Political instability shakes investors’ confidence

26th of 12, 2018


The political crisis is deepening as the New Year approaches. As we write this, Parliament, the highest institution of state authority, has not sat for several days because of internal disputes in The Mongolian People Party (MPP), which commands a very comfortable majority in it. People are watching how two groups in the same party are fighting with each other, one calling for the resignation of the government and the other trying to push the Speaker off his chair. The mining industry cannot escape being affected by the conflict between groups in the party in power, both likely to pose as more populist than the other, to get the support of citizens. 

An example is Prime Minister U.Khurelsukh’swords to the licence holders on TsagaanSuvarga. He said, “MAK owns 36 licences, including TsagaanSuvarga. Resources in Mongolia cannot be the property of a single family. I will bring up the issue to return the deposit back to the state.”Private sector investors, domestic or foreign, will see this as a threat and thus a risk to doing business here. 

The TsagaanSuvarga project came to a halt in 2014 as the European Bank for Reconstruction and Development opted out of a financing agreement, ironically because of a largely political dispute in Mongolia. MAK has since come close to raising the funds and it is not appropriate for an individual in authority to play politics with what certainly is a national project, no matter that it is not owned by the state. Such words are particularly unacceptable from the head of a government which claims to promote investment and has set up an Investment Protection Council.

Today’s fight among the President, the Parliament Speaker and the Prime Minister is all the more unfortunate as they are the three members of the National Security Council, responsible to ensure the unity of the nation and the national security. Their actions for selfish reasons have led to Parliament failing to fulfil its constitutional responsibility of passing laws. 

Take, for example, the two draft laws on amendments to the Minerals Law that were submitted on November 21 and, given their importance for the national economy, listed for discussion on December 20.  But the discussion has not been possible as no session of Parliament has been held for either lack of quorum or to allow party meetings. The gold sector, in particular, would face several problems if the law is not passed this year. 

One of these will arise because the provision that the resource usage fee (royalty) of tangible and intangible gold sold to Mongolbank or commercial banks should be equal to 2.5 percent of the sale price would lapse on January 1, 2019. Without any direction from Parliament, the royalty will automatically return to 5 percentplus a surtax. At the current price of gold on the international market the addition of the surtax will raise the tax to 9 percent, almost double the 5% royalty one pays on gold in China. That is a strong incentive for Mongolian producers to smuggle gold to the south.If immediate action is not taken to keep the royalty figures in place, gold sale to Mongolbank will fall, with consequences for our foreign reserves. The adoption of the now infamous 68% windfall profit tax in 2008 resulted in only 2 tonnes of gold being sold to Mongolbank in 2010, while smuggling flourished. 

The 2.5% royalty has played an important role in the past five years in protecting the economy against fluctuating exchange rates by increasing the foreign exchange reserve and in ensuring macroeconomic stability. It has also resulted in a regular yearly increase in the amount of gold sold to Mongolbank. From12.7 tonnes in 2014 this went up to 15.1 tonnes in 2015, 18.3 tonnes in 2016 and 20.01 tonnes in 2017.The final 2018 figure would be a little more than 21 tonnes. In other words, the gold sector has contributed a total of $800 million to our foreign exchange reserve. 

The Ministry of Mining and Heavy Industry (MMHI) wants $1 billion to come from the gold sector. This is certainly possible. Mongolbank needs to purchase about 25 tonnes of gold to contribute $1 billion to the foreign exchange reserves. But that amount of gold will be offered only if the miner-producer is not tempted to go elsewhere for better profits. For that, the law on gold royalty at 2.5 percent and zero surtax must be retained. 

However, non-gold miners would point out that this is less than the rates that apply to other mineral resources. They resent the preferential treatment to a sector that contributes only 1 percent of the total mining revenue in the state budget, while coal and copper together account for 90 percent. This is directly related to the fact that more than 50 percent of the gold purchased by Mongolbank is sold by individuals.

For instance, 8 individuals and 120 companies sold gold in 2013, a year before the amendments were made to the Minerals Law, while the 20.01 tonnes of gold in 2017 came from 216 individuals (66%) and 117 companies (34%). The corresponding figures until December 20 this year are 59% and 41% respectively. 

Another immediate reason to extend the validity of the provision for 2.5 percent royalty on gold is that a new regulation announced by the European Union,requiring that gold is purchased from responsible sources only, will be effective from January 1, 2021. That may see a considerable drop in the amount of gold Mongolbank buys. Eventually Mongolia must have a gold refinery that meets global standards to make more trading possible for producers and if Mongolbank can store processed gold, that would further bolster foreign exchange reserves. Following a recent agreement signed between The Ministry of Mining and Heavy Industry and Mongolbank, there is anticipation that work on refinery construction could commence in 2019 itself. 

Another big issue for MMHI is the active depletion of resources in placer deposits, which now stand at only 50 tonnes and could be exhausted in two years. If most gold extraction does not move to primary deposits within five years, revenue from the gold sector could fall, and so will the amount of gold extracted. The Gold-2 programme sets a minimum of 20 tonnes as its annual extraction target, but that may prove to be an empty dream.

It is worth noting that the mineral exploration sector has shown a slight improvement since August this year. Since the government decided to give the coordinates of areas offered for exploration, 60 such areas have been tendered. With 123 companies openly bidding for 30 areas, MNT18 billion has come to the state budget, close to the Government target to raise MNT20 billion from the exploration sector in 2018.   

No licences have been granted under the application process this year. Exploration companies prefer the application-based system but the Government priority being earning money for the budget, the focus for now is on the tender-based system.
In this last issue of 2018, MMJ is providing information on the progress made in mining mega projects in the year and a brief account by E.Odjargal of major investment projects.  

The recently established Tavan Tolgoi Railways Company has appointed its management team and one hopes to see some real progress on the Tavan Tolgoi – Gashuunsukhait railway. But that will largely depend on the stability of the government.
We wish 2019 to be the year of development for the Mongolian mining industry, and for that to really happen, it is absolutely critical not to scare away actual and potential investors. We can only hope that political instability does not make that impossible. 

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