Mongolia leads other countries in the excessive number of policies, decisions, rules and regulations around its investment climate,” emphasized Ms. Christine Zhenwei Qiang, Practice Manager for the Global Investment and Competition Unit of the World Bank Group’s Macro, Trade and Investment (MTI) Global Practice, at the Economic Forum in May. Add to this lack of infrastructure, political risks, unstable state policy, and a small domestic market – and one gets a fair idea of the challenges faced by investors in resources-rich Mongolia. Not to be forgotten is the risk inherent in investing in producing commodities as their prices are always unpredictable.
A favorable run in the commodity market has positively impacted the economic growth and exports revenue of Mongolia in the past year and more. Economic growth reached 6.4%, higher than that estimated by both the Asian Development Bank and the World Bank. Both institutions have highlighted the impact of the second phase construction of Oyu Tolgoi and other mining investments on the growth, apart from the rise in coal and copper exports. Mongolbank reported a total of $1.4 billion in foreign direct investment (FDI) as of November 2018, which is equivalent to the total FDI in 2017. Today, mining investment comprises over 70% of the FDI.
No new project has been taken up during this growth cycle, except the oil refinery, leaving it to Oyu Tolgoi alone to hold up the economy. Society, however, continues to be divided over Oyu Tolgoi, and many would like to stop its operation even at the risk of losing the investment. Centerra Gold chose to leave after “save the mountain and water” protests and lack of what it saw as Government support to allow any progress in the Gatsuurt gold project. Then, the Government began to talk about buying shares in several privately-owned projects, but it was only talk. The dispute over ownership of Erdenet Mining Corporation is still not resolved. Overall, 2018 is ending with political confusion and no bright colours in the investment picture. With 2019 being a pre-election year, investors might choose to wait and watch until a new government is formed and its attitude becomes clear.
Mongolia’s investment programme for 2018-2021, approved in January, envisioned a total investment of MNT38.2 trillion on 113 projects, each to receive at least MNT30 billion, coming from the state budget, or domestic and foreign loans, or aid, or concessions and private investment. We give below a status report on some of the new projects that are related to mining, their implementation process and investment conditions.
This should be THE year of the mother of all mega projects in Mongolia. Like all its predecessors, the present government also had its own plans to move the project. In June 2018 Parliament passed a resolution to begin work on putting the deposit into economic circulation and now the Government is busy preparing for an international IPO for up to 30 percent of the project. The $1.5 billion expected to be raised would finance infrastructure projects in and around Tavan Tolgoi. The exact timing for the IPO and the stock exchange chosen will be known in January 2019.
The infrastructure work includes five roads to take the coal to different foreign markets and a 450-mw power plant. The Ministry of Mining and Heavy Industry reported last year that altogether $7.11 billion would be needed until 2021 to activate Tavan Tolgoi to its full potential. Below we give a list of the projects to be implemented.
Tavan Tolgoi lies in Tsogtstsetsii soum of Umnugovi aimag. Its total resources under block modelling have been put at 6.3 billion tonnes or 7.6-8 billion tonnes under JORC standards.
The giant copper and gold project in the southern Gobi, 66% owned by Turquoise Hill Resources and 34 by the Mongolian Government, has for some years been the main catalyst for the country’s economic growth. Its first sales were in 2013 and now the $5.3-billion underground mine construction is on fast track. Production at the underground mine is expected to start in mid-2020 and sustainable production in the third quarter of 2021.
When the underground mine development work is completed in 2022, Oyu Tolgoi would be the world’s third largest copper mine after Escondida in Chile and Grasberg in Indonesia. Peak production at Oyu Tolgoi is expected to come in 2025, with over 600,000 tonnes copper concentrate and 670,000 oz gold in concentrate. Sales revenue in the first three quarters of this year was $833.9 million and is expected to reach $4.9 billion at peak production in 2025. Capital expenditure on the underground mine will be $1.2 billion in 2019. Lateral development of the mine is progressing on schedule.
This year’s open-pit mine production is expected to be 140,000-155,000 tonnes of copper in concentrate and 240,000-280,000 oz of gold in concentrate. Next year copper production would be a little higher but that of gold will remain almost the same as in this year. According to Thomson Reuters, sales revenue is expected to reach $1.14 billion this year and $1.21 billion next year.
