politics & Economy 4 lead article: Pits and the Pendulum 10 Q&A:
Erdenebulgan, O. Ministry of Mining 12 feature interview:J. Dwyer, BCM 14 Q&A: A. Walker, Control Risks 16 lead Issue: All Eyes on SEFIL 18 Q&A:
Publisher: Freestone Publishing
D. Damba, MNMA 19 leader insight: Dr. J. Dierkes 20 Q&A: O. Ish-Ochir, Mongolia Economy 21 leader insight:
Field Research Country Director: Oni Aningo Country Editor: Jesse Snyder Project Assistant: Anuujin Gantulga Headquarters Regional Editor: Mathew Youkee Production Editor: Samantha Eyler-Driscoll Sub-Editors: Emma Crowley & Emma Tracey Contributor: Grant Sunderland Art Director: Miguel Camacho Torres Design Assistant: Camilo Patiño Díaz Administrative Manager: Silvia González International Media Coordinator: Karen Delgado
E. Ellis, Minter Ellison
COAL & POWER GENERATION 22 25 27 28
D. Paull, Aspire Mining 35 company focus: Sharyn Gol 36 q&a:
Enkhtsetseg Ch., IKH Gobi Energy 37 project focus: Salkhit Wind Farm
copper & gold 38 lead article: A Tale of Two Mines 43 project focus: Oyu Tolgoi 44 company focus:
Erdene RD 45 Q&A: J. Rickus, Kincora Copper 46 lead issue: Water Management 48 Q&A:
lead article: Fueling the Dragon box: Bridge to the East project focus: Chandgana feature interview: G. Hancock,
ETT 30 company focus:
Executive Directors Charlotte de Casabianca & Raluca Monac Printed in Ulaanbaatar by Tavan Bogd
32 lead issue: Coal Power Generation 34 Q&A:
Khotgor Shanaga 31 Q&A: M. Earley, Draig Resources
B. Thornton, Xanadu Mines 49 leader insight: T. Bates, Meritus Minerals 50 project roundup 52 Q&A:
J. Burke,Voyager Resources
Cover Photo: Atlan Rio
Mining Leaders
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Iron Ore & Other Minerals 54 lead article: In Days of Ore 57 box: Uranium Nation 58 company focus:
Mon Laa 59 box: Holy Moly 60 project focus: Mongol Resource 61 Q&A:
62 64 66 67
R. Wrixon, Haranga Resources company Focus: Areva Mongol lead issue: Mineral Plan 2030 project focus: Berkh Uul&A: project focus: Tamiryn Gol
mining equipment, technology & services 80 lead article: Horde Behavior 85 company Focus:
Lithopro 86 feature interview: S.Potter, General Director, Wagner Asia 88 company Focus: MNO 89 box: An Industrial Playground 90 company Focus: Gobi Catering 92 METS ROUNDUP 94 Q&A: D. Turnbull, Transwest Mongolia LLC 95 company Focus:
109 market focus: Capital Raising 110 Q&A:
L. Ettedgui, Quam Asset Management 111 Company Focus: Legal Consulting 112 Q&A: O. Dendevsambuu, Deloitte Onch LLC 113 leader Insight: S. Lim, National Investment Bank
insurance section 114 117 118 119 120 121
lead article: Insuring a Strong Future company Focus: MIG Insurance company Focus: Bodi Insurance market focus: Reinsurance Law company Focus: ARD Insurance Q&A: S. Ganchimeg, Nomin Insurance
MonMag
drilling 68 lead article: What Lies Beneath? 73 Q&A:
96 97 98 99
company Focus: Maxam Explosives company Focus: Blast Company company Focus: Tree Global
financial & legal services J. Polson, AIDD 74 75 76 77 78 79
company Focus: Ordgeo Q&A: Ganbaatar P. Tanan Impex
100 lead article: The Unpredictable Arm of the Law 104 Q&A:
company Focus: Ellehcor Drilling market focus: Drilling Tech Q&A: G. Dashnyam, MT Drilling Q&A:
Gary R. Barlow, Traverse Resources
ml recommends
market focus: Worker Shortages
N. Kato, Khan Bank 105 leader Insight: A. Khangai, Mongolian Stock Exchange 106 Regulatory overview 108 Q&A: J. Wadhwani and A. Ruff, Shearman & Sterling
122 lead article: The Great Escape 126 Q&A: A. Bayaraa, Blue-Sky 128 hotel listing
Mining Leaders is a trademark of Freestone Publishing Inc. Copyright Freestone Publishing Inc. 2012. No part of this publication can be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopied, recorded, or otherwise without the prior permission of Freestone Publishing Inc. Freestone Publishing has made every effort to ensure that the content of this publication is accurate at the time of printing. However, Freestone Publishing makes no warranty, representation, or undertaking, whether expressed or implied, nor does it assume any legal liability, direct or indirect, or responsibility for the accuracy, completeness, or usefulness of any information contained in this publication.
WWW.MINING-LEADERS.COM Mining Leaders
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politics & economy
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lead article
Pits and The
Pendulum D
espite the misgivings of some commentators, Mongolia managed to elect a new parliament in July 2012 without incident. There was none of the street violence that had marred the 2008 elections, and the process was broadly deemed free and fair by international observers. The July polls marked the sixth time since the fall of Communism that Mongolian citizens had voted in a new government, reinforcing the country’s reputation as one of the region’s foremost democracies. The elections produced a coalition government between the victorious center-right Democratic Party (DP) and the newly revived Mongolian People’s Revolution Party (MPRP), providing a convincing majority in the unicameral legislature, one that bodes well for the enactment of new policies to confront the challenges facing a rapidly changing country. Yet for the scores of foreign mining firms already active in Mongolia, the conclusion of the election process has done little to assuage the uncertainty that led them to cut back their investment budgets in 2012. In a country that once boasted one of the most pro-investment mining frameworks in the world, the political pendulum has begun to swing back quickly towards state control of major deposits. Mining Leaders
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lead article mine, expanding to 51% after 30 years of production. The agreement seemed to clarify what the government could expect to claw back for strategic deposits, even if it did not fully define what constituted one. However, the following year the government introduced the Forests and Water Law and the Nuclear Energy Law, which together revoked thousands of mining licenses. In May 2012 the Great Khural passed SEFIL and with the new coalition taking its seats, the newly appointed Minister of Mines, Davaajav Ganhuyag, announced that he would seek to bring forward the government’s controlling stake in Oyu Tolgoi from 30 years to when initial costs have been recovered. Ghengis Khan stands guard outside of the State Great Khural, Mongolia's unicameral parliament
The run-up to the election had begun with the arrest of a former president on corruption charges and had developed into a polarized campaign in which resource nationalism was the defining issue. With the new members of the parliament taking their seats in the State Great Khural in July 2011, old debates resurfaced about the state’s take in strategic resource projects, debates that had seemed to be already resolved. And so the question remains: what role will foreign investment play in the development of Mongolia? One thing is for sure: Mongolia has an enormous endowment of coal, copper, gold, and other minerals. With just 2.8 million citizens it is unsurprising that some have compared the country to the resource-rich, low-population Gulf States. In many senses the country looks well placed to manage its mineral riches, with strong democratic values, high levels of literacy, and no significant regional or ethnic conflicts. After the fall of Communism, the country undertook a turbulent period of “shock therapy,” guided by the World Bank and IMF, that aimed to restructure the economy on neoliberal principles. Under the new constitution of 1996, the government put in place favorable tax regimes and mining regulation. In the 2000s, juniors and majors arrived in force, attracted by rising commodity prices and the extensive geological work done by Soviet geologists. Major projects entered development, new deposits were uncovered, the economy grew at unprecedented rates, and FDI boomed.
