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Adding value and sharing the wealth in Mongolia mining

Interview - January 24, 2014
Mongolia is rich in mineral resources. It has some of the world’s major mineral deposits including gold, copper, uranium and coal. Erdenebulgan Oyun Deputy Minister of Mining speaks to Worldfolio about how reform is going to assure that communities affected by the mining industry receive more of the financial benefits generated and how they hope to work with partners to bring more of the value chain to the country
MONGOLIA
ERDENEBULGAN OYUN | DEPUTY MINISTER OF MINING MONGOLIA
Could you give us an overview of the mining industry? What are the main policies that your ministry is implementing to take full advantage of the potential of the sector?
 
The FDI to the mining sector dropped significantly last year, about 40% due to certain mistakes. Our parliament made some very surprising laws for investors and players of the sector.

Since our entrance into the capitalism model, our country has progressed, however as an open economy we also face some challenges and difficulties.

In the short-term we see our path as being really bumpy, but in the long-term the perspective of this nation is really bright. We are learning by doing.

Of course, if we make mistakes, then we will see the results and outcomes. Of course, this is our price loss – people and some other politicians they play games using these issues and make them popular in the country. This is happening in Mongolia. I know that it also happens anywhere, especially in developing countries.  

The important thing we have to fix all this problems, we have to learn from the mistakes that we have made. That’s why we keep reminding and keep changing our laws and our legal framework in order to make it more “west-friendly”. I would like to speak about some key issues and key policy of the mining sector in Mongolia.

As you know, Mongolia is really dependent on mining – this is what everyone knows. I believe that the preponderance of the sector will continue at least 20 to 30 more years. Based on the exploration of these mining assets Mongolia could be one of the richest countries of the world. That’s why the government has to do it properly. 
 
I’m going to give you just four figures: the mining industry represents about 25% of the GDP, 60% of the total industrial production, 90% of the total exports and 85% of the FDI comes from mining sector. Also 40% of the total State revenues come from the mining industry. So, these numbers shows the importance of the mining sector. 
 
Since the establishment of the Ministry of Mining we began to focus on how we make our mining industry efficient and environmental responsible. For the sustainable development of our economy we need to balance – that’s why we are introducing a new kind of best practices in the mining sector – responsible, transparent and environmental friendly. We must use high technology in the mining sector and also we need to protect our labor force with laws and working standards. All businesses should be based on the mutual benefits, because we don’t want foreign investors just to dig in mines, there has to be a social responsibility behind.
 
What should be the priority of those companies regarding the impact that a mine has in the local communities?
 
As you well know, all mining companies are in the countryside. The first point is to make local communities understand how important and beneficial a mining business is for their lives. There is a problem of miscommunication with local people, from the side of the government and from the side of the private industries. For example, the centralized taxation system is not really satisfactory, because only 10% of the taxation income is collected by the central government and redistributed to the people nationwide as salary. 
 
That’s why we are also focusing on how to give more benefits to local governments. That’s why we are working on a new amendment to our Mineral’s Law.

We want more involvement of local governments and we want them to use the mining revenues to benefit their local communities. With the new amendment up to 30% of the taxes collected will be distributed and they will be retained for the area where the mining company is located. This is a new approach that will help local people to see and feel the benefits of the mining industry. 
 
This collaboration between local and national government will be beneficial for both sides – they will have more benefits from the mines and they can use it in their own area. This is a good step. It is also good for miners, because they will be no anti-mining activities – they will understand how important these mining operations for the area and for the life of those people in the area are. 
 
How is the Ministry and the private sector working together to add value to other sectors of the economy in order to diversify Mongolia’s economy for a long term economic growth?
 
Regarding the figures I gave you, one of the aspects that disappoint us is the fact that we only sell raw materials – coal, copper concentrates and some kind of ironed concentrates. We want more value added industries – that’s why our government, especially our ministry is working on that. We are also setting up several action plans for the development of value added industries. We have some programs – “Mongol Iron Program”, “Mongol Copper Program”. 
 
We are inviting all stakeholders in the sector and we are talking and discussing with them about how we can work together. From our side we will help them; we will give them the opportunity to start a new business and some kind of help, for example some kind of tax exception on the products that they import like equipment. We’ve just signed a number of cooperation agreements with local miners and mining associations like “Iron Ore Producers Association” and “Gold Producers Association”. 
 
So, we are all focusing on the development of the value added industry. In northern Mongolia we have the biggest iron ore deposit of the country, that’s why we want to set up a big iron ore industrial park there. We want to build the furnace blast. Maybe in the next 3 years we will probably export more iron ore concentrates that raw materials. In mid-term and long-term we want to produce finished products. With the establishment of an industrial area lot of mines could work together. Maybe they’ll have probably one big plant – they can supply all raw materials to the factory and then get the products back on some kind of arrangement. This is our vision. 
 
In your introduction you’ve discussed mistakes, developments, learning by doing. What is your evaluation of the Investment Law and how are you going to attract the foreign investors that the sector needs?
 
