More investments are needed to unlock Mongolia’s ‘huge potential
Resource-rich Mongolia is positioning itself as an alternative to China in supplying minerals used in the renewable energy sector but needs help from foreign investors to develop the necessary mining infrastructure, its deputy prime minster says.
“We will be one of the main players [in critical minerals], I’m sure, but it will take time,” Amarsaikhan Sainbuyan told Nikkei Asia while in London to celebrate 60 years of U.K.-Mongolian diplomatic relations. “The Mongolian government is open for all kinds of investments and partnerships.”
Minerals such as copper, nickel, lithium and cobalt are crucial for manufacturing battery-powered electric vehicles, as are rare-earth metals that largely come from China.
The National Geological Office of Mongolia had registered reserves of 61.4 million tons of copper and 3.1 million tons of rare-earth minerals as of July 2022. Last year, Southern Mongolia’s Oyu Tolgoi mine — one of the world’s largest known copper reserves — received approval to begin underground operations.
Sainbuyan said unlocking Mongolia’s “huge potential” to supply minerals crucial for the green transition would require help from foreign investors in developing environmentally friendly and energy-efficient mining technology.
“A country like Germany, or European or Western producers, they are interested in securing the raw materials, especially in critical mineral and rare-elements metals,” as they seek to reduce their dependence on China, he said. “We have to capitalize” on this interest.
Several high-level German visits have been planned to discuss cooperation on such matters, he said. Germany, a leading vehicle maker, has been eyeing Mongolia’s potential for over a decade, co-founding the German-Mongolian Institute for Resources and Technology.
When German Chancellor Olaf Scholz welcomed Mongolian Prime Minister Oyun-Erdene Luvsannamsrai to Berlin last October, he said Mongolia would be “an important partner” for “many raw materials” in Germany’s diversification strategy but emphasized that concrete projects need to be identified.
Mining accounted for roughly a quarter of Mongolian GDP in 2021 and 29.6% of budget revenues, according to the Extractive Industries Transparency Initiative. The pandemic slowed activity, but now is the time to “pick up,” Sainbuyan said.
Corruption allegations over coal exports to China by a state-owned enterprise led to demonstrations in December. Investigations are ongoing and several people have been arrested.
Sainbuyan said the government is committed to fighting corruption. “This is the main concern of the government, to reduce poverty and stop corruption,” he said.
Wedged between Russia to the north and China to the south, landlocked Mongolia faces limitations on export routes for coal — a factor that could also affect its ability to ship strategic minerals. Despite strong interest for coking coal from the likes of India, South Korea, Japan and Europe, China will remain its main coal market because of “limited access,” Sainbuyan said.
The government has been building and upgrading infrastructure to better connect the country, mainly through industrial railway links to China and Russia.
“Unfortunately, because of the geographical location, we have limited access and exit — either we have to go to Russia or to China and export,” Sainbuyan said, Nikkei reports.
Erdene Resource Development Corp. reported results from recent drilling at the 100%-owned Dark Horse prospect
Erdene Resource Development Corp. reported results from recent drilling at the 100%-owned Dark Horse prospect, located approximately 2km north of its 100%-owned Bayan Khundii gold project in the Khundii minerals district in southwest Mongolia.
Highlights included intersecting high-grade, near-surface gold in Dark Horse Mane South; 39.6 g/t gold over 6 metres within 12 metres of 20.2 g/t gold (AAD-218); 34.4 g/t gold over 3 metres within 11 metres of 13.0 g/t gold (AAD-217); 13.7 g/t gold over 1 metre within 18.6 metres of 4.6 g/t gold (AAD-215); 11.0 g/t gold over 1 metre within 13 metres of 1.9 g/t gold (AAD-216).
Drilling intercepted deep, high-grade zone at Dark Horse Mane North; 11.2 g/t gold over 2 metres within 8 metres of 4.1 g/t gold (AAD-194). The deepest intersection along trend to date demonstrating potential at depth And confirmed potential of new East Mane target, 500 metres east of Dark Horse Mane.
“Recent drilling at our Dark Horse prospect successfully expanded high-grade mineralization along the 1.5-km Dark Horse Mane trend and produced multiple targets in adjacent areas,” said Peter Akerley, President and CEO. “Today’s results include the highest grade intervals to date at Dark Horse Mane North and also confirm the discovery of the new East Mane target.”
“Since discovering our Khundii Minerals District, we have delineated over nine kilometres of prospective gold bearing structures connecting our Bayan Khundii, Ulaan and Dark Horse deposits,” continued Mr. Akerley. “Plans are being finalized for the next phase of drilling along this trend and throughout the broader Khundii-Ulaan alteration system.”