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In March 2012, Mongolia was named Mining Country of the Year at the Hong Kong Mines & Money exhibition. Two months later, following the enactment of the Strategic Entities Foreign Investment Law (SEFIL), which placed further restrictions on foreign investments in mining, finance, and telecommunications, Mongolia-focused mining stocks were in free fall. Old Mongolia hands may have experienced a sense of déjà vu. Since 2006 the country’s mining legislation has been the subject of numerous changes, including the introduction of state ownership of deposits of “strategic importance” and the passage and repeal of a windfall tax on copper and gold. The 2008 signing of the investment agreement for the Oyu Tolgoi coppergold mine in the southern Gobi seemed to have achieved a degree of stability: the government claimed a 34% stake in the
The rise of resource nationalism in Mongolian politics in recent years should be seen in the context of a similar global trend. Since the mid-2000s, countries with strong mining industries including Brazil, South Africa, Indonesia, and Australia have all attempted to increase the state’s take of revenues by transferring mine ownership or by introducing windfall taxes or local content requirements. Such measures are expected and not necessarily opposed by the mining sector. The 2012 resolution of a windfall tax on mining profits in Peru, negotiated by the government with major mining firms, added over $1 billion to the treasury but was roundly accepted by the companies involved. In Mongolia, what most concerns mining firms is the way laws are enacted, the subsequent uncertainties often contained in the laws themselves, and the tendency to renegotiate contracts after signature. Speaking at the Discover Mongolia conference in September 2012, James Liotta, partner of international law
Mongolia’s GDP growth and FDI 2000–2012
Source: Thompson Reuters Datastream/UNCTAD: World Bank
lead article
Mon Laa's Elstein mine lies only 130 kilometers from the Chinese border
firm MahoneyLiotta, said the pendulum of Mongolian politics had swung firmly towards resource nationalism: “Accustomed to their experience during the Soviet era of Five-Year Plans and rule by law—where the laws could be arbitrarily changed or enforced at will— the Mongolians were now struggling with the concept of being bound by their own legislation.” From the government’s perspective, the existing laws governing the mining sector are not adequate. Government officials told Mining Leaders that previous laws had been contradictory and uncertain. They maintain that the legislative package under preparation in the final months of 2012—consisting of new laws for mining, petroleum, and water usage—will be definitive and transparent. They readily state that foreign investment is crucial to the development of the industry but, having encountered high instances of land speculation in the past, insist that firms will be held to a higher standard and subject to closer scrutiny. However, it would appear that there are other motives behind the move to resource nationalism, motives that are not easy to acknowledge publically. Although the government denies that SEFIL was aimed at one company, it is widely believed that the law was passed in response to Chinese state-owned CHALCO’s $926 million bid to take a
controlling stake in SouthGobi Resources, which owns a major coking coal project near the Chinese border. Mongolian politicians had previously voiced concerns that allowing its mines to be controlled by the number-one consumer of Mongolian exports, China, would result in unfair pricing practices and an unacceptable control of production. After awarding the tender to develop the West Tsanki portion of the massive Erdenes Tavan Tolgoi coking coal mine to a consortium led by China’s Shenhua Energy and the United States’s Peabody Energy, the Mongolian government promptly cancelled the deal
90%
of mongolian exports go to china
in September 2011. A year later CHALCO dropped its bid for SouthGobi. Given the sheer size of the country lying to the south and the fact that Mongolia only earned its independence from China in 1911, concerns over national sovereignty are to be expected. Over 90% of Mongolian exports head to China and the country accounted for over half of the more than $4 billion of FDI that
entered Mongolia from 1990 to 2010. The country’s northern neighbor, Russia, produces mass quantities of many of the same raw materials that Mongolia does and is therefore not a viable alternative source of demand. While the government has long-term ambitions of developing rail routes to Russian ports to open up additional export markets, the country’s fortunes are inextricably tied to Chinese demand. Attempts to control Chinese incursion into the mining sector have the effect of increasing all foreign investors' wariness of putting their money into Mongolia. The country's miners, particularly in the coal sector, have a rich tradition, but the sheer scale of some of the country’s major projects means that they cannot be developed without foreign capital and expertise. Investment in the Oyu Tolgoi project alone is set to reach $6 billion this year. The country’s annual budget revenues amount to just $5 billion. When Oyu Tolgoi enters commercial production in early 2013, it is expected to boost Mongolia’s GDP by around a third. After a tough 2009, when the economy shrank 1.3% and was helped through by an IMF loan, the economy has grown at rapid rates. GDP grew 6.4% in 2010, surpassed 17% in 2011, and is expected to continue to grow at a similar rate in 2012. However, this growth has been accompanied by growing expenditure by the Mongolian government. Given Mining Leaders
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lead article
Elbegdorj Tsakhia, President of Mongolia, addresses the 64th session of the UN General Assembly
The release of liquidity into the market has stoked fears that inflation will increase from the 2011 rate of 13%. As a result, the central bank has increased the base interest rate to 13.5%. Such rates do little to help loans to businesses looking to diversify in sectors outside of mining and to avoid the “Dutch disease” that dependence on natural resources often causes. Perhaps most importantly, the government needs to think carefully about its current procyclical fiscal policy. In all countries political parties tend to promise
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big spending prior to elections, but for a country as dependent on mineral exports as Mongolia, this can be perilous if commodity prices fall. In 2010 the government passed the Fiscal Stability Law, which will cap the structural fiscal debt at 2% of GDP from 2013 and introduce a transparent mechanism for forecasting future copper prices. Excess revenues generated when the actual price surpasses the forecasts will be put into a fiscal stabilization fund and used when commodity prices decline. Vice Minister of Finance Ganhuyag Chuluun Hutagt has also disclosed that the government intends to establish a sovereign wealth fund that will invest an initial sum of $600 million overseas and will support pension payments.
By late 2012 the new Mongolian government stands at a crossroads. Investors are looking for a clear framework that clarifies the government’s stance towards foreign investment. Some commentators speculate that nationalist rhetoric was a symptom of the election cycle and that the realities of running the economy will push the government towards a pro-investment tack. Much hinges on the fall parliamentary session in which new mining, petroleum, and water laws will be discussed along with potential clarifications to SEFIL. Until a clear mining framework is established, foreign investors will continue to be wary.
Sources of Mongolia's incoming FDI 1990–2011
China 51% Source: FIFTA
the forecasts for strong future growth and the fact that around a third of Mongolians live in poverty, increased social spending in the short term seems reasonable, even if it leads to a modest budget deficit. The government has many admirable plans, including investments in education, infrastructure, and the improvement of living conditions in the capital’s ger districts. However, it has also received criticism for failing to accurately target its spending, with the decision to award every citizen a cash handout of 1.5 million tugriks being the most cited example. Public-sector wages and pensions have expanded by over 50%. While the expenditure is relatively modest at current levels, the country would do well to avoid setting precedents that could lead to a handout culture in which the state, rather than private enterprise, becomes the population’s main source of income.
Such policies have been implemented to great success in countries including Norway and Chile, and Mongolia can benefit from following best practices developed elsewhere. Most long-term outlooks for the country remain rosy and Mongolia has been included in Citigroup’s list of 11 countries destined to be future global growth generators. Of the many statistics used to extrapolate the Mongolia story, the one expounded by John Finigan, CEO of Golomt Bank, is the most powerful: the country’s top ten mines alone sit atop mineral reserves worth $2.75 trillion, enough to make every citizen a millionaire. Mongolia has the chance to become one of the richest countries in Asia, but statistics like these also lead to increased resource nationalism and premature expectations of immediate returns. The ore in the ground is worth nothing without the capital and expertise to exploit it and without a buyer at the other end, and China is the only customer for bulk commodities.
Bringing the best of Mongolia’s investment opportunities to Asia’s leading investment hub
H O N G
K O N G
29-31 October 2012, Four Seasons Hotel, Hong Kong Now in its third year the Mongolia Investment Summit has strongly cemented its position as Hong Kong’s one-and-only investment platform that connects international investors with Mongolia’s most promising projects and businesses. Covering all key economic growth sectors, the Summit brings the best of Mongolia’s investment opportunities together under one roof.
Mining Opening address by:
Chuluunbat Ochirbat Vice Minister Ministry of Economic Development of Mongolia
Keynote by:
N. Zoljargal Governor Central Bank of Mongolia
Financial Services
Key sectors covered include: Infrastructure Power
Real Estate
Agriculture
Key business leaders, investors and government advisors joining the Summit include:
Altai Khangai Chief Executive Officer Mongolian Stock Exchange
B. Byambasaikhan Chief Executive Officer Newcom Group
Randolph Koppa President Trade and Development Bank of Mongolia
James Passin Co-Founder and Manager Firebird Mongolia Fund
Christopher de Gruben Founder and Managing Partner M.A.D. Investment Solutions
D. Zorigt Former Minister of Mineral Resources and Energy of Mongolia
Graeme Hancock Khashchuluun Ch. Chief Operating Officer Chairman Erdenes Tavan Tolgoi National Development and Innovation Committee
Lakshmi Venkatachalam Vice President, Private Sector and Cofinancing Operations Asian Development Bank
Norihiko Kato Acting Chief Executive Officer Khan Bank
Dugar Jargalsaikhan Chairman, MIH Group Senior Partner Tulga Investment Partners
Bat-Ochir Dugersuren Chief Executive Officer Xac Bank
Ashok Kothari Managing Director Asia Pacific Capital Group
Mark Hutchinson Chief Executive Officer Greater China and Mongolia GE
Amar Hannibal Managing Director TenGer Financial Group
Tuyen D. Nguyen Carolyn Clarke Resident Representative Managing Partner for Mongolia PwC Mongolia IFC
Cameron McRae President and Chief Executive Officer Oyu Tolgoi
Jim Dwyer Executive Director Business Council of Mongolia
Lee Cashell Chairman & CEO Asia Pacific Investment Partners
Tur-Od Lkhagvajav Special Adviser to the Minister of Justice and Legal Assistant to the President of Mongolia
Get the latest updates & insights on: Post-election foreign investment climate Impact of Strategic Foreign Investment Law Growth outlook for Mongolia’s mining and non-mining sectors Platinum Sponsors
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16/10/12 7:53 PM
q&a
Erdenebulgan O. Vice Minister Ministry of Mining
Yes, Minister
Before his appointment in August 2011 Erdenebulgan O. worked in the banking and mining industries and held a number of positions in leading NGOs including the Mongolian Chamber of Commerce and Industry. He lays out the key issues confronting the mining sector from the perspective of the government. Foreign investors seem concerned about Mongolia’s policy orientation and legal framework for mining investments. What will be the policy and action of the new government towards mining? This sector is an essential contributor to the growth and further development of the Mongolian economy. Its rapid development must succeed in the long term within a stable, mutually beneficial, and sustainable environment. The 2009 moratorium that the president imposed on the issuance of new licenses will end with the adoption of a new mining law. We are reviewing and analyzing the present situation in mining and related sectors; we want full transparency. Such review and analysis must precede new lawmaking and must be understood in context. The mining sector and the system for applications was not and is not transparent. In fact, it is unreliable, with laws that sometimes contradict each other outright. Such uncertainties are perceived as hostile to foreign investment, which I understand—and we cannot afford such negative perceptions. We need to harmonize the overall framework regulating and guaranteeing a stable, transparent, and sustainable license application process. And we must strike a long-term, mutually beneficial balance between the interests of foreign investors and those of both the state and the local communities at mining sites. The discussions surrounding the modification of the Mining Law have been under way for more than two years now and have included consultations with business groups, NGOs, and local communities. We will also be guided by international best practices and the examples of other countries such as Chile, Norway, and Australia. While we are focused on providing a framework to create the necessary investment environment, we expect the mining companies also to respect our laws, to introduce advanced and high-standard technologies, to carry out their social responsibilities, and to protect our natural environment.
