G. Erdenetuya: The mineral industry can attract foreign investors with mutual understanding

G. Iderhangai of The Mongolian Mining Journal interviewed G. Erdenetuya, Executive Director of the Mongolian National Mining Association.

Looking at the last 12 years of investment in the mineral sector,

the peak period was 2010-2011

- Let's start the interview with information about when and how foreign investments were made in the mineral sector?

When investors come to the mineral sector, they look first at markets, available resources and opportunities. Moreover, investors look at the stability of the political and legal system. We have studied the investment environment over the past 10 years, starting with investment from third countries.

Indeed, there are market opportunities here. But we do not seem to be able to take advantage of them. However, the political situation changes. Since 1992, 16 prime ministers have served for an average of 1.8 years. This requires all governments to work quickly in very short periods of time.

The impact of political stability on the legal environment is also clear. Looking over the past 10 years, the mineral sector is not only regulated by the Law on Minerals. In addition, another 92 of  830 laws in force in Mongolia must also be followed in our industry. Of these, 20 laws relate to enterprises, 10 to the mining industry, 13 to infrastructure, 19 to the environment, 8 to healthcare, 3 to labor relations, 4 to safety, and 15 to finance and economy. This means that there are sufficient laws governing the mineral sector. But not all activities are regulated by laws alone. There are 6555 approved standards, of which 1200 are relevant to our industry. There are also 32 government resolutions, 97 ministerial decrees, and 24 management decisions by state agencies.

In addition to the law, there are a number of requirements. What are the numbers on that front?

Of the above 92 laws, the Law on Minerals must be 100% complied with by all project implementers. As for other laws, only certain requirements are followed. For example, in the Law on the Protection of Cultural Heritage, only certain provisions are followed by project implementers. Regarding medical requirements, there are certain requirements that a hospital providing medical services in a mine must meet. Thus, in addition to the law, there are about 1,500 requirements.

In addition, project implementers have obligations under international agreements. There are requirements from investors and creditors. In addition, if a company is going to improve its corporate governance, it must follow international standards. There are many other requirements that must be followed, such as government policy documents.

How does this legal framework affect foreign investment?

If we analyze the last 12 years of investment in the mineral sector, the peak was in 2010-2011. At that time, there was a sharp increase in investment. Investments were stable in 2011-2012 and fell sharply in 2012. The reason for the sharp increase was because construction work on Oyu Tolgoi began then. Oyu Tolgoi promoted its project very well on the international market. In addition, Mongolia was promoted as well. As a result, many exploration companies came to Mongolia. However, foreign investment in our country has also declined due to the decline in project construction work.

There have been many changes in the legal framework in the past. Has this situation had a positive impact on investment?

Looking back at the changes in the law, a law with a  very long name was passed in 2010. It is called the  “law to prohibit mineral exploration and mining operations at headwaters of rivers, protected zones of water reservoirs and forested areas”. A law prohibiting new exploration permits was passed in 2012. In 2013, a law was passed to regulate foreign investment in enterprises operating in strategic industries. Although this law was approved, it failed to attract investment.

Thus, in 2015, special exploration permits were issued in accordance with the Law on Minerals. At that time, a small amount of investment was received. In 2016, with the start of construction of the Oyu Tolgoi underground mine, investment increased.

Unfortunately, in 2017, it was prohibited to issue special permits for exploration. A decline in investment was observed. This decision cut the number of new exploration licenses in half. Based on this, we can say that the legal environment has the greatest impact on the investment environment. We believe that the industry has been affected by the passage of many unstable and abruptly promulgated laws.

The royalty on minerals used to be 5-8%, but now it has risen to 20%. With such  high royalty on minerals, it becomes unprofitable for companies to operate.

Changing the royalty rate on minerals has long been criticized. The issue is still unresolved. Companies are criticizing that it is also a consequence of the change in our legal environment?

Changes occur suddenly within the rules. The regulations on mineral royalties have been changed within the Law on Minerals. According to Government Decree No. 342 of 2019 approving the rules on the announcement of exchange and market price sources, Part 3.6 of Appendix 2 of Resolution No. 81 has been declared invalid and new rules on benchmark prices have been issued. The contract sales price of the commodity on the international market is no longer used to calculate royalties. Instead, the foreign stock exchange price is now used as the benchmark price, and royalties are imposed on that price.

The issue of benchmark price stirs a lot of controversy. A working group led by the Deputy Minister of Mining and Heavy Industry worked on it. Although 13% VAT is no longer charged, there has been no significant change in the royalty rate for minerals. For example, royalty on minerals was 5-8%, but has increased now to 20%. With such high royalty on minerals, it is not profitable for companies to do business. Unless this situation is urgently resolved and the parties come to an agreement and start moving forward, coal exports will not be able to grow to the desired level.

Many companies have stopped exporting because of high royalties on minerals. Despite the fact that borders are opening and export opportunities are growing, companies stop their work because it is becoming unprofitable to hire workers and do business. We talk about increasing exports and expanding the capacity of border points, but there are very few results. There is an opportunity to fix this.

The income from mining is expected to be quite high. If we can't find a solution to the problems that you mentioned, we won't be able to generate sufficient revenue, will we?