Do you know why Mongolia is attractive for Investors? I will tell you why: First, Mongolia is a democracy. In twenty years we have progressed in terms of freedoms, not just regarding the market opening but also the freedoms of our citizens.

We understand that some people feel insecure about investing in our mining sector, but the majority of stakeholders are here making profit and operating well. I totally understand that we have done some mistakes in the past, but if you look at it with perspective you will see the tremendous growth that the sector has experienced in the last 30 years.

Mongolia is a very stable country – economically and politically. 

So, here you can find the stability for a long-term?
 
Definitely! This is the first important thing.

Secondly, we are so rich in minerals. We don’t have diamonds – that’s all – except diamonds we have everything. This all gives a really good opportunity for investors, those who want to play in Mongolia – not only mining, but mining related businesses like service industries, equipment sales, hotels and resorts – all this goes together. If you put one dollar into our mining sector it will generate 4 dollars in one year.

This mining boom is also developing other sectors of the economy. Thirdly, we are the perfect gateway to the Chinese market. As we have our largest mineral deposits next to China’s border – so easy access and easy transportation. China consumes the world’s biggest mineral products. Australia and Indonesia are not our competitors anymore.

Now they are supplying coking coal from Indonesia and Australia, but believe me – in two to three years they will be no more our competitors, because we will give to China better solutions, better products and better prices. Political stability and a good law system, that’s what an investor will find here. 
 
What opportunities would you point out for US investors interested in the mining industry? In which areas would you like to see Mongolia and the US working more closely together?
 
Currently, there are not so many American companies – I don’t really understand why. They are now showing their interest in the oil and gas sector and they have found big reserves in UB area.

They have found reserves for billions of dollars – billions of tons of oil shale reserves and the company has signed an exploration agreement with the government.

So, we came to turn this exploration to product sharing contract and in a short-term we just waiting for the results. I know the company did many lab tests and the quality was perfect – better than Colorado or Utah ones, because the content of some kind of toxic stuff was very low – almost zero in Mongolia, but in Colorado the oil shale has 10% of this very toxic content – it is costly to remove this – it will need probably another big investment. So, the company is ready to produce, they are willing to invest about 4 billion dollars to produce gasoline, gas and other products made from oil shale.

Hopefully our domestic consumption is not much – so they have a very good market in China. Just recently our Prime Minister has visited China and made Landmark Agreement with the Chinese Government to sell 1 billion tons of coking coal to China within next 20 years and Mongolia will work with Chinese companies to develop gas called Coal Bed Gas CBM or Coal Bed Methane Gas – it’s gas from coal, because Mongolia is rich in coal.

This brown coal doesn’t really have other purposes – you can just burn to produce electricity and cannot sell it. So, we have 160 billions of coal – for what? – We need to make this workable. Today new technologies are coming and many companies are working to develop natural gas from these non-conventional products like coal, oil shale – this is really huge market for us.

Then we’ve also agreed to build a pipeline to China – gas pipeline. So, the government made a really good business opportunity for investors, those who are willing work in the oil sector – they don’t need to worry about the sell, because China has huge demand on oil and gas products. They are currently building a gas pipeline from Russia to China, but if we offer them good opportunity we will be big competitor to Russians. This is an example. I think Shell Oil is dealing with one of the Mongolian oil companies and want to come to Mongolia.

ExxonMobil is interested. But we are really willing to invite American companies – this is a big opportunity not only for mining related businesses – we also wanted to be a hub. Business hub for Chinese business sectors, because if you set up your offices in Mongolia – it’s cheaper than to have your office in China.

You can manage your activities from Mongolia and you control your business in China. We have a good access and lot of opportunities. We have a very good relationship to US Government. I think that many companies will come. Currently, of course, Mongolia is a country whose 20% of the area only has been explored, diagnosed and surveyed. The rest of it is still unknown. Probably we will have many more deposits like Oyu Tolgoi.
 
Oyu Tolgoi, What are the main challenges, opportunities and objectives up until 2020?
 
Oyu Tolgoi is just one project. Mongolia will never allow be dependent on only one project.

Of course, it is a very important project for Mongolia but it’s still just one company – one project – one business. That’s why we are going to have good relations with our stakeholders – not only with Rio Tinto, but also with some other players. Of course, we have small disputes on some issues, but there are no big and specific conflicts.

We are working perfectly with them – we understand each other very well and we hope that we can immediately start our underground mines; we can find a good financing – we all are working hard for these together. I can tell you one thing. We had probably one or two big issues with Rio Tinto – I can tell one thing – it was about cost overrun of about 2 billion dollars.

But we never justified or judged them like “Why did you spent so much?” Just as the stakeholder we are also shareholder – at least we have to know where did you spend or why the cost was so high? Every investor must know that - if you are investing 1 dollar into a company at least you have to know why the cost increased. Apart from that, Oyu Tolgoi and other undergoing projects will bring lot of revenues, investments, employment and prosperity to Mongolia. As I said before, we have the economic, political and legal stability that every investors is looking for. 

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