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Does the government plan to limit the number of mines going into production? This question raises an important issue. Our future mining production policy must support both our present needs and the long-term needs of future generations. It must also prepare our economy for its inevitable transition to non-mining bases of growth, since our mining resources will be depleted one day. Mongolia is now considered and will likely continue to be one of the fastest-growing economies in the world based on the strength and growth of its mining industry. In my estimation, only 20% of the potential mineral resources in Mongolia have been discovered so far. The state must undertake an expansive and well-designed new program of mapping, prospecting, and surveying, and it is likely that we will discover new large deposits. But at the same time, we have a responsibility for the standard of life of our future generations. We must avoid letting too many mines go into production at the same time, and take into consideration the benefits and risks for the region of the sites. These considerations make it more likely that fewer and larger mines will be exploited. What are the infrastructure needs for the mining sector? The infrastructure issue is of strategic importance. We have world-class mines but our products need access to an export market. At the moment we lack the infrastructure we need to support mining production and commodities exports. Currently 92% of our mineral exports go to China, and exporters are subject to substantial price cuts, and even to reduction or suspension of off-take. But I believe in four years' time the country’s infrastructure will be strategically transformed and enlarged enough to permit us to diversify our export markets. We also want to accomplish transit agreements. Our ambition is to be able to export to other buyers like Japan, Korea, and Europe. The higher transportation costs of shipping to new export markets will require us to focus on adding value to our
ERDENEBULGAN O.
20%
of mongolian territory has been explored to date
products, instead of simply shipping raw materials. Also we cannot continue to mainly use trucks; we urgently need investments in rail and paved roads. We must also focus on water supply and power generation. The fact that we have to import 100% of our transportation fuel and diesel engine procurement requirements at spot conditions exposes us to higher-than-market prices and shortages. Do junior mining firms have a place in the future exploration works in Mongolia? We must recall why the President introduced the moratorium in 2009. At that time we had bad experiences of abuse, such as firms using licenses for land speculation. Once the new mining law is adopted, new licenses will be granted to explorers. Obviously, junior mining firms are key to the exploration process; however, we can only invite firms that are eligible as professional companies in good standing and that are also prepared and able to meet all Mongolian requirements, legal and otherwise. What can the Government do to ensure responsible mining? Until now, local communities, authorities, and other stakeholders were practically not consulted when the central authority granted new licenses. We plan to change this within the new legal context. A company that wants to
engage in exploration will have to request permission from the local community concerned. Furthermore, protecting the public interest also involves requiring miners to safeguard the natural environment—our forests, water, and landscapes— against pollution or contamination. In the case of existing mining operations, the potential costs of compensating license holders for taking back their license can be very high. We want to find a balanced solution to ensure this protection requirement. We must create an effective and protective mine closure and rehabilitation program. How can the government promote the production of more value-added mining products within Mongolia before export? We want to see our minerals processed inside Mongolia. In the context of investment agreements, in particular in the case of strategic deposits, we can insist on processing and further refining the product in-country. In general, we encourage miners to install processing plants and fabricate semi-finished or end-products. We also must plan to produce steel in Mongolia. We cannot be satisfied just to export iron ore concentrate; the national public interest requires more. We will promote steel production here, using tax incentives and export tax barriers for raw materials and encourage investment in a metallurgical industry in the Sainshand Industrial Park.
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feature interview
Taking care of
BuSiness The Business Council of Mongolia (BCM) was established in 2007 to encourage trade and development. Today it has become a hub for both international and domestic business connections within the economy. The BCM represents Mongolian businesses and investors with its analysis and advocacy on governance and legislative affairs. Jim Dwyer, the BCM's Executive Director, delivers his insight on the political developments now shaping the future of the Mongolian mining industry.
T
he Mongolian business sector may seem an odd choice for a man who admits to having “run the gauntlet” of a successful stateside career in mergers and acquisitions. But Jim Dwyer, upon finalizing the privatization of two of the country’s largest banks, Khan Bank and Trade and Development Bank, must have known that his future in Mongolia was to be anything but a relaxing descent into retirement. Today, as Executive Director of the Business Council of Mongolia, Dwyer oversees both foreign and domestic interests in a country with one of the highest levels of GDP growth in the world and that may have the potential to become the newest Asian Tiger.
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Since its founding in 2007, the BCM has served as an official portal for the international business interests flocking to Mongolia, lured by massive mining projects such as Oyu Tolgoi (OT) and Erdenes Tavan Tolgoi (ETT), whose key investors include Rio Tinto, Peabody Coal, Banpu of Thailand, Kerry Group, and Wagner Asia. The Mongolian economy had been in a state of flux since Soviet withdrawal in the early 1990s. But by the mid-2000s this inexperienced state in possession of enormous mineral deposits had begun to auction off its resources to the highest bidder. “After the OT investment agreement between the Mongolian government and Ivanhoe
Mines in 2010, the floodgates opened for foreign direct investment,” says Dwyer. “The private sector began to dominate in its role as the key financial player in the Mongolian market, taking over from donor organizations such as the World Bank and various NGOs.” But the transition from ex-Soviet satellite to resource-rich free market has not been entirely painless. On October 6, 2010, the Mongolian government and Ivanhoe Mines (now Turquoise Hill Resources) signed a final long-term investment agreement for OT, rounding off years of negotiations and private meetings. However, 15 dissenting voices remained—
Jim Dwyer
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Mongolia's ranking out of 183 in world bank's 2011 ease of doing business report
primarily within the the Democratic Party, the minority partner in the coalition government formed after the 2008 elections, which charged that Mongolia was selling off its national resources to international corporations at the expense of its citizens’ best interests. Within a few weeks these dissenters had come together to demand publicly that the investment agreement be renegotiated to grant the state 51% ownership of OT, instead of the previously agreed 34%. Dwyer and the BCM, along with OT management and concerned politicians from both parties in the ruling coalition, responded forcefully in opposition, arguing that backtracking on such important agreements could seriously damage Mongolia’s international business reputation. “This all emanated from a fringe group operating within the coalition’s minority party under the banner of resource nationalism,” says Dwyer. “In the face of such strong political and business opposition, the dissenters agreed to sign a statement committing to uphold such agreements for a designated period of time.” Today, to promote a favorable investment climate and combat the uncertainty surrounding foreign direct investment, the BCM has working groups on tax, capital markets, legislative items, education, and other areas with over 130 people from its member entities as volunteers. But the rhetoric of resource nationalism continues to concern Dwyer. He considers that the main factor in the growth of resource nationalism in Mongolia has been a lack of education in the practices of responsible mining. The Mongolian people have been primarily exposed to small, poorly run mines around the country that have damaged the rural environment. Such irresponsible mining has damaged the trust of a certain proportion of the population.
The Business Council of Mongolia welcomed several new members in 2012
The elections of June 2012 ushered in a coalition of four parties, including the left-leaning Justice Coaltion comprised of the Mongolian Peoples Revolutionary Party (MPRP) and the Mongolian Democratic Renaissance Party (MDRP), which campaigned on a platform of resource nationalism that proposed a 100% state-owned OT. However, Dwyer is unconcerned about the possible populist influence that the Justice Coalition might wield as 25% of the new parliament. To Dwyer, the centrist politics of the Justice Coalition’s most prominent members, including its veteran leader of the MPRP Nambar Enkhbayar, indicate the party’s real leanings. The ex-president Enkhbayar, currently jailed for four years for corruption, has a reputation as a successful, if flawed, businessman in his own right, and played a major part in the negotiations over OT. The BCM also works to identify and address other less publicized factors
affecting the business environment in Mongolia. In 2011 the World Bank ranked Mongolia as 119 out of 183 economies for ease of doing business when it came to dealing with construction permits, and 159 for trading across borders. What Dwyer wryly describes as the “out-of-control chaos” of the main border points for Chinese-Mongolian trade has led to plans for the development of official economic trade zones and the establishment of a trade bank unit. Dwyer is committed to a successful future for Mongolia despite the hard work involved in resolving economic obstacles. The BCM, working alongside four embassies, advised to improve somewhat the new Strategic Entities Foreign Investment Law, which was adopted in June after just two weeks. Despite the delays caused by the recent elections, Dwyer is optimistic that the new government will handle such important legislation responsibly. Mining Leaders
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q&a
RISK Anna Walker Senior Risk Analyst Control Risks
INTELLIGENCE
Anna Walker is a senior analyst for Central Asia at Control Risks, a global risk consultancy working with many international conglomerates, particularly those operating in hostile markets. Walker, now based in London, has covered political risk in Asia for years. Walker believes Mongolia's political climate will ultimately stabilize, but warns government’s populist message will gain traction if mining legislation isn’t implemented effectively. Do you think Mongolia’s newly elected Democratic Party will follow through with the populist platform it campaigned on? The position that the Democratic Party adopted in the run-up to the June 2012 election was not particularly surprising—all the political parties veered towards populist election strategies. Now that the DP is in government, it will likely act more cautiously, and I don’t expect it to follow through on all of its campaign discourse, in spite of pressure from its coalition partners. Is the recent surge of resource nationalism a result of the election or does it indicate that popular attitudes are changing? I would argue that pressure has been growing over the past two years or so for the government to become more resource-nationalistic in its outlook, particularly in the mining sector—just look at the attempt to renegotiate the Oyu Tolgoi agreement in mid-2011. I think this is partly due to the increasing pressure from the public on politicians to start to deliver on some of their promises. People have built up high hopes of the benefits that they will receive from development of the mining sector and have started to express these more vocally. Having said that, the election reinforced the tendency to push for more nationalistic policies, as politicians tried to align themselves with the public mood and to win the public vote by persuading the electorate that they were the ones capable of devising mining sector policies that would reap the most immediate rewards for the population. Does the government’s recently published four-year Action Plan pinpoint any major areas of interest or offer up any hard solutions? The Action Plan is more favorable for foreign investors than it could have been, partly because it sets out positive goals for Mongolia’s economic development and for strengthening government accountability—a key concern for investors. If the government can live up to that commitment, it will reassure businesses and the public, who worry about corruption and a lack of transparency. Other positive developments include plans to reduce the number of required business licenses and speed up the license application approval process.
