Dr D.Galsandorj, certified consulting engineer, tells MMJ about the sorry state of the global copper market now and expresses his apprehension that the outlook will not be any brighter in the near future, which could mean serious trouble for the Erdenet copper company.You are one of Mongolia’s few experts on the copper industry at a global level. When did you start in this sector?I have been involved in this sector from the time the Erdenet copper project was started. At that time, the State Committee for Foreign Economic Relations (SCFER) and Complex, the import company under it, were in charge of financing the Erdenet complex for building the open pit mine, the processing plant, the township, and all related infrastructure and social projects. My formal designation at SCFER then was Specialist and Department Head. I was also a full member of the inter-ministerial technical board charged with monitoring the Erdenet financing and projects development.
Between 1991 and 1993 I worked as Commercial and Economic Counsellor at the Mongolian Embassy in Great Britain and then from 1993 to 2000 I was Representative of Erdenet Mining Corporation in London. These years were marked by successful efforts to establish business ties between Erdenet and the London Metal Exchange, leading western banks and financial institutions and technology suppliers, assay laboratories. This was also when we started to sell our copper concentrates in the international market.
I was Director of the Geology and Mining Department in the Ministry of Industry and Trade from 2004 to 2006 and was part of the team that prepared the master plan for the development of metallurgical plants and expanding the range of value added copper products. It was also in this period that I was awarded the PhD degree for my thesis “A technical and technological study on developing the Mongolian copper industry into a mining and metallurgical complex”. All these years I have been studying the nature of the demand for copper in the international market, specially in the Chinese market.
The copper market has been depressed for some time and there is concern that prices may fall further. What do you think?The last two or three months have seen a very rapid change in the copper market. The prices set on a daily basis in London and New York metal exchanges are used by European, and North and South American copper producers and buyers, while the Shanghai Metal Exchange prices are used in China and other Asian countries. Copper is a strategic commodity for China, and so it keeps enough stocks to ensure continuous operation of manufacturers and takes regulatory steps whenever there is any glut or deficit in the copper market.
In recent years, China’s own copper reserves have decreased significantly. It generally consumes over 40% of the world copper production, but now, its slowing economic growth has led to a fall in its copper purchase. Unsold production in the face of falling demand has meant there is an oversupply in the copper market, and this is likely to continue for the next two to three years. I do not see copper prices rising before2018.
What is the estimated price of copper next year?I hope our budget makers keep track of analyses and forecasts by independent and specialist research organizations. The present forecast is for the price to be around $4900-$5000 next year.
How do Erdenet and OT compare in terms of their contribution to the state budget?Erdenet exports 50% less than OT, and its concentrate grade is 22% while OT’s is 28%. This means that OT produces higher-grade copper concentrate and also sells more, apart from producing 20 tons of gold a year.
In 2014 Erdenet paid into the state budget 20% more than OT did, despite what I said just now. This was possible because of a selective tax system in the copper industry.Besides the 5% basic mineral royalty tax the Erdenet company pays additional royalty and other taxes and makes some other types of payment, which OT does not. If the price of copper is between $5000 and $6000 then 11% royalty and 12-13% extra taxes are paid respectively. Actually, Erdenet pays 3 times more in royalty and taxes than OT. In other words, more than 60% of its total revenue goes into the state budget, while for OT, the corresponding figure in 2014 was 8%.We need review some provisions of the Oyu Tolgoi Investment Agreement that granted the investors much too favourable tax conditions.The OT Investment Agreement and underground mine development plan promised that 54% of the total value of the project will be received by the Government, but in reality it has been only eight to ten percent of the total sales revenue.
How a problem is it for Erdenet that its production costs remain the same as sale prices fall?To tell you the truth, Erdenet’s production costs are on the high side, at over $5000 for a ton of refined copper. With copper price today at $4900, this can only mean loss. The government has not so far agreed to support the company, which saved Mongolia during the difficult days of transition to the free market. If Erdenet falls into financial difficulties it will be very bad for the country’s economy.
What should the company do to stay above the water?It is doing a lot to reduce its expenses, such as contraction and even closure of non-productive units, stopping non-essential imports etc. The $150 million spent in the past few years on expansion and modernization of the processing plant is showing results. I feel that Erdenet has to try harder to export more copper concentrate at a price close to the world average. Care should be taken to improve the quality of its products. It needs to raise the copper recovery rate and also the copper concentrate grade.
In your opinion small scale sx/ew plants can be built for treating Erdenet copper ore wastes. How many hydrometallurgy plants can be built?The first hydrometallurgy plant treating Erdenet ore wastes and producing refined copper with advanced technology was constructed in 1997. It was low-cost and also environmentally friendly. The Erdmin plant’s annual capacity is 3000 tons and it has been contributing to the local budget. Another hydrometallurgy plant, Achit Ekh, with a capacity of 10,000 tons, was commissioned in 2014. It should be possible to build 3 or 4 more hydrometallurgy plants treating copper ore wastes. Erdenet is working efficiently in this direction. Hydrometallurgy plants with a capacity of between 10,000 and 15,000 tons need to be developed to treat Tsagaansuvraga and OyuTolgoi copper oxide and waste ores.
The Oyu Tolgoi underground mines will have a significant impact on the economy, but when do you see this happening?OT is the second largest copper deposit in the world, after Indonesia’s Grasberg mine. Around 80% of its 30 million tons of copper are in the underground deposits, so it is clear how important it is to develop them. The underground mines will start production and thus earn money in five or six years, say from 2021. The high construction and development costs will certainly produce benefits, but do not expect that hundreds of billions of dollars will come in cash and all our economic problems will disappear.
The cost of development may be as high as $6 billion. Where will the money come from if work is to begin in 2016?Several banks are expected to lend the money, though there has been no final word.
Does China or Russia have a comparable copper-gold deposit likely to be commissioned in the near future? What about Udokan?Many countries have been recording significant depletion of their copper reserves, but several new deposits have also been found, but mostly in areas with no infrastructure. The Udokan deposit in Siberia has refined copper resources of 25 million tons, making it almost as large as OT and nearly five times larger than Erdenet. However, the deposit there has a very high content of sulphur and various metals, and the geological and mining conditions are quite difficult. Many technical and technological problems have to be resolved and a huge investment will be required. The deposit is near the Chinese border and Russia has recently held talks with China on joint development. If negotiations are successful, work may begin soon.
When Udokan starts production, China could buy significantly less copper concentrate from Mongolia. Our three large deposits -- OT, Erdenet, and Tsagaansuvarga -- will face tough competition. Similar competition from coal is expected in the next five to ten years.