The launch of the first domestic oil refinery, which is strategically important to remove Mongolia’s dependence on oil products from a single foreign source, took place in Altanshiree soum of Dornogovi aimag in June. The refinery is financed by a $1-billion discounted credit provided by the Indian Government.
The management of the state-owned Mongol Refinery says the cost of the project will go up to $1.7 billion, as commodity price increase has made equipment more expensive. This means the Indian loan of $1 billion will not be enough, even though the general perception is that the refinery is being built with it.
Construction of a road and a railway has been going on since the foundation stone was laid four months ago. Progress has been good, with 40% of the earthwork for the railway, 60% of the road, and 90% work on the power transmission line already done.
All this infrastructure development is being financed with a MNT250-billion loan from the Development Bank and is expected to be finished by October 2019.
As for construction of the refinery, The Mineral Resources Professional Council received the detailed project feasibility study in November. The process to select the project management consulting company has begun.
The refinery will process 1.5 million tonnes of crude oil and produce 1.3 million tonnes of products per annum once it commences operations in 2023. The average price of one litre of gas will be around MNT850. This can fall to MNT800 or less if the capacity is increased to 2 million tonnes. The expected product range and amounts are given below.
A subsidiary of Mongolyn Alt (MAK), Erdenes Tsagaan Suvarga is implementing a copper-molybdenum concentrator project based on the Tsagaan Suvarga deposit, which will increase domestic value-added production.
Mongolyn Alt, the licence holder of the deposit in Mandakh soum of Dornogovi aimag, began the project in 2012, with a $450-million loan agreement with the European Bank for Reconstruction and Development. EBRD withdrew from the agreement when the issue of state-ownership in strategic deposits reached the Constitutional Court. If the state owned 34%, its proportionate share of the investment would have been $350.6 million, and Parliament later adopted a resolution that MAK would own the project 100% and be responsible for the entire financing. The Government estimated that it would receive around $2.5 billion in direct economic benefits, of which some 60 percent was to come to the state budget as taxes and fees, and signed an agreement with Mongolyn Alt, whereby the Government would keep tax rates stable and the company pay taxes regularly for 24 years.
Some 1.6 million tonnes of copper, 66,000 tonnes of molybdenum and 11.1 tonnes of gold would be mined by the open-pit method in Tsagaan Suvarga in three stages over 18 years of mine life. A processing plant employing flotation technology will be built. MAK has spent $400 million of the total projected investment of $1.089 billion on renewed exploration work, registration of resources, metal recovery pilot test, feasibility study preparation, followed by ordering equipment overseas and building infrastructure. The next stage(s) of work will depend on when and how the remaining $680 million is raised. The present estimate is that the project would create 1120 jobs and put into the state budget altogether MNT3.3 trillion in taxes and fees, MNT185 billion each year on an average.
The project has halted half way. Equipment installation for the mine is fully complete. The basic equipment for the processing plant is being imported. Work on staff houses, kitchens, the office, the hospital, laboratories, the water supply system, the power station, and power transmission lines in the plant area has been completed. Operation can begin within the third quarter of 2019 as planned, once the financing deal is done.
The Gatsuurt gold placer deposit in Mandakh soum of Selenge aimag is ready for extraction to begin. The Canadian company, Centerra Gold, which ran the Boroo gold mine, owned the licence for the Gatsuurt deposit and had planned to use the processing plant and equipment of Boroo mine to develop Gatsuurt, even as it worked on rehabilitation and mine closure at Boroo.
Investment in the project, including on infrastructure and operational costs, was put at $320 million and $400 million in taxes would have come into the state budget. Total sales over the 10 years of mine life would have been around $1.7 billion. Unfortunately, Centerra Gold sold all its assets and business in Mongolia under pressure from up and below, after spending years with a number of governments, each with its own agenda and attitude. Protests by the “Save Noyon Mountain Movement” NGO led to multiple court cases.
Centerra Gold sold its Boroo mine, the processing facility there, and the licence over the Gatsuurt deposit for $35 million in October. The sales agreement covers the outstanding shares and debts of Centerra Netherland (BVBA), which owned the subsidiary companies in Mongolia - Centerra Gold Mongolia and Boroo Gold. OZD ASIA, the new investor in Gatsuurt, is a subsidiary of OZD Capital headquartered in Brisbane, Australia and has previously invested in the mining sector of Australia and Singapore. OZD ASIA was registered in Singapore in August, two months before the sale.