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One aspect that could well prove problematic for mining companies is the requirement to purchase more goods and services locally. Developing local content requirements tends to be seen by countries as a way of boosting domestic industries, but it can cause problems if the local manufacturing and services sectors are not sufficiently developed to cater for technologically difficult projects. If companies are not allowed to source the most cost-efficient and technically suitable inputs, this is likely to then push up their costs and make Mongolia a less attractive destination. Even if the government does deliver a stable term in power, will it be enough to calm investors? Regardless of who is in power, what investors need to see is evidence that the government is committed to a stable and predictable investment environment, where contracts are respected, decisions are transparent, and disputes can be resolved equitably. There has been doubt in recent years that this is the case, so the DP-led government will need to work doubly hard to demonstrate its commitment to improving the business climate and to adhering to these principles. Is enough being done politically to enable growth in infrastructure? This is a crucial challenge for the new government. We’ve seen how decisions on infrastructure are influenced by geopolitical concerns, and specifically Mongolia’s desire not to depend on China. An example of this is its rail development policy, where commercially it would make sense to develop high-quality transport connecting the mines in the south with China—given that most mineral exports go to China—but politically this has been a sensitive issue, given Mongolia’s desire to be independent from its southern neighbor. Another risk is that any uncertainty over the government’s mining policy could make it difficult to raise the necessary capital to cover the costs of infrastructure. Potential creditors need to be certain that Mongolia’s economic development is sustainable and that policy is predictable enough for the country to remain creditworthy, otherwise they are likely to raise borrowing costs or restrict access to financing.
Mining Leaders
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lead issue
All eyes on sefil When the state-owned Aluminum Corporation of China (CHALCO) bid for a controlling stake in SouthGobi Sands in April 2012, it set in motion a political process that has begun to chip away at the country’s investment-friendly Mining Code of 2006. The Strategic Entities Foreign Investment Law (SEFIL) was approved in May 2012. At its heart the law proposes to introduce an approval process for major foreign investments in the strategic areas of mining, telecoms, and finance and a similar approval system for investments by foreign state-owned companies across all sectors. Cabinet approval is needed if a foreign firm takes 33% of a local strategic entity or when a potential monopoly over mineral products could occur.
$5bn
approximate inflow of fdi in 2011 Ytd Indexed Price Performace (%) post-introduction of SEFIL May 2012
The passing of the law had immediate repercussions. Foreign investment, which surpassed $5 billion in 2011, stalled in the middle of 2012. Mongolia-focused mining firms saw their stocks suffer far greater declines than those in other jurisdictions. Investors hope that these demonstrable effects will persuade the government to reconsider SEFIL. President Tsakhiagiin Elbegdor has publicly criticized elements of the law and said that there will be the possibility for further negotiations under the new parliament. The country’s most important business organization, the Business Council of Mongolia, released in September 2012 a detailed proposal to protect local and foreign investment in all sectors.
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INDONESIA CHINA
MONGOLIA
Source: UBS
Historically, resource nationalism rises during times of high commodity prices as governments look to take a greater proportion of bumper profits, and in this sense Mongolia is following a trend. Across the world a number of major mining countries, including Peru, South Africa, and Indonesia, have changed legislation regarding the control and taxation of natural resource projects. But while many foreign investors in Mongolia say they commend, or at least understand, the intentions behind SEFIL, they are almost universal in criticizing its formulation and the uncertainties left in the final text.
lead ISSUE
1
Approval process
Central to the new law is the requirement that foreign ownership of companies in the strategic sector be capped at 49% except with government approval. For deals over $75 million, a parliamentary majority is required; for smaller deals approval must come from the cabinet. The government has 45 days to make a recommendation to the cabinet after an application is submitted. This uncertain and timeconsuming process could restrict access to foreign capital for Mongolian firms.
2
Local-Content Provisions
SEFIL requires that firms operating in strategic areas give priority treatment to Mongolian firms for procuring goods, works, and services. The government has not yet developed the rules that will govern what levels and under which circumstances localcontent requirements will be necessary. Until they do companies may fret that they may be forced to use less efficient or inexperienced contractors.
3
Executive recruitment
Mongolia already requires companies to meet 90% of their staffing requirements with locals, but SEFIL contains a requirement for government permission for a transaction that confers the unconditional right to elect the executive management or board of directors for a company. Will firms be required to put unqualified or unwanted members on their management?
4
Retroactivity
When the law was introduced an accompanying note from the Ministry of Finance claimed that it would not be retroactive. Yet Article 9 of SEFIL states that the government can cancel the rights to operate for any firm not in compliance with the law. Foreign-owned firms already operating in the country remain uncertain as to how the law will be applied towards them.
5
Existing Bilateral Treaties
The text states that international treaties to which Mongolia is party should prevail over the law. The country currently has bilateral treaties with a number of countries including the United States, China, and Russia. It is unclear whether the “no less favorable� status afforded to companies originating from these countries will be applied in the case of SEFIL, given that these treaties are often difficult to enforce.
Jim Dwyer Excecutive Director Business Council of Mongolia
The foreign investment law, with which the BCM was involved in advising, was completed within two weeks. Our Australian contacts were involved in advising on different aspects of the legislation and we invoked the Australian foreign investment law as an example of an efficient legislative design. The difficulty is that there is still a lot of unclear wording in there, so it is possible that it may need to be amended further.
Andrew Ruff Managing Partner Shearman & Sterling
In enacting the foreign investment law Mongolia has dealt itself a double blow. The law was imposed to deal with a threat to national sovereignty from China but partners such as Australia and Canada also bring in crucial expertise. The section over whether government approval or specific parliamentary approval is needed is very unclear. This government needs to assure investors it will not interpret SEFIL in a draconian manner.
Michael Aldrich Partner Hogan Lovells
I believe this question is but a storm in a teacup. There are static elements here, particularly that of need: Mongolia needs foreign capital and expertise. Without it these resources are just rocks in the ground. Furthermore, the world needs the resources found in Mongolia. Mongolia is keen to address popular interests and concerns, including the issue the electorate has about how the nation's resources should be utilized. It is a question of fine-tuning this.
Sardor Koshnazarov Head of Research Eurasia Capital
The new foreign investment legislation is restrictive. We may expect a certain slowdown in foreign investment, and we are cautious about private consumption. People may not be benefiting from salary increases in the second half of this year. The years 2012 and 2013 are extremely crucial from a political perspective and certain moods among key political decision-makers can become important. Mining Leaders
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q&a
Union of
Damba Damjin President MNMA
Progress
The Mongolian Mining Association (MNMA) is a nonprofit established in 1994 to protect the rights of mining workers. Its members range from multinational mining corporations to academics. Its current president Damba Damjin was elected in 2010 with the primary mandates of helping increase cooperation between the mining industry and the government as well as continuing work with students from universities and technical schools. Can you give us an idea of your history with the MNMA and why you started out with them? I’m a mining engineer. I’ve been working in the Mongolian mining sector for 30 years. I’ve been involved with MNMA since it was first established in 1994. At that time I was working for Boroo gold mine, about 100 kilometers west of Ulaanbaatar. I had heard that a new NGO had been established to protect the rights of miners. I understood the need for such and motivated by the formation of this organization, some friends and I, all of us miners or geologists, formed a club named Harot—“Black Star.” We were all secondgeneration miners and we came together to discuss the future of the mining sector in Mongolia. We then produced a charter for the Harot Club, which would later become the basis for the charter of the MNMA. What are some of the main challenges facing the industry? What needs to be addressed first? I believe the Mongolian mining sector is in a new stage of development. Mining is responsible for the current economic boom in Mongolia, and because it is such an important part of the economy, the challenges we face are even greater. First, we need to establish a stable and concrete legal environment. By concrete I mean that we need to provide the public with the right information on the mining sector. Currently the Mongolian public believes the mining sector is destroying our pastureland and that it has reduced our success in producing livestock. We need to develop responsible mining and introduce the most modern and environmentally friendly equipment and techniques. What role does the MNMA play in the implementation of these changes? We often cooperate with the government, but if there comes a point when legislators are not meeting the requests of our members through legislation and rulings, we try to make them understand why we believe they need to make changes. We also frequently write emails, letters, and notices and present them to the government. We cooperate, yes—but we don’t have to agree on everything.
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We also work with law firms on mining-related laws. We carry out extensive research on mining legislation and if we believe there are clauses missing or problems that need to be addressed, then we try to work with the legal firms to effect these changes. What are some of the main advantages that you provide your members? The biggest advantage is the ability of our members to protect their rights through us. We relay governmental decisions and regulations to our members so that they can be implemented without any conflict of interest. Our main service is information, whether online or through international organizations and their projects. When working on a project we go first to our members to solicit information or advice. You work with many students here in Ulaanbaatar. How important is it to educate young people about the mining industry? The younger generation is extremely important to the mining industry. We generally procure analysis and research from mining companies and then pass that information on to Mongolian schools of technology, or mining schools such as the Darhan-Uul province vocational school, and to other smaller universities and colleges. If the mining company needs specialist professionals, we contact the universities to set up specialist training. Not only do we connect mining companies with schools and universities, but we also conduct training ourselves. There is a human resources NGO located at our office with an expert in-house human resources specialist. We also conduct training with banks and financial companies and stage onsite presentations on safety and rehabilitation, human resources, and many other subjects. What does the MNMA hope to accomplish in the next two years? When I was elected as president of the MNMA in 2010, the Mongolian government made decisions and regulations without any consultation. However, after much hard work, things have started to change. The Ministry of Mineral Resources and Energy has begun to consult with us and to reflect our opinions in its decisions—overall this is a huge advance for our organization.
leader insight Dr. Julian Dierkes Sociologist Institute of Asian Research University of British Columbia
Dr. Julian Dierkes, a sociologist at the University of British Columbia’s Institute of Asian Research, first visited Ulaanbaatar in 2005 and went about meeting the key players across the spectrum of the Mongolian economy. He returns regularly to Mongolia and is a respected expert on the country’s politics and economy, focusing on everything from government to mining regulation. At UBC he runs two graduate courses that often use Mongolian case studies to teach students about mining policy.
