“150 Articles in the draft need careful review”

Dr. G.Tsogt, Vice President of Industry and Project Implementation at Mongolyn Alt, answers questions by N.Ariuntuya on the draft mining law.

How do you in the mining industry find the draft law?

I have read the draft closely and paid keen attention to every article. After all, it will be the governing law of the mining sector. All the mining engineers and technical staff of our company met for a day-long discussion of it and then we sat down with a lawyers’ team and reviewed every article. These two sessions produced suggestions on nearly 150 of the 500 articles divided into 15 chapters in the draft. We think some articles needed to be completely revised and are planning to put our suggestions together and submit this officially to the President’s Office. 

Some criticise the current Minerals Law as a cadastral law. That way, the present draft is an apparent attempt to regulate the entire range of activities in the mining industry in a holistic manner. In this, it resembles the Minerals Law of Australia, a country with a highly developed mining sector.

Some provisions, particularly those supporting the industry in general and especially the national entities in the sector,meet our expectations. Still, there is a feeling that the draft tends to increase State bureaucratic control and that several proposals in it will clash with other existing laws. It will take too long to mention every article that needs to be reviewed, some of them more than others, but a careful reconsideration is essential.

Still, can you give us an idea of which proposals need to be discussed thoroughly?

First come the issues regarding agreements, State authority, time period and fees and payments. The draft also needs to be more specific about the meaning and purpose of the proposed deposit development agreement, cooperation agreement and local development agreement.

The many different timeframes mentioned in the draft need to be coherent. For example, it says, “The aimag or city self-governing authority shall enter into an agreement with the licence holder within 30 days of the date of receipt of the draft local development agreement.” What if there is a failure to establish the agreement within 30 days? Local development is a issue, and so needs to be more clearly explained, otherwise some local authorities might think that a mining company is like a bank or a financial organization and demand something impossible like building a railway. In such a situation, negotiations on the agreement will be protracted and very likely go beyond the stipulated timeframe.

Similarly, the draft says that a licence will be suspended if exploration work doesn’t begin in six months from its issuance. What about the long winter in Mongolia? Let’s say a company obtains a licence in September. It will take several months to prepare its work plan, and when the company is ready to start the work, the temperature begins to drop and the soil is frosted. It will be far more than six months until the snow melts.

The draft sets 14 days for finalising the exploration work plan and six months for preparing the Technical and Economic Study Report. Six months may be enough to prepare a Feasibility Study for a gorge that has only 50 kg of gold but not if you want to build a good deposit and plan to mine on an extensive scale. Work on a Technical and Economic Study requires a lot of time, with samples sent to domestic and international labs and making the right choice of technology. I repeat,six months are not long enough for this job for a mine.

Take the example of our own company. We started exploration work on Tsagaansuvarga mine in 2001. Work on the Technical and Economic Study began in 2005 and was completed only in 2011. We needed the six years to try out several experiments on acid ores, sulphide ores and other side elements, and also to choose the most appropriate technology. Several processes have to be tested before the most economically efficient technology, requiring less human labour and a lower investment, can be identified. All this cannot be done in only six months.

We also have questions about issues of fees and payments. I really don’t understand why we shall have to pay royalties for minerals mined and processed, derivative deposits and industrial waste. This last has no economic value for the miner. There are many cases where the amount of waste in an element cannot be accurately estimated. In copper, we take only 0.25 percent of the concentrate and throw the rest away. A mine may have certain minerals, but it’s hard to tell which and how much of them are usable as concentrate, with the rest going as waste. Lab tests give a general idea, but cannot determine the exact amount. It is impossible to know these things in advance. There can be no logic in levying royalty on something that has no economic value. I know of no country that levies tax on wastes. I also don’t know if this is a mistake in drafting or translation.

A good law should be precise and direct, easy to understand, and admitting of no amuity. The draft frequently fails this test. As the proposed law has got to be a very long one, I think we should separate the articles concerning processing plants from those that deal with mining. It looks like as if the intention is to regulate everything, but in reality it’s not so. Also there are linguistic lapses and terminological inexactitudes. Take the phrase “high grade mining”. This should mean that the mining would be restricted to only the more profitable parts and not extend to the whole of the reserve but leave the unextracted reserve, deemed obtainable as per the Technical and Economic Study Report,impossible to mine further. This would be the result of not following approved technical procedures while mining. This article should cover mining activity on a mine where the economically beneficial reserves are already mined. There used to be lots of mines dug by the Chinese in the Zaamar area in the socialist days which are basically made like small hills. That area is rich in minerals, but high grade mining has taken away the cream.

