The second “Metals Mongolia” conference on mining investment was held this month in Ulaanbaatar. While the first conference, held two years ago, was attended by 1,200 representatives from 25 countries, there were only around 240 attendees at this year’s event. Attended by a few expatriates, the conference seemed to be indicative of the fact that foreign investors are not really rushing to make investments into Mongolia’s mineral processing industry.
On the other hand, the active participation from the Ministry of Mining, Ministry of Economic Development, Ministry of Industry and Agriculture, and Mongolian state-owned companies showed that the government is actually rushing to accelerate the development of its mineral processing industry.
During the event, government representatives who attended the conference reported that the Mongolian parliament is discussing the development of a resource sector policy for the government. Even though our resource sector has seen high economic growth for the past 10 years, the government of Mongolia has never had proper management or a specific policy in this sector. Despite the belated measures the government is planning, the initiative to devise a policy intended for the resource sector sounded promising to the companies that have been operating in the sector, enduring the absence of a governing policy for a long time.
Participants of the “Metals Mongolia” conference placed great emphasis on the fact that the absence of a governing policy in the resource sector has been the cause for laws that kept the sector from developing and pushed foreign investment away. Furthermore, the subsequent amendments to those laws have wasted a significant amount of time and harmed Mongolia’s reputation. We have made a mistake by not having a proper governing policy for extracting natural resources. If we repeat the same mistake when we start processing natural resources, Mongolia will lose not just ten, but a hundred years of development.
When extracting natural resources
The experience from gold mining in Mongolia clearly illustrates the damages caused by the absence of governing policy and occasional laws that were passed almost secretly and implemented only in part. Gold production is different from other metals because it has to be first found, then washed, sorted, smelted and refined before the final product is ready for use.
T.Ganbold, a Director of the Mongolian Gold Producer’s Association, stated that Mongolia extracted approximately 130 tons of gold during the 20 years since the “Gold Program” has been implemented. Although we used outdated equipment during the initial years and the rehabilitation was not adequate, gold extractions increased consistently, reaching 20 tons a year several times.
However, the gold mining business went underground after the windfall profit tax law was passed in 2007. Consequently, there was increased gold smuggling, more “ninjas” (unauthorized individual gold miners) and decreased environmental rehabilitation. Furthermore, the reputation of gold miners in Mongolia was falling.
P.Ochirbat, the first President of Mongolia and founder of the “Gold Program”, noted that after the profit tax was imposed on gold mining, gold prices were rising worldwide while there was “less” extraction taking place in Mongolia.
The Ministry of Finance has failed to implement the law that states one fourth of the royalties paid to the state by mining companies should be allocated to provincial (aimag and soum) governments. As a consequence, gold mining companies were pressured by local governments and communities who constantly demanded various payments and donations. It triggered the emergence of many governing institutions at local levels and expanded the underground economy where corruption flourished.
The conference attendees stressed that it was time to restore the ethics of local governance and regulate the operations of so called “ninjas” to prevent environmental damage as well as damage to human health and wellbeing, including that of the “ninjas” themselves.
It was also said during the conference that some companies were interested in receiving compensation from the public budget for their unsuccessful exploration projects. Fully aware of their risks and responsibilities, those companies carried out exploration that turned out to be unsuccessful and stopped operating. Now they are trying to use the “long-named” law to use the public budget to cover their expenses.
Participants of the conference supported Mongolbank for resuming their purchase of gold at international rates.
When processing extracted natural resources
The government representatives at the “Metals Mongolia” expressed that they were resolved to increase the value of Mongolia’s natural resources by processing them, and introduced certain projects related to refining raw products.
D.Ganbold, the Director of Heavy Industry Policy Implementation Department of the Ministry of Industry and Agriculture, spoke about the government’s decision to establish an industrial park in Sainshand and build a power plant along with steel, coking coal, copper and cement plants.
D.Ganbold said that all raw materials to be processed at the plants mentioned above are found in Mongolia, and that Sainshand has enough underground water reserve to support the plants. The industrial park will employ a technology that uses nitrogen instead of water when processing coke. Also, when producing steel, the iron ore will be transported from Selenge to Darkhan for wet processing and then sent to Sainshand for final processing.
Several companies that are to take part in the project gave presentations on the plants that they are planning to build. Large amounts of sulfuric acid, which is an output of steel production, will be used to produce fertilizers from the Burenkhaan phosphate deposit located in Khuvsgul aimag. It was also noted that there would be minimal environmental impact because the deposit is located a hundred kilometers away from Khuvsgul Lake.
The plan is that those companies will build a steel plant to meet all domestic demands and become a leverage for future urbanization.
In the upcoming ten years, they are planning to supply steel to the Chinese market, and by that time, China will have steel production that can only meet half of its domestic demand. It was also said at the conference that India has already banned their iron ore exports and Brazil is likely to do the same in the near future, and the structural change in iron ore trading will be advantageous for Mongolia.
O.Sainbuyan, the CEO of the state-owned Erdenes Mongolia, and the other government representatives who were present at the conference, promised that they would invest in building mining plants in Mongolia. Erdenes Mongolia is to establish a subsidiary in each of the 39 deposits including the existing seven strategic deposits.
The only question left unanswered during this conference was the role of the Mongolian private sector in this huge historic development. Their manner of involvement, and in which part of the project they will contibute to, wasn’t clear. It was also unclear when, how and by what criteria these private companies that had already developed their plans and completed their estimations were selected. The participants are hoping that this information will be disclosed in the government policy document which is expected to be finalized soon.
O.Sainbuyan shared his plans to make Erdenes Mongolia into a company just like Temasek, a multinational investment fund with a net portfolio of 170 billion USD and owned by the government of Singapore.
However, what he did not mention was that, in order to build a company like Temasek, there must be transparent public governance, a business-friendly environment and much less corruption, like Singapore, which is one of the five countries with the lowest corruption. Mongolia is currently ranked 94 out of 178 countries on the Corruption Perceptions Index.
The people of Mongolia would be doubtful of the government’s ability to manage these huge projects, which will increase the amount of debt by issuing additional bonds, and will require them to build high quality plants, make profit by operating them, and repay the debt on time.
One in every three state-owned companies in Mongolia runs a deficit, and their management team is selected based on their loyalty to the ruling political party rather than their skills. Unless there is a change, we should not even dream about those plants profiting.
In any case, Mongolia is currently discussing what policy the government will be pursuing in the resource sector in the future. The investment law has recently been changed and a new agency called the “Invest Mongolia” is to be established. Depending on the amount of investment and location, the agency will determine the length of time to be given as guarantee of stability.
A substantially more foreign investment is needed when processing natural resources than extracting them. In order to attract such a vast amount of foreign investment, there must be a business environment that is stable for the long term, and it should be easy for investors to understand the rules and how their interests are going to be protected. The same conditions will be required to attract domestic investments as well.
When the government takes part in industrialization, for example, by building an industrial park, the principles of public-private partnership (PPP) should be applied. There is absolutely no need for the government to build those plants by issuing bonds, putting the economy at risk, and laying a huge debt burden on the people.
Translated by B.AMAR
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