Doctor's Orders Mongolia is entering a new phase in its development. In the third quarter of 2011, year-over-year GDP stood at a stunning 21%. The country grew 17% over the entire year and surpassed Qatar as the fastest-growing economy on earth, with mining driving much of this expansion. But as foreign companies and technical experts have entered the country, a shortage of trained local workers has led to the underrepresentation of Mongolians in the industry. This has caused an increase in so-called resource nationalism among voters and has put the country’s political leadership on the defensive. The shock therapy introduced by the Bretton Woods institutions in the 1990s had a negative effect. Mongolians are growing tired of foreigners telling them how to run their country. And, now that the country is entering a new stage of wealth, there is a strong belief among the populace that the country doesn’t need this outside While the government is unlikely to interference. Some foreign residents say turn its back on foreign investment they now feel less secure in Ulaanbaatar or nationalize major mines in the than they did five years ago, but this relates short term, a few politicians will mostly to petty crime. Mongolia has no say that Mongolians should be organized anti-Western groups. The situation is different when it comes to the Chinese. Mongolia finds itself in a strange position with regards to its southern neighbor. All the major mining and export projects are targeting Chinese demand over the next decade. Unfortunately, given the country’s geographical position, there really isn’t much of an alternative. At the same time, there is a sense of historical resentment of Chinese quasi-colonialism during the Qing dynasty. Throughout 70 years of socialism, the Mongolian government openly sided with the Soviet Union against China, especially after the Sino-Soviet split in the 1960s and 1970s.
running large projects, and they will win votes as a result
Today’s ruling class grew up in that era, and while they recognize economic reality, they are not instinctively inclined towards China. There is a palpable growing resistance to major foreign firms. Some of the large projects, operating under difficult circumstances, have not won over the Mongolian people as well as they could have. Many locals resent what is rumored to be the industry’s hiring procedures. Some Mongolians applying for low-level jobs at Oyu Tolgoi (OT) believe that the process is biased towards English speakers. If a truck driver needs to speak English then the company should teach him. Considering Mongolia’s history of open-pit mining—which stretches back for decades—why should foreigners manage open-pit projects today?
The investment agreement at OT also allowed foreign workers to be used during the construction process, leading to a massive influx of Chinese workers. The dissatisfaction surrounding these issues is easy prey for populist politicians. While the government is unlikely to turn its back on foreign investment or to nationalize major mines in the short term, a few politicians will say that Mongolians should be running these projects, and they will win votes as a result. Because of this, it is vital to include local workers in the development of the mining industry. Mongolia has been a mining country for decades, but at present its education system offers only one mining course for Mongolians. Run by the Mongolian University of Science and Technology, the course is strong in geology and mining theory but teaches very few practical skills. You can’t take graduates and send them straight to the field; you need to put them through a professional training scheme first. Fortunately the private sector is starting to develop these upgrade programs and the British Columbia Institute of Technology has developed lower-level training schemes for truck drivers and machinery operators. Mining Leaders
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q&a
Economic
Ontgonjargal Ish-Ochir Founder, Deputy Editor Mongolian Economy
Times
Since 2011 dual-language publication Mongolian Economy has been one of the leading economic magazines in Mongolia, reaching a wide audience of private and public-sector readers and organizations. The bimonthly publication has an established presence on the desks of its high-end readership, but it also has the broader goal of educating all Mongolians on business and economic issues. What principal macroeconomic challenges will Mongolia have to confront in 2013? A number of challenges now face the Mongolian economy, including rising inflation, a significant budget deficit, and the threat of a China slowdown. The government and policymakers are debating these issues, but no one appears to have a clear plan to address them. However, for a country with a strong natural resources industry and where 90% of exports are mining products, the biggest challenge is preventing the onset of “Dutch disease.” The growth of the mining industry presents challenges for other important sectors of the Mongolian economy, both by pushing the currency upwards and by monopolizing vital resources. One example is the tourism industry. Tourism jobs often offer good wages but they simply can’t compete with salaries in the mining sector. Many other sectors face similar challenges in terms of human resources. Inflation and the budget deficit are also significant short-term issues, but they are internal and most people believe the new government will be able to tackle them. What can the country do to reduce poverty? In 2011 the National Statistics Committee reported that the number of Mongolians living below the poverty line fell from 39% to 29%. Despite this drop, poverty levels are still similar to those of the 1990s. Income distribution over the last 20 years has not been equitable. Unfortunately the government’s decision to offer cash handouts to all Mongolian citizens was done in the wrong way. Such policies need to be targeted to the communities that need the money, instead of lining the pockets of higher income groups. Unfortunately we do not have a unified idea of how to define poor and rich Mongolians. The 1.5 million tugriks handed out to each citizen in 2012 was just one of the promises that policymakers made before they took office. What steps have been put in place to curb irresponsible government spending? The first and most important is the 2010 establishment of the Fiscal Stability Fund. It’s a good law that ensures that the government won’t overspend during times of strong commodity prices and will save a portion of its income for countercyclical spending. There are also
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other key funds such as the Human Development Fund, which invest in long-term education and healthcare projects. However, at the moment quite a few funds in the country are competing for cash and there is still some discussion about which will be the most suitable for the country. We have to research other countries’ experiences with these funds and choose the best ones. Do you believe the government’s stance towards foreign investment is well considered? From the mid 1990s Mongolia’s economy had a strong proinvestment orientation, making the market attractive to foreigners. It worked very well in those times to bring capital into Mongolia. I think the introduction of the Strategic Entities Foreign Investment Law (SEFIL) in May 2012 has proved to be a two-sided coin. On the one hand I believe it was crucial that the government acted to limit the inflow of foreign capital that was overrunning the state’s capacity to administer and oversee it. However, some elements of the new law remain unclear and have led investors to take a waitand-see approach. I think, if the government can clarify how it will implement the law, SEFIL will not be a major problem for investors. If any parts of the law need changing, the government can still do so. What needs to be done to improve the financial knowledge of Mongolian citizens? With each Mongolian citizen scheduled to receive shares from the IPO of the Tavan Tolgoi project, this has become a major issue for the future of the economy. Like Russia, in the 1990s we had a bad experience with the privatization of former state-run firms, where a few well-connected individuals were able to buy up cheap shares from Mongolians who didn’t really understand the concept of stock ownership. Fortunately, knowledge is improving and we have seen an inflow of Mongolians who have studied and worked overseas sharing their experiences and training with their countrymen. But the public media also have a crucial role to play in making such information easily available. One of the main goals of our publication is to educate all Mongolians on financial and economic issues.
leader insight Elisabeth Ellis Partner Minter Ellison (Mongolia)
Elisabeth Ellis, a corporate partner at international law firm Minter Ellison, heads the firm’s Mongolia operations out of its new Ulaanbaatar office. Ellis left her native Australia nearly 20 years ago to work in Hong Kong and Thailand as a corporate advisor on infrastructure projects, cross-border investments, joint ventures, mergers and acquisitions, and private equity. In Mongolia, she hopes to use of her natural resources expertise and her experience in infrastructure to assist in Mongolia's many new infrastructural projects. She considers those years spent in Hong Kong a dress rehearsal for the challenges that lay ahead.
OVER TO YOU, Mongolia Time and again, Mongolia’s burgeoning economy has been compared to Western Australia 20 to 30 years ago. And it’s easy to see why. The two resource centers certainly share some common ground. Both faced very similar battles in the early stages of development: rail access, employment constraints, isolation. Contrast Perth’s skyline 20 years ago to its current one, and the growth of recent years is thrown into sharp relief. That same progress can easily occur here in Ulaanbaatar, and in Mongolia in general, if investors can be sufficiently certain about the regulatory regime. The fact that Mongolia could be on the crux of something remarkable is what attracted Minter Ellison to the country. Mongolia definitely counts as a market in transition. One of the largest restrictions that could threaten future growth, however, is the current uncertainty about the role of foreign investment in the development of the country both in the short term and the long term. The uncertainty as to how the Strategic Entities Foreign Investment Law passed in May of 2012 will be implemented as a result of delays in adoption of the implementation regulations does much to explain the circumspection seen from investors in recent months. Serious players in the mining sector are, however, taking a long-term view on this issue, recognizing that regulation of foreign investment in resources and other strategic sectors is inevitable (and no different to what occurs in other resource nations such as Australia and Canada) and that relative to other countries in this region, investment in Mongolia is far less regulated. That long-term vision applies equally to legal firms. We opened an office here in February 2012 to make a commitment to Mongolia as a permanent addition to our network of offices in Australia, New Zealand, China, and the United Kingdom.
Relative to other countries in this region, investment in Mongolia is far less regulated.
If we had continued to work out of Hong Kong, we wouldn’t have been able to establish the same connection with the local business community. Having a local connection is integral here; the flyin fly-out approach simply won’t suffice. In Ulaanbaatar, we have already made important advances into the mining industry. We can deliver advice on M&A, mining operations, capital markets, finance, construction, and infrastructure. In total, 60% of our business is advising international and local conglomerates looking to develop resources projects. Another 20% of our business involves providing commercial insight for construction consultants and other service companies coming into Mongolia from Australia and beyond. We spend the rest of our time on banking and financial services and on infrastructure, which we expect will become a major focus for us in the future.