If the draft is approved as it stands, it is certain to give rise to a lot of conflicting interpretations and disputes, especially on issues related to agreements, payment and fees and role of State organisations. The Administrative Cases Court will not be able to handle all the cases that go to it. The draft is a very general statement of principles, but badly short of specifics.

The draft says the number of strategically important deposits will stay put at 15, precluding any new addition. Mongolyn Alt operates two strategically important mines, in Tsagaansuvarga and Narynsukhait. What is your position on the issue?

Laws change frequently in Mongolia, and we have never had stability longer than only 5-6 years. This is well seen on the issue of deposits of strategic importance. Some media reports, for example one by Oyun-Erdene of the daily Onoodor, seem to say that Mongolyn Alt owns many different strategically important deposits. Actually, the term “deposits of strategic importance” was introduced in 2006, when the then valid Minerals Law was amended. But we had obtained the licence overTsagaansuvarga in 1999, when nobody knew that it would one day become anything termed strategically important. We are a serious and ambitious mining company and obtained licences in a perfectly legal way, selecting mines that held promise.

In any case the concept of strategically important deposits is flawed. A deposit is identified as such if it contributes more than 5 per cent of local GDP. Now, if a deposit with 200 kg of mineral reserves is located in an isolated soum where industry hasn’t developed much, its total production, nothing much in absolute terms, will stil leasily exceed 5 per cent of the gross local product. It is also doubtful if in recent years reserve amounts have been determined correctly. There is a common misunderstanding that if the reserve amount is great, it will be classified as strategically important.

Resolution No.27 of the State Great Khural lists the15 strategic deposits. As for Narynsukhait, it is actually one coalfield divided into several licences. The resolution names Narynsukhait, and people think only the area MAK owns is classified as strategic, not other parts of the mine because they have different names such as Narmandakh, Narshingeh and Ovoottolgoi. This is all because of legal inexactitude.

It is good that the draft talks about “minerals of strategic importance”. Other countries also identify as strategically important radioactive minerals as well as other simportant for national security. However, after defining the minerals of strategic importance, Article 9 of the draft says that the 15 deposits in the first appendix of the Resolution No.27 are strategic. This is confused logic. Deposits that contain minerals of strategic importance cannot but be treated as strategically important deposits. 

The issue of the 15 strategic deposits needs to be re-discussed by the State Great Khural, the Government, professional mining associations and experts. Most of those deposits are already used up, some are being operated currently, some are under investment agreement and some are not going to be operated in the near future. We have prepared some suggestions for discussion.

The draft introduces the concept of Deposit Development Agreements, without really setting out what the terms of such an agreement will be. How do you see this?

You’re right. It’s not clear whether the agreement will be with deposits that have water, oil, radioactive minerals and rare earth elements, or with the 15 deposits named in Resolution No.27 or with a newly discovered mine.

There are many mining companies operating in Mongolia. And they need to be regulated by the State. Today, anybody can establish a mining company and become a miner. The State needs to pursue a policy to help and support only professional mining companies. It does not bode well for the sector if it is filled with unprofessional people. It’s correct to set high professional standards of operation, and I think Deposit Development Agreements are expected to do that.

The State policy should be to determine which deposits to operate now and which to leave for later. Several mines are now active in Mongolia. OyuTolgoi is in operation, construction work is going on at Tsagaansuvarga and hopefully things will move ahead with TavanTolgoi as well. There are two or three more coalfields. I personally think we need to focus on making value-added products and final products from these mines rather than seeking more deposits. The draft appears to support this view when it suggests that processing will be regulated by an independent licence. But, here again, a closer study of the proposals does not reveal any real support for processing. The larger the capacity of a processing plant, the more it will be charged as licence fee. The law thus discourages thinking .

The Deposit Development Agreement needs to cover a wider range of issues including that of processing and production of value-added products.

The general global practice is to think of a copper smelting plant as being economically viable only if it uses more than 1 million tons of copper concentrate. OyuTolgoi will produce more than a million tons of concentrate,Tsagaansuvarga 300,000 and Erdenet 500,000 tons. This works out to some two million tons of annual output in Mongolia. We need a copper smelting plant so that all this concentrates is not exported. If this gets a legal mandate, we shall make cathode copper and start value-adding operations. Many side elements such as gold and silver will be extracted as well.

