi power plant, so we can stop importing electricity from China. The plant can use thermal coal from Tavan Tolgoi itself. The transmission line that is now used to draw electricity from China can, instead, carry power the other way, when the plant starts full production. Such multi-benefit projects need to be carried out straightaway. Mongolia’s economy cannot grow sufficiently until coal starts moving along the Gashuunsukhait railroad and power from the Tavan Tolgoi plant flows into many parts of the country. We have to find mutually beneficial collaborative solutions to these issues. We also have to be very active in the tri-nation “Economic corridor” programme that connects China-Mongolia-Russia.
How is the minerals sector doing globally? And where is Mongolia on that stage? Worldwide, there is increased demand for almost all commodities. They say that coal is on its way out, but it is not. It is only that less coal is being used for production of energy and heat. Coal is converted into hundreds of different polymer products, a mainstay of the chemical industry. This is one component of the nanotechnology which marks the Fourth Industrial Revolution. As societal and industrial needs grow we can find markets for our mineral products without problem.
Just how can we maximise our mining exports, find new markets without losing our hold in the main market? There are mining products, such as lightweight precious metals, gold, silver, uranium that can be transported by plane while oversized heavy stuff such as coal, petroleum products, iron, copper and slate will have to be conveyed by railway, roads, water ways and pipelines. Means of transport will depend on who the consumer is, the destination, the volume of demand and the shape and size of the material, and, of course, national security. The Government has to announce a long-term minerals sector policy and professional experts should suggest the best ways of how to develop the mineral sector. Unfortunately, these days not much importance is given to expertise and experience.
How can the mining sector recapture its reputation in this chaotic situation? Once shattered, it takes time for reputation to recover. I will say this again; we need a state policy built on national consensus. This industry is too important to be used as a puppet. Every stage of its cycle -- from exploration to extraction to export – needs to be supported and allowed to grow, if our minerals are to become national wealth.
For decades to come, Mongolia’s economic growth will mostly be reliant on the mining sector, but the economy must also diversify. Just how can this be done? This reliance has high risks, as we saw some years ago. It is anomalous if the mining sector alone has to earn 90% of our export revenue. We have to find a way to diversify, shedding our total reliance on mining. The industrial structure has to become multi-disciplinary and multi-sectoral. In agriculture, our focus should be on exporting cashmere products to the global market. We can even build 30 cashmere factories.
We have to follow the global trend and apply high-performance technologies in a product-oriented and localised manner, and build a reliable and low risk industrial economic structure.