For Mongolia to reach its bullish projections, infrastructure will need to make serious headway. The country is rich in coal, copper, gold, and rare earths, but how can it capitalize on that enormous wealth without infrastructure? We would love to think that we could leverage the massive experience we have built up working with governments in Australia and in Hong Kong on strategic infrastructure projects to help the government of Mongolia develop a coordinated approach to its infrastructure needs. Minter Ellison can also assist in carrying such projects forward by helping companies navigate through the shifting legal framework here. As we move forward, our local presence should give us an edge in this increasingly tight market. By working together with the local community as a single, functioning unit, Minter Ellison can help Mongolia reach its full potential. Australia was able to overcome somewhat daunting odds. Now it’s Mongolia’s turn. Mining Leaders
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Coal & Power Generation
22
lead article
Fueling the
Dragon A
country with approximately 10% of the world’s coal resources, a massive 192 billion tons, sits at the doorstep of the world’s largest consumer, which demands 3.7 billion tons of the stuff each year. Leaving aside Oyu Tolgoi, the Mongolian mining story has been about coal and about China. Coal is the country’s biggest export—21Mt crossed the border in 2011, generating $2.25 billion in revenues—and coal mining stocks such as Baganuur, Shivee Ovoo, and Sharyn Gol dominate trading on the Mongolian Stock Exchange. Yet the Mongolian coal story is not as simple as the dynamics of supply and demand might suggest. Challenges such as weak coal prices, a lack of infrastructure, and an overdependence on a single market are making investors more selective in the projects they support. Quality of coal and access to infrastructure are the key factors, while generating value-added products, from washed coal to electricity, has become essential. While China accounts for almost half of world coal consumption, it is also the largest producer. In 2011 China only imported 170Mt of its annual consumption. Just below Mongolia, the Inner Mongolia autonomous region of China produced nearly a billion tons of coal in 2011 and expanded its reserves to 770Bt over the course of the year. Mining Leaders
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lead article
21Mt Mongolia's Coal exports in 2011
Demand for coking coal will have increased by 115Mt a year by 2015 as a result of accrued consumption in Asia
Hence the short-term growth of Mongolia's coal industry must focus on large-scale, high-quality coking coal projects. Having imported 44.6Mt of coking coal in 2011, China may well import more than 50Mt in 2012. In 2010 Australia provided over 13Mt of coking coal to the tiger economy, compared to Mongolia’s 10Mt. But with its huge reserves located close to the surface and cheaper freight costs, Mongolia accounted for 45% of China’s imports by November 2011, while Australia fell away to 29%. The country could eventually triple its coking coal exports to China. Fortunately, given Mongolia's limited infrastructure, many of its excellent coking coal projects are situated in the South Gobi Desert, near the Chinese border. Mongolian Mining Corporation’s Ukhaa Khudag mine produces 7Mt per year, ahead of TSX-listed SouthGobi Resources' Ovoot Tolgoi mine, which has an output of 4.5Mt per year. Local firm MAK, owners of the Nariin Sukhait project, contributes an additional 3Mt per year. This trio of projects has ample scope for scale-up and further exploration should boost reserves—but they will still be dwarfed in size by the gigantic Tavan Tolgoi deposit. As with many of Mongolia’s major deposits, Tavan Tolgoi was discovered by Soviet
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geologists in the middle of the 20th century. Coking coal wasn’t high on the Soviet Union’s list of priorities, however, and the project lay dormant until the late 1990s, when BHP Billiton acquired the license before passing it on to a local firm. In 2008 the project came under control of state-run Erdenes MGL and was subsequently divided into an eastern section, which the firm will develop itself, and a western portion earmarked for development by western investors. However, complications surrounding the projects' attempted triple-listing on the Mongolian, Hong Kong, and London stock exchanges coupled with political stalling over how the western half should be divided among foreign firms have left the project underfunded and delayed. With a total estimated resource of 6.4Bt,
the project is expected to reach a peak production of 15Mt per year following a $2 billion investment, but 2012 production is likely to be just 4Mt. While the Gobi projects have been some of the most eye-catching projects in recent years, coal finds are distributed across the country, in 12 basins and over 200 deposits. In the north of the country, ASX-listed Aspire Mining has recorded a 252Mt JORC resource of coking coal at its Ovoot project. Exploration work at Draig Resources’ Teeg project, in the central Mongolian province of Övörhangay, has identified a deposit of semi-soft coking coal and high-quality thermal coal. The success of these projects will be determined by infrastructure development, however, and while
Projected Mongolian Coal Production (Mt)
Source: Erdene Resource Development
From this position of strength, China has been able to buy low-quality Mongolian coal at the border for half its benchmark price.
Source: tochinaandbeyond.com
box
bridge to the east The Trans-Siberian Railway has often been listed among Russia’s various white elephant projects. The 9,300 kilometer line linking Moscow to the Pacific port of Vladivostok took 13 years to construct between 1891 and 1904, and was completed just in time to transport troops during the Russo-Japanese War. But otherwise the railroad has contributed little economic value, mainly serving to tie the country’s remote regions to the capital. But since the late 2000s, officials from Russian Railways (RZD) have proposed to expand and develop the Trans-Siberian to create a land-bridge for freight between Europe and Asia. RZD officials believe that, while rail transport will never undercut sea shipping prices, freight times between Europe and China can be cut to just 14 days using the rail link, compared to 40 days via sea. In 2009 RZD unveiled plans to invest $1 billion in upgrading the track of the Trans-Siberian, with a further $900 million earmarked for alleviating bottlenecks and improving logistics centers and container terminals. The project could take a decade to develop, but it would significantly benefit Mongolian commodity producers. The Trans-Mongolian Railroad runs from Beijing through Ulaanbaatar and connects with the Trans-Siberian at Ulan Ude in Russia, using the same gauge as the Russian line. While firms such as Mongolian Mining Corp look to build railroads to northern China, the land-bridge project could open up access to Vladivostok and, from there, other Asian consumers. While Mongolian coal is not the time-sensitive export that the Eurasian land-bridge is targeted towards, the project could still bring important benefits. Coal would run west to east, meaning it wouldn’t compete for space with Chinese exports flowing in the opposite direction. Meanwhile, Mongolia’s geographic isolation has allowed Chinese buyers to dictate contracts to coal producers, often at prices well below the international level. Access to the Pacific would allow the country to sell to other major consumers, such as Japan, at international prices. The challenge is more likely to lie on the Mongolian side of the border. The Trans-Mongolian Railroad is currently operating close to capacity and is limited by its single track. Mining Leaders
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lead article Key Project
Coal Quality
Resource (Mt)
Energy – kcal/kg (adb)
Inherent Moisture (% adb)
Ash (% adb)
Sulphur (% adb)
CSN
Aspire Mining
Ovoot
Hard Coking
331
6,668
0.6%
19.5%
1.2%
7.7
Hunnu Coal (now Banpu)
Unst Khudag
Thermal
541
3,995
18.3%
21.3%
1.3%
-
Teeg (Unwashed)
Possible Coking & Thermal
-
6,265
4.5%
12.2%
0.9%
3
Draig
TVN Corp
Nuurst (primary seam)
Thermal
-
4,117
25.4%
13.0%
0.9%
-
South Gobi
Ovoot Tolgoi
Semi‐Soft Coking
363
6,000–7,300
7–8%
8–19%
1–1.7%
2.5–5.5
Gobi Coal
Shinejinst
Semi‐Soft Coking
229
7,530 (washed)
-
8.1%
0.5%
5.8
trucking coal may be a short-term option, rail is seen as the natural solution. In April 2010 the government approved plans to construct 5,000 kilometers of track. An east-west track will run from Tavan Tolgoi via Sainshand to the eastern border town of Rashaant with a spur linking to an existing track running from Choibalsan into Russia. A second track to the Trans-Mongolian Railway is also planned, as is a much longer western route, which appears a distant prospect. All of these routes are set to use the broader Russian gauge, meaning freights to China will still need to change bogies at the border.
port of Nakhodka. Although such moves currently incur a high cost, it is hoped that improved logistics could cut freight costs and establish a floor for Chinese prices. The previous year thermal coal producer Prophecy Coal sent ten wagons of product from Ulaan Ovoo to industrial consumers in the Russian Republic of Buryatia.
Some companies are planning private railroads to reduce freight costs. In 2012 MMC signed a build-operate-transfer agreement with the government to construct a 240-kilometer track from the UHG coking coal mine to Gashuun Sukhait. Aspire Mining has formed a Mongolian company, Northern Railways, to study and construct a 400-kilometer railroad from the Ovoot project to Erdenet, connecting with the existing rail spur in the town.
Mongolia's share of chinese coal imports
The country’s proposed rail projects also provide access to alternative buyers and may give producers additional leverage when negotiating prices with China. In June 2012 MMC announced that it had sold three cargoes totaling 53,000 tons to clients in India, Japan, and Taiwan. MMC trucked the coal from the Gobi before heading north along the Trans-Mongolian Railway to the Russian
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45%
Although Mongolia has several deposits of lignite coal, often used for thermal power generation, near the Trans-Mongolian Railroad, weak prices and the continued development of Inner Mongolia’s own lignite deposits means that major exports to China in the near term look unlikely. As a result several juniors with a mixed-commodity basket have turned their attention to copper-gold projects. In July 2012 Prophecy Coal suspended production at Olaan Ovoo after meeting its contractual supply obligations. The firm’s plans are far bolder, however. In 2011 the firm was awarded a construction license for the Chandgana power plant,
which will have a 600MW capacity following its start-up in early 2016. With major mining projects set to come online in the coming years, Mongolia faces a serious power deficit. Chandgana will be the first private power plant constructed in the country in 20 years. A significant investment in transmission lines could create possibilities for exporting electricity to northern China, potentially making a number of lignite coal projects feasible. In the meantime, some coal projects will have to sit tight and restrain cash flow. The years 2010 and 2011 saw a burst of M&A activity in the coal sector, with MMC’s acquisition of QGX and Indonesian giant Banpu’s takeover of Australian-owned Hunnu Coal being the standout deals. But it seems that the latter deal—signed in November 2011—couldn’t have been better timed. Since then valuations have plummeted, on the back of both the worsening global economy and fears of resource nationalism in Mongolia. Steel prices continued to fall in the third quarter of 2012 on the back of Chinese oversupply. But miners will all tell you that slowing Chinese growth needs to be viewed in relative terms. Growth of 6% to 7% in an economy of China’s size still represents a strong opportunity. Coking coal prices remain at historic highs and with mining costs continuing to rise in Australia, Mongolia is the best-placed country to exploit the market.
Source: Draig Resources
Company
adb: as dry basis
Coal Quality Comparison
Project focus
Prophecy Coal (TSX: PCY, OTC-QX: PRPCF, FWB:1P2) Hentiy province, Central Mongolia Thermal coal & power RES: 1.4Bt 2013: Plant construction
Chandgana
If completed on time, the facility will be the first coal-generated power facility built in the country in over 20 years. The construction of the power plant is well timed. According to Energy International, demand for power will rise exponentially in coming years, from 800MW to 1600MW between 2010 and 2015. After the second phase of construction is completed at the plant, which will have an output capacity of 3600MW, Prophecy could emerge as a leading power supplier in the country. Taiwan-born John Lee, the company’s CEO, is close to locking down a power purchase agreement with the Mongolian government that would give Prophecy a 20- to 30-year supply contract. But Lee’s plans go beyond power generation. He sees Chandgana as a gateway to grander expansions, including more complex conversion
In the end coal is energy, and as technology advances there are various ways of converting coal into energy, whether it’s electricity, liquid, or gas.