270-km road from Tavan Tolgoi to the Tsagaan Del mountain
The road will be of significant help in expanding the commodity export gateway at Ulzii in the Tsagaan Del mountain, which gives access to the eastern part of Alishaa aimag in Inner Mongolia. The 270-km road will start from where the 32-km road between Tavan Tolgoi and Baruunnaran ends in Khankhongor soum of Umnugovi aimag.
Undrakh Govi has been selected to implement the road project under a design-build-operate-transfer agreement. The company will raise the required funds on its own.
450-km paved road linking Tavan Tolgoi, Oyu Tolgoi, and Khangi
Once built, this road will allow direct movement of commodities to the steel plants in Baotou in Inner Mongolia. It will thus increase coal export, reduce the congestion at Gashuunsukhait and on the road there from Tavan Tolgoi, and also encourage development of mineral deposits in the areas of Tsogttsetsii, Khanbogd, and Manlai in Umnugovi, and in Khatanbulag, Mandakh, and Khuvsgul in Dornogovi.
A build-operate-transfer concession agreement is being negotiated with a company named Nako. Preliminary estimates put the total cost of the project at approximately $270 million.
259-km-paved road between Tavan Tolgoi and Gashuunsukhait
The construction of this road is expected to at least double coal export through Gashuunsukhait and improve safety levels by leaving the existing road for the exclusive use of returning empty trucks. The Government has signed a design-build-operate-transfer agreement with Tal Nutgiin Hugjliin Zam (Steppe Development Road) Company which will build the road at a cost of $320 million within 2.5 years and will transfer ownership to the state after 12 years of use.
272-km paved road between Baruun-Urt and Bichigt
This road is designed to begin in Baruun-Urt soum of Sukhbaatar aimag and end at Bichigt after going through Asgat and Erdenetsagaan soums. It will help develop the economy in these areas, bring more business to the free trade zone in Bichigt, create favourable conditions to increase export, trade and services, and, most important, would be the gateway to third markets through Tianjin, Jining, and Dalian in China. The road is planned to be built within four years at a cost of $140 million.
Tavan Tolgoi – Zuunbayan – Sainshand railway
This railway will relieve the dependence of Mongolian mining products on a single market by helping them reach third markets from seaports in the Far East of Russia and will also shorten the distance to China’s main industrial region where coal and iron ore are in high demand. Only a certain percentage of Tavan Tolgoi coal would be transported to the Russian ports and so it was decided in May 2018 to build another railway to the south along the 414.6 km from Tavan Tolgoi to Zuunbayan.
It will be built by the newly established Zuunbayan Railways, which is 51% owned by Mongolian Railways. Dornyn Railways, owning the remaining 49%, will be responsible for the entire financing of the project. G.Tsengel, Executive Director of Mongolian Railways, has indicated that Dornyn is in talks with some Chinese companies to raise the money. The route from Tavan Tolgoi to Zuunbayan will be connected to the central railway line to get access to the Russian ports in the north. The Tavan Tolgoi–Zuunbayan railway will have a wide gauge and capacity to transport 25 million tonnes per year. It is estimated to cost $1.2 billion.
Nariinsukhait – Shiveekhuren – CeKe railway
A railway to Ceke border port in Umnugovi will help increase supply to the Chinese market and get better access to Chinese ports. It was decided in August to establish a company to be called Shiveekhuren Railways to construct the 13-km-railway between Shiveekhuren and Ceke. It will be 51% owned by Mongolian Railways, and the remaining 49% will be held by a consortium comprising Mongolyn Alt, Usukh Zoos, SouthGobi Sands and Chinhua MAK.
The Government resolution called for construction under a concession agreement to begin within the third quarter of 2018 and to be completed in 2019. That did not happen as no decision could be taken on the gauge. Finally, it was decided in October that the gauge would be narrow and that the Shiveekhuren–Ceke railway will be linked with the Nariinsukhait–Shiveekhuren railway, making for a total route length of 46 km.
Around 20 million tonnes more coal could be exported along this route. The consortium led by Mongolyn Alt will bear the entire cost and is reported to be seeking Chinese partners, who would be willing to accept repayment in the form of coal from the consortium members’ mines.