The draft calls for four types of licences in place of the present two and introduces the concept of “work permission”. Do you see this as an improvement, or will it just lead to more pressure and bureaucracy?

I don’t think all these licences will make mining easier, and they are very likely to add to the amount of pressure. I think the Minerals Professional Council should include more people from the professional associations, otherwise, I fear that too much state involvement will only lead to more bureaucracy and open doors for corruption.

The draft also says that a company’s report on its prospecting work will be reviewed by an independent geologist. We need to know more. In foreign countries, such experts have to be professionals with a standing. In Australia, these experts who approvere serves command so much respect that their certificate is accepted by banks and financial organisations. If we really want something similar, we have to make sure we have enough independent experts with the requisite qualifications. Otherwise, reports on the review will be based on how much the expert is paid.

I wonder what chances there are for provisions in the draft to be actually implemented. Do we have the required number of independent professional experts with the right qualifications? Will companies be able to pay them the right fees for their work, and will the fee depend on the reserve amount? Without precise guidelines, good intentions might lose their way.

The draft refers to many kinds of assessment. These include impact on health, calculation of damage to nature and the environment, and to society and the economy, etc. I think these should be centralised and simplified. It is a pious wish that a State organisation will monitor all these factors in order to improve the work quality, for everybody knows that the whole thing will turn into another money-spinning business. Someone comes from a State organisation to do the assessment and all shortcomings are overlooked for the right price. This is how it has always been with us but now it’s going to be legalised, which is worse. A professional organisation will most likely be set up to assess the health impact of mining projects on local people. Companies will pay the designated fees and that is all that the inspection team will check. Nobody takes these assessments seriously, that’s the reality on the ground.

When we make such things legally mandatory, we need to make sure the mechanisms will work. Otherwise industries will tweak the rules and regulations and get away with all failures to fulfil requirements on payment of a fine. All this needs to stop. On the other hand, we should not also entrust the State and a local administration with too much authority, for that can be misused because the companies will be totally dependent on their goodwill. I get the impression the draft proposes something like this and a re-discussion is very much in order.

How do mining entities see the article that says the State may transfer a site or a deposit to its own reserve after reimbursing the actual prospecting and exploration expenses?

There are actually quite a few articles on State control over giving or suspending a licence. Decisions based on political considerations can create many difficulties for industry. One political party wins the election and decides to take a deposit into the state reserve. After four years, another party wins and reverses the decision. This will cause complications.

It may not be a bad thing to take a deposit into the state reserve, but much depends on the reasons the Government proffers. One political party’s whim is not the same as a unanimous decision by the State Great Khural. The period of time for which the deposit will be part of the State reserve should be made clear and judicial intervention has to be sought, if necessary, to resolve issues concerning reimbursement of actual expenses. Currently, the Administrative Court has jurisdiction over any local authority’s decision but not the Government’s. Where will a company seek redress if the Government puts a deposit into the state reserve but doesn’t accept the reimbursement claims? Either the State Great Khural should be made the final arbiter in any dispute with the Government, or the right to appeal to the court should be there. Mining requires a lot of investment and is always a risky venture. It also affects the interests of many, and the law should protect the interests of all sides.

Do you think the draft provisions, if approved, will have negative consequences such as hindering foreign investment?

The real test of the proposals will be in their on-site implementation. Foreign investors may have their own views, but they also seek to work in the industry, as we do, so ultimately our concerns might turn out to be the same.

I foresee many difficulties for both national and foreign companies seeking funds. The chance of a deposit taken into the State reserveis a major constraint. There are also issues regarding taxes. It looks like tax will be levied even on industrial wastes. It will be hard to calculate the actual economic value of such wastes. When a company discovers a mine, it has to calculate the total economic benefit and the time it will take to recuperate the initial investment, etc., but with all these types of taxes, it will be difficult to make a realistic calculation.

Do you think the proposals on mine closure are practical?

I thought they were generally fine. However, the draft seems quite off the mark when it says, “Before obtaining the work authority to conduct the relevant work, the licence holder shall place the expenditure deposit for closure of a mine or a plant in a monetary form in the special account.” True, a company obtains a licence only after its Technical and Economic Study has been approved, but this study gives just a tentative estimate of the mine design and of how deep the mining would go. These become clearer only afterwards, so the estimate of the closure costs to be put in the special account can only be a rough guess.