John Lee CEO Prophecy Coal
processes like gasification. “In the end coal is energy, and as technology advances there are various ways of converting coal into energy, whether it’s electricity, liquid, or gas,” he says. In the meantime, Lee plans to build a second power generation plant near his Ulaan Ovoo development, located just 17 kilometers from Russia’s Zeltura border post. Prophecy made its first export into Russia in July of 2011 with a 650-ton shipment to Energy LLC. Together the
company’s two deposits total 1.4Bt in measured and indicated resources. Constructing the power generation plant was not necessarily the original plan. Lee’s first attempt to export raw product into Russia and China met with obstacles. China is particularly strict on trade regulations. While China remains an enthusiastic buyer of thermal coal, shipments over the border are often delayed due to bureaucracy. Even at Ulaan Ovoo, which is practically touching the Russian border, Lee has been forced to jump through hoops to get his coal to market. Coupled with the less-than-ideal price of thermal coal, as well as some overvalued contracts with local power plants, extracting a margin can prove difficult. But Lee remains focused on domestic buyers, especially considering the shaky relationship between Mongolia and its neighbor to the south. “There’s not just economics but also geopolitics involved,” he says.
Major Coal-fired Power Plants in progress Power Plant Project
Company
Capacity
Status
Tavan Tolgoi TPP
Tavan Tolgoi Incorporate
600MW
Still in discussion stage
TPP #5
Undecided
450MW
To be built by 2015, but continous delays
Chandgana Power Plant
Prophecy Coal Corp
600MW
Construction will start in 2013
Mining Leaders
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Source: World Bank and Prophecy Coal
Prophecy Coal, a Vancouver-based thermal coal producer, will soon complete construction on the first-ever independent power plant in Mongolia. The 600MW facility, set for start-up of the first unit in the second quarter of 2016, will provide a much-needed boost to Mongolia’s ailing power infrastructure. The plant will be located at the mouth of the company’s 1.2Bt Chandgana mine, which lies roughly 350 kilometers north of the Chinese border.
feature interview
The Sleeping
Giant Graeme Hancock, holder of a PhD in Mineral Economics, worked for the World Bank before joining Erdenes Tavan Tolgoi. He arrived in Mongolia in 2006, and has since seen major improvements. But vexing challenges persist, especially for the man tasked with overlooking one of the largest mining projects in the world.
I
t is hard to imagine, given China’s mammoth economy, that a single coking coal project in Mongolia could cause a global shift in demand for the product. But in coming years, Erdenes Tavan Tolgoi, the company overseeing the world’s largest untapped coking coal deposit, could easily snag much of the Chinese demand for coking coal that is now directed toward Australia, and could vastly impact the price of Mongolian coal, both thermal and metallurgical. The project could also set a precedent for Mongolian mining, one that carries it from a struggling young democracy to an established success story.
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Whether ETT reaches its potential in the expected timeframe depends on a number of factors. The challenges include financial restraints, underdeveloped infrastructure, a delayed IPO, and completing a deal with a convoluted consortium to develop the project’s West Tsankhi area. Furthermore, a rising sentiment of resource nationalism could frighten away foreign investors. But despite these uncertainties, the stunning resource potential of the project almost certainly guarantees that ETT will eventually develop into a worldclass venture. “This is the most exciting coal project in the world, because of its scale,
its potential, its coal quality, and its proximity to China,” says Graeme Hancock, COO of ETT. “We have hard coking coal seams up to 26 meters thick and one semi-soft coal seam that is 80 meters thick. These coal-seam thicknesses are unheard of elsewhere in the world, and thus our operating costs per ton produced are very competitive.” Tavan Tolgoi is made up of six blocks, five of which are owned by ETT. Within those five blocks, the state-run firm holds a JORC-compliant 1.8Bt in proven reserves within a total JORC resource base of 7.4Bt. At the moment
Graeme Hancock
7.5BT
the focus is on the Tsankhi block, which is divided into East and West. In East Tsankhi, which boasts 948Mt in reserves, production is set to increase from 4Mt per year to 20Mt per year by 2017. “It’s such a large coalfield that ramping up production to above 60Mt per year is certainly possible. Whether we do so may depend on the elasticity of demand in China. If we produce too much we’ll dilute the price; we will have to consider what optimizes the value in terms of production versus price.” Currently ETT’s unwashed coking coal fetches around $70 per ton from its southern neighbor, whose border lies about 240 kilometers away from the open-pit mine. This price falls well below the global average. Yet with many infrastructure developments currently underway, including Mongolia Mining’s planned 240-kilometer UHG-Gashuun Sukhait railway to China and other planned railways to alternative markets, that could soon change. Plans at the East Tsankhi development seem to indicate this: the firm is building a coal washery, warehouses, water supply infrastructure, and a 300MW power generation facility at the site. At the moment, ETT coal is processed by CHALCO at the border as part of a five-year off-take contract.
The West Tsankhi project resembles its eastern counterpart in resource potential, with proven coal reserves of 888Mt and production targeted to reach 20Mt per year by 2020. Where the two mines diverge is in ownership; the western half is planned to be developed by a consortium of companies based in Russia, China, Japan, South Korea, and the United States.
Estimated Resource of Thermal & coking coal within 300m depth range at ETT
Mongolia's vast mineral resources are transforming the economy into a mining powerhouse
As with most mining developments in Mongolia, raising capital has proved challenging for ETT. The firm has long been planning a $3 billion IPO with a triple listing on the London, Mongolian, and Hong Kong stock exchanges. But the offering has been delayed repeatedly, due to both an unclear legal framework and an unexpected government initiative that distributed 20% of the firm’s shares to Mongolian citizens. “Some of the decisions made by the government will have negative implications for the IPO valuation, so I think the government needs to review these and see if they can make the necessary progressive changes to maximize valuation,” Hancock says. Such changes could include a new securities law, expected in 2012. The IPO, which was first rescheduled for the fourth quarter of 2012, is now likely to happen some time in 2013. ETT will need to raise an estimated $600 million in pre-IPO financing to sustain the project until then. But while awaiting the IPO, Hancock is drumming up support through other
avenues. For one, he is pursuing talks on developing another of ETT’s five blocks, something that will certainly appease foreign investors. Yet infrastructure remains a problem, and could soon overtake any other obstacle facing the industry; the construction plan at ETT alone is gargantuan. In order to diversify its client base, coking coal from ETT, located in the Gobi Desert, will have to reach the Pacific coast. Mongolia’s landlocked border leaves few alternatives. That will require 920 kilometers of railway from the mine to Choibalsan, a city located on the eastern border of Mongolia. At roughly $2.5 million per kilometer, the project could easily reach a cost of $3.2 billion. Additionally, it would require a deal with either the Chinese or Russian governments, though neither have been approached in earnest. Hancock believes a deal could be expedited, however, because of the Russian investment in the multinational consortium that is expected to manage West Tsankhi. Mining Leaders
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company focus
Khotgor Shanaga (2011) Project: Khotgor Shanaga Thermal & coking coal RES: 76Mt
Khotgor Shanaga For Khotgor Shanaga, a mining firm named after its coal mine 170 kilometers from Mongolia’s Russian border, time delays have posed a constant challenge. “I always say that in Mongolia, you have to work three times as long and three times as hard in order to make it on time,” says Park Jong-cheol, CEO of Khotgor. Despite Mongolia’s stunning GDP growth driven by a mining boom, Park notes that doing business in the country can require much time and patience. But time has also worked to Khotgor’s advantage: “Sectoral experience underpins the success of any strong mining company” Park says. “We have that experience.” The Khotgor Shanaga mine is now primed and ready to go into production. But finding a buyer has proved difficult, especially with China bidding to buy at below market prices. The mine lies 323 kilometers from the Chinese border, making it difficult to compete with producers operating in the South Gobi region. While many other well-developed mines surround Khotgor, inadequate infrastructure still poses a challenge. Meeting clients’ shipping requirements is, at the moment, nearly impossible. But Park maintains that the future of the mine is sound. His partners are veterans in the industry, and, while Khotgor is young, its parent company has its own storied history in Mongolia.
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Mongolia will work through its difficulties. Every developing country has these kind of issues. The word “developing” itself indicates that there is a process the country must go through. It just takes time. Park Jong-cheol CEO Khotgor Shanaga
Khotgor was established in 2011, and three South Korean companies now share a 51% stake in the project: Sunjin LLC, Natural Resource Development, and Korea Coal Corporation, a publicly operated firm. Sunjin LLC is the sister company of Sunjin Group, a developer that started its Mongolian operations in the agriculture sector. In 2007 Sunjin began operating Sunjin Grand Hotel, now one of the highest-capacity hotels in the country. It also operates
S.M.T. Trucking, which is currently contracted out to Mongolia Energy Corp for its shipping obligations. Khotgor's recently completed resource estimate, conducted by SRK Consulting, marked its total reserves at around 76Mt—roughly 20% of which is soft coking coal. The mine lies along a coal seam averaging 60 meters across, though much of the tract still requires preliminary exploration drilling. Near the end of 2012 Khotgor began a 24-hole drilling program totaling 8,000 meters. Khotgor is committed to Mongolia for the long-term and intends to be more than an average miner here. Park plans to upgrade water and road infrastructure, and already the company has invested in construction of a 50MW power generation facility that will feed electricity to nearby sites, as well as boost Mongolia’s existing grid. Park hopes Khotgor will produce around 18,000 tons of coal per month by 2013.