Today it is reported that about $3.5 billion came from the export of mining products. This money is not yet in the budget, it is still figures on paper. On the other hand, when we talk about expanding the capacity of border crossings, we focus only on the Gashuunsukhait border crossing.  However, the companies are also willing to work together and invest in the Shivee Khuren border check point. But there is  lack of support. It takes too long to submit an application to the ministry. The other side of the border is requesting us to expand the capacity of the Bulgan border crossing. Now we export 1.5-2  per year. We need to export 10. (Одоо бол манайх жилд 1.5-2-ыг экспортолж байгаа. Түүнийг 10 болгох боломжтой.) If this proposal is discussed by the National Border Council and supported by the Cabinet, it would benefit  us. We spend a lot of time on things that depend on us. Thus, there is an opportunity to increase exports over a short period of time.

When investors believe in us and invest, they face many challenges. How would you assess this situation as a professional?

Investors will come if they see that the business environment is comfortable for them. They, of course, spend the most on exploration. If a deposit is discovered and its use is deemed feasible, construction work begins. Then, the mining operation will transition to extraction and the closing stage: a total of four stages

The exploration stage is the riskiest. It requires a lot of time and money. As for us, we use the money of the project implementer to explore our own mineral resources. The construction phase of the project is one of the most challenging phases for our country. At the very least, the project team faces resistance from the local population. Moreover, when it comes to fundraising and construction work, there are many different permits that have to be obtained, one after the other. On average, a company must get about 280 permits.

There are two types of permits: a special permit and an ordinary permit. The others are confirmation documents. Feasibility study is a confirmation, not an approval. Environmental assessment is the same. But the companies are wasting a lot of time by treating them as permissions.

Could you please explain this in more detail?

In short, there are meetings of professional councils. The Ministry of the Environment works very slowly. They meet two to three months after the application is submitted. The same applies to unofficial national councils. The main problem facing gold miners is the National Council on Chemicals. In some cases, they meet only once every two years. Based on the conclusion of the council, the next approval is issued. This makes the construction phase of the project and the work plan very uncertain. However, the project implementer is trying to complete construction in a short time and then move on to mining. It seems to me that certain measures need to be taken.

As for our organization, we are implementing a "Code for Responsible Mining" to make it easier and simpler for foreign investors to enter and work in the minerals sector and to get information on the legal framework, permits and certification instructions in one place.

What information about the investment climate in other countries could you share with us.

Australia and Canada are still the most attractive countries for investors. They are rated the highest for reliability and stability of investment. In addition, countries similar to ours in area and natural resources have been rushing into the market lately. For example, Peru and Chile declared themselves mining countries. Their governments have developed plans to attract investment and are working with stakeholders by clearly defining their responsibilities and duties. In addition, these countries offer the best tax conditions. Saudi Arabia is going to exempt investors who mine critical minerals from paying royalties for the first five years. Chile just announced the same policy. You may remember that we also used this method. As a result, Centerra Gold came and invested in Mongolia. This company passed on a lot of mining culture and knowledge in Mongolia. So, we must investigate how we can compete with other nations.

In these difficult times, the industry is celebrating its 100th anniversary. There are many economic problems in the aftermath of the COVID pandemic. During this period, projects were idle for many months. We are talking about exports, but things are also very difficult with imports. Most gold projects are moving production to primary deposits. Chemicals used in the mining industry were transported directly through Erlian, but because of COVID, Erlian stopped transporting chemicals through its territory. Therefore, our companies are importing through Russia. The cost is 3 to 4 times higher. There are many real obstacles. Transportation logistics have become a pressing problem.

Geological information is the main factor that attracts foreign investors. What is the progress here?

It is said that exploration takes a long time, so it should start 10-20 years earlier than mining. If you look at the development of our mineral industry, the exploration sector currently lags behind the world by 10-20 years. This means that we are 10-20 years behind world trends in the development of the mining industry.

Today, the world is talking about critical minerals. These minerals are expected to be in great demand in 10 or 20 years. If we don't start exploration now, it means we'll fall behind the global trend again. We like to say that there is no other country in the world with such rich resources as Mongolia. In fact, we are far behind. Now, on our 100th anniversary, we need to strive for a common understanding with equal participation by all parties.

The revised Labor Law came into effect on January 1, 2022. What do you think about its implementation?

Of course, the project implementers must take all necessary measures in accordance with approved regulations and legal requirements. Previously, mining projects operated in 3 shifts, but due to changes in the 14/14 roster of the new law, they now work in 4 shifts. This led to a 15-20% increase in the total workforce. In reality, however, the staff that worked on small projects moved on to large projects. Therefore, this caused a shortage in the labor market. Heavy industry requires qualified personnel. Therefore, the costs of transportation, logistics, training and wage costs associated with the implementation of the law increased by 20-30%.

Also, companies with seasonal operations were not taken into account. So, this law has left out many issues. The law cannot be applied in the heavy industry sector and has caused many disputes.

We are not just talking about money here. We are discussing labor safety, which is related to human life and health. Project implementers, faced with a shortage of workers, hire locals, train them, and put them to work at short notice. This increases the risk of accidents. In addition, the Ministry of Labor and Social Protection, when approving the bill, left many industry issues unaddressed. Today, depending on the location of projects and existing infrastructure, it takes different amounts of time to get to the mining site. Some companies spend 2 days for arrival and departure, and some spend 4 days. According to the new law, an employee must work 10 or 12 days, because time spent on the road to work is considered working time. In addition, companies with seasonal activities were not taken into account. So, this law has left many questions unanswered. The law, which cannot be applied to the heavy industry sector, has caused much controversy.

                                                                                                                                                                                          Thank you for the interview