Another factor must not be overlooked. Any mining enterprise begins with a large investment and this is usually a loan. For the first few years, the company buys machinery and equipment, builds plants and develops infrastructure. There can be no profit in this period, and keeping a large amount blocked as closure costs is a too heavy burden. It’s better if the money is allowed to be placed in a fund which will give returns. The draft proposes reimbursement of the money after the mine is closed to everybody’s satisfaction. What about inflation? If a company places $1 million today, how much should it get back after 30 years?

It is correct to make mine closure plans and to have a guarantee that the miner will pay for them. But the estimated expenses do not have to be deposited all at once, and can be collected in a fund year by year. Also, the deposit should earn interest, like money paid into the pension fund or the social insurance funds in some countries.

Earlier,money for rehabilitation was placed in a special account. Companies made the payment according to the environment plan every year. In the early years of this century, some aimag governors made a habit of diverting the money from its actual purpose, spending it instead on celebrations and unproductive events. Places like Zaamar came up this way. I believe things have now improved, with the Ministry of Environment and Green Development managing the fund. Instead of keeping the deposit idle, it can be used to set up specialist rehabilitation companies. Then I wouldn’t have to be a miner, environmentalist and botanist all at the same time. It would also create more jobs.

Geological conditions specific to a mine have to be considered when rehabilitation and closure are planned. For example, the Erdenet mine has vertical shafts, and Narynsukhait, while it is a coal mine, has a 45-degree incline. There can be no rehabilitation in such mines in the first few years, as the mining goes deeper and has to take place on one side. Extraction becomes economically unprofitable after reaching a certain depth and then it’s time for closure. Some people don’t understand this, and think that if you dig here today, you have to rehabilitate there tomorrow. Given that the geological condition and structure of the mineral, and the technique used vary from mine to mine, the same norms cannot be applied everywhere.

What do you think of the proposed Local Development Agreements to be signed by companies during their mining and processing stages, and to follow Ministry of Finance guidelines?

It is not a bad concept and emphasises the need to ensure local development, but the proposals need more clarity and precision. Just general guidelines on prioritising local issues, supporting local industry and business, creating jobs for local people, improving the environment and developing infrastructure and so on will not do. The local governing authority may very well demand something beyond the mining company’s capacity and financial power. What if a not very miner is asked to build a power plant?

Negotiations with local self-governing authorities are generally difficult. There are unreasonable pressures and unethical demands. There are several instances where individuals in authority came together to create problems for a mine for their own gain. The law should not give anybody such opportunities.

We have to understand why local residents protest against mining saying that it is destroying their pasture and spoiling the environment. It’s because they are frustrated at not seeing local benefits from the mining in their land. If this is taken care of, both sides can reach an agreement easily. It will remain true, however, that there will always be some saying that our traditional animal husbandry can develop alongside mining, while some others will see mining as enemy to everything.

There are good things in the current law only if they were implemented fully and well. If we had really transferred 70 per cent of the royalty to the State budget, and 20 and 10 per cent to the aimag and soum budget respectively, we would have seen considerable local development. This provision should remain in the new law and we should see it is implemented in toto. If Gurvantes soum, for example, receives 10 per cent of the royalty from three mining companies, there is no way it will remain undeveloped. What happens is that, ignoring the law, the Ministry of Finance uses part of the money to provide State services to the 3,000 people of the soum and takes the rest to use elsewhere.

How will a soum develop if money earmarked for it doesn’t really reach its people?How can we blame local residents when they assert that mining has brought them only hills of dust and heavy-load trucks that break the land?The same frustration is seen at the aimag level. Just consider how Khanbogd, Tsogttsetsii and Gurvantes soums can benefit if only the authorities of Umnugovi aimag really spend on local development part of the royalty paid by mining companies for the purpose. The responsibility will have to be shared and the resistance some people now show to mining will change eventually. There are some direct and immediate benefits of mining also. If an isolated soum develops, its population will have access to so many new things.

That reminds me of something. We have been talking about improving the registration system for many years, but nothing much has happened. Records in Khanbogd, Tsogttsetsii and Gurvantes soums have to be updated and show actual figures. The registered number of people is 3,000, but the actual number of people who come and go has reached 8,000. However, the hospitals there still have a budget for 3,000 people and it’s same for other state services.

As our company begins work on the Tsagaansuvarga mine we are hiring residents of Mandakh soum, Dornogovi aimag. We have agreed with the soum authority to hire people who are registered at the soum in the first place and then look elsewhere.