q&a
mining on the margins
Mark Earley Managing Director Draig Resources
In hard economic times, profit margins often matter more than the size of the resource. So says Mark Earley, Managing Director of Draig Resources, a junior coal explorer with 16 licenses in Mongolia. Teeg, its flagship project in the Ongi River, is a perfect example of this: it’s a small project in a previously mined region that Earley believes will pay large dividends. Has the recent drop in mineral prices and talk of a slowdown in the Chinese economy caused any concerns for Draig? People have latched onto the perceived slowdown in Chinese growth, but in reality it is the European and US markets that are finding themselves struggling to overcome economic obstacles. In mining it is necessary to take the long-term view. The peaks and troughs of the mining market are cyclical, as anyone who’s worked in this industry for long enough will realize. Right now prices are historically high, and as a result commentators have undervalued small assets with low production costs, preferring to focus exclusively on major projects. Investors have turned their backs on what makes money in favor of the Oyu Tolgois and Erdenes Tavan Tolgois of this world. We’re a small company with a small deposit, but we have the potential to develop a mine that can produce good margins. Have you found other areas to capitalize upon when establishing a mining firm in Mongolia? Mongolia is an undeveloped mining country with untapped deposits at shallow levels and lower costs. For example, our Teeg project lies on a 32 meter long coal seam with a potential of less than 300 meters of strip ratio, which is less than most. Compared to well-explored mining countries, we have far lower operation expenses, so our recoveries will be higher. On top of that the proximity to China allows for a further drop in transportation costs. In my opinion Mongolia is being unjustly marked down in the market, especially when you look at the high costs of the Australian market. New discussions over the Strategic Entities Foreign Investment Law might justify a discount in Mongolian prices. But then again look at Indonesia—everyone is doing it. Mongolia’s government is highlighting the potential to add value to Mongolian coal. Is that an economical route to take? From a coal perspective the costs incurred by washing plants and ore processing are not dramatic. However, a mine without a water resource can run into serious financial problems.
Fortunately for us our priority project, Teeg, is located close to a good supply of groundwater. Have you experienced any bottlenecks over a lack of human resources in Mongolia? There are already 50,000 people employed in the Mongolian construction sector. But if you take a glance down the line the labor market in Mongolia is too limited. I think Mongolia will experience immigration on a jobs basis. Regulated labor markets will appear, whether from within Inner Mongolia or elsewhere, and the government will have to implement strict labor regulations. Realistically, how long do you believe the Mongolia mining boom can last? It’s hard to estimate. Chinese growth remains stable at 6% to 8% and it is inevitable that the Chinese mining industry will evolve. With the rise of NGOs and corporate social responsibility policies, dangerous mines will simply cease to exist. In the meantime the captive market is Mongolia. However, Mongolia is unwilling to allow the Chinese to come in and operate the mines as they have done in Africa, which may become a point of contest in future Sino-Mongolian relations. What is in store for Draig Resources during 2013? We are heavily focused on exploration. The decision whether to push ahead with Teeg or one of our other licenses in the South Gobi will depend on the marketability of our exploration results, despite the fact that the recent priority has been Teeg. If something stands out that we can bring into production, we could fast-track it for the next eighteen months and gain a rapid cash flow. Geologically our Teeg project should be a low-energy coal but because the unique volcanic activity in the area has driven off the moisture and cooked the coal, it has been transformed into a very high-energy semi-coking coal. Teeg lies in the Ongi River Basin about 340 kilometers from the Chinese border. Its potential export route could run through Draig’s other licenses in the South Gobi, which will lower shipping costs. Mining Leaders
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lead issue
Power Generation
comParátive tax rates (2010)
John Lee CEO Prophecy Coal
Of all the challenges facing the Mongolian mining industry, one question usually rises above the din: how can the country add more value to its products? While not the most immediate threat to the industry, this may pose one of the most daunting challenges in the long term. Adding value to thermal coal products typically brings to mind nothing more than a washing facility. But in the minds of some, Mongolia’s best chance at selling refined, value-added coal products is actually through thermal coal–generated electricity. Not just electricity to be used on-site, or even sold domestically, but to create enough coal-generated power capacity to eventually be used for export to China. Already a number of power generation plants are in the feasibility stages. Most of these facilities will be based in the South Gobi region, and will fuel large undertakings like Oyu Tolgoi and Erdenes Tavan Tolgoi. A few will feed voltage into the existing infrastructure network. If these projects go online on schedule, Mongolia will be left with a power surplus that it could export across the border. With an eventual capacity of 3,600MW, the Shivee Ovoo Thermal Power Plant will be the largest of the planned projects, according to Southern Mongolia Energy Strategy, a World Bank report. Aside from the various plants already underway, enormous challenges remain. Most of these projects seem perpetually delayed, with the government and miners prioritizing road and rail developments that will serve big mineral export projects. Power is a valuable product, but it hardly carries the short-term appeal of exporting minerals across the border. Considering that trend, the question then becomes more immediate: how long can this shortsighted power-generation strategy last?
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Instead of selling coal through trucks and rail we’re looking to sell power through transmission lines. To be clear, we’re not a Chinese story, we’re not a Russian story: we’re a Mongolian story. The power produced out of the power plant will be dedicated towards serving Mongolians. Maybe five years from now, when Mongolian needs are satisfied, we will branch out into providing electricity to China.
Bayanjargal Byambasaikhan CEO Newcom Group
Mongolia has probably one of the best solar and wind resources in the world. It’s only a matter of making these projects commercial. You do feasibilities, you take up offers, and you find the financing. Couple this with all the other resources we have, like coal, coal bed methane, and oil and gas, and it makes me think Mongolia is an energy heaven.
Park Jong-cheol CEO Khotgor Shanaga
We are building a power plant at Khotgor that will have a capacity of more than 50MW. All industries require electricity to grow, in particular the Mongolian mining sector. Around 75% of Mongolian land has natural resources wealth, and sectorial expansion is inevitable—but the Mongolian government is unable to provide the necessary power. There also needs to be more value-added shifts in the coal industry here. Our power plant will make the natural coal more valuable.
lead ISSUE Energy system of mongolia
Russia darhan
Erdenet Ulaanbaatar Choibalsan Undurkhaan
Chandgana
Omnogovi
China
Central Energy System (CES) Eastern Energy System (EES) New transmission lines Power plant
Peak demand forecast 2007–20
Electricity generated by source in Mongolia
Central Energy System
Source: Mongolia national renewable energy program
South Gobi
THERMAL COAL
IMPORT
SOLAR & WIND DIESEL
HYDRO
Source: Mongolia: Power Sector Development and South Gobi Development, Draft Report Economic Consulting Associates (2008)
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q&a
Northern
David Paull Managing Director Aspire Mining
Promises
Aspire Mining is an ASX-listed company that operates the second-largest quality coking coal project in Mongolia at Ovoot, which produces almost pure vitrinite. This allows for high-quality coke production when processed with the more common variety of coking coal found in the Gobi region. David Paull, Aspire’s Managing Director, sees a role for the company in improving the country’s infrastructure and helping its communities grow. Aspire has explored only 24% of the area in Ovoot that the company currently holds under title. How much more production do you expect to see from this project? We steer away from exploration targets as they tend to bring unrealistic expectations. But we are considering a small-scale underground mine in the northeastern region of the territory and there remains room here for other large discoveries. We’re now in the process of moving a drill rig to the central area of Hurimt, which has some similar geological characteristics to what we’ve seen at Ovoot. We drilled preliminary holes in 2010. Only three showed the necessary sediments, but we didn’t drill deep enough to pick up the total sedimentary results. We used diamond drilling because of the soft conditions for the top 1,500 meters. In June 2012 we completed our prefeasibility study, which involved identifying water resources and doing a substantial amount of infill drilling and some initial geotech drilling. The study indicated that further geotech drilling could increase reserves so we have extended this process into August. We also completed a prefeasibility study for our rail line in 2012. Next comes an environmental impact assessment, which should take up to 12 months. The rail line will allow a travel time of only 20 minutes between Ovoot and the town of Erdenet before continuing on to the commercial hub of Mörön. The regional support for our rail project has been encouraging— the Hövsgöl provincial government has adopted the project as a key part of its five-year development plan. In June 2012 Aspire signed a memorandum of understanding with the Mongolian subsidiary of Russian Railways. How will this agreement impact the development of coal exportation? In June 2012 Mongolian Mining Corporation exported three cargoes from central Erdenes Tavan Tolgoi (ETT) to Japanese, Korean, and Indian customers by first trucking the coal to the TransMongolian Railway. It was a high-cost method, but it demonstrated it was possible. The plans now being put in place will help develop alternative markets to China—not to replace China but to allow for a more sensible price negotiation with alternative clients. That
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is also our strategy. We would like to move our coal to the TransMongolian Railway and then be able to choose whether to go north to Russia or south to China. I still expect that much of our coal will end up in China but to have the option is important, both for us and for Mongolia. It maximizes royalties and taxes for the country. A drop in coal prices has led some firms to slow or halt production of thermal coal. How much does the slowdown of the coal market affect Aspire? The last three to four months in particular have been very weak. Now is not the time to be driving additional production projects. However, analysis has shown that metallurgical coal is in short supply. Unlike iron ore, for example, there is not a huge inventory of coking coal projects ready to begin production. Ulaan Ovoo produces thermal coal, which historically earns half the price of high-quality coking coal in seaborne markets. In Russia and China thermal coal sells even more cheaply because of the enormous quantities available there. The industry is difficult right now for those whose only product on offer is thermal coal. Recent investor initiatives like the Silk Road Australia Index have brought more focus to Central Asia. Do such funds increase investor interest in Mongolia? In Mongolia the portfolio approach to investment has an important place in the market. These funds can have the time and effort to select the most promising projects; overseas investors generally don’t have the capacity. This specialist focus creates more informed decisions and acts as a conduit for capital entering the market. Would you consider listing on the Mongolian Stock Exchange (MSE), one of the fastest growing stock markets in the world? It’s certainly something that we are looking to do in the future. The London Stock Exchange partnered with the MSE in 2010 to improve the MSE’s framework and legislation. Once the full benefits of this partnership have been realized we would consider a Mongolian listing.
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