The Q3 2022 Dark Horse drill program, completed in September 2022, was designed to confirm and expand gold mineralization in this prospect, located approximately 2km north of Erdene’s shovel-ready Bayan Khundii Gold Project. The 20 km2 Dark Horse prospect comprises the northern portion of the company’s Khundii mining and Ulaan exploration licenses. Drilling to date at Dark Horse has focused on the Dark Horse Mane (DHM) prospect, a 1.5-km north-south oriented, mineralized trend discovered in early 2021, that remains open along strike to the north and south and at depth.
Along this trend, Erdene has delineated southern and northern zones, referred to as Dark Horse Mane South and Dark Horse Mane North, respectively, and recently identified the East Mane prospect that was drill tested in Q3 2022.
The recently completed drilling program consisted of 29 holes (including one hole extension) totaling 2,417 metres. Exploration was focused on Dark Horse Mane South, Dark Horse Mane North as well as targets adjacent to the Dark Horse Mane mineralized trend identified through the reverse circulation (“RC”) drill program completed in mid-2022, geophysics and surfacing sampling.
Drilling at Dark Horse Mane South was comprised of seven holes totaling 543 metres, including five near surface, large diameter (PQ), diamond drill holes, totaling 82 metres (AAD-214 to AAD-218).
The PQ holes were drilled to confirm continuity of grade and geometry of shallow, very high-grade mineralization and to collect material for process test work. Multiple zones of high-grade mineralization were intersected within 15 metres of surface, with several one-metre intervals returning grades exceeding 10 g/t gold, including a one-metre interval grading 88.5 g/t gold (AAD-218; 6 to 7 metres), interpreted as supergene enrichment. Two holes at DHM South, AAD-191 and AAD-192, were designed to test extension of mineralization at depth.
In addition to the exploration at Dark Horse, Erdene drilled three step-out holes on the western and northern periphery of the main mineralized zone at Ulaan Southeast, expanding mineralization at this recent discovery.
Erdene is focused on the acquisition, exploration, and development of precious and base metals in underexplored and highly prospective Mongolia. The company has interests in three mining licenses and an exploration license in Southwest Mongolia, where exploration success has led to the discovery and definition of the Khundii Minerals District, Resource World writes.
Xanadu poised to benefit from Mongolian mining laws
Equities firm MST Access believes changes to the Government of Mongolia’s mining code has the potential to benefit foreign investment with revisions to the nation’s laws expected later this year.
One of the potential beneficiaries of the proposed changes is ASX-listed Xanadu Mines that is aiming to develop its Kharmagtai copper-gold project in Mongolia.
An independent assessment by MST Access — engaged by Xanadu — expects the government’s updated mining code to be competitive with other successful mining jurisdictions.
What happened to a decadelong mining boom
Located just steps from downtown London landmarks like Harrods department store and Hyde Park, The Knightsbridge Apartments, a luxury residential building in the eponymous upscale central London neighborhood, advertises itself as “private homes enjoying levels of service and facilities to rival any five-star hotel.”
Boasting white limestone floors, hardwood timber features, a pool, spa and a feng shui garden, two-bedroom flats sell for between $4 million and $8 million, according to London estate agents. Residents, meanwhile, like their privacy. Many of the residences are owned by corporations aimed at camouflaging the ultimate owner.
Keeping such secrets is getting harder, however, and earlier in October the Pandora Papers, a massive data leak on offshore finance published by the International Consortium of Investigative Journalists, revealed the existence of two flats purchased in 2006 by a company operating on behalf of Batbold Sukhbaatar, a former prime minister of Mongolia.
They appear to be the same flats in The Knightsbridge Apartments that were the subject of an injunction in November 2020 by a U.K. high court pending legal proceedings in Mongolia against Batbold. One flat was sold in an apparent arms-length transaction in 2017, while in 2018 the remaining flat was transferred to a corporation controlled by individuals. In granting the freezing injunction, the U.K. high court judge said he was “satisfied” that the evidence established that these individuals were “proxies for Mr. Batbold.”
A lawyer for Batbold, however, said the former prime minister bought the flats legally when he was a private businessman, before holding high office, and has since sold them. “Now he doesn’t own the property in question or, indeed, any assets in the U.K.,” he said. The legal proceedings in Mongolia, referenced by the U.K. high court ruling, were opened in October 2020 by the Metropolitan Prosecutor’s Office accusing Batbold of using proxies to siphon hundreds of millions of dollars from local mining companies.
Batbold’s lawyer said that there is no truth to the accusations and the cases against him are inspired by political enemies in Mongolia. Furthermore, he said, Mongolia’s prosecutor does not have the authority to bring the case on behalf of the government agencies and entities named in the suit. “Mr. Batbold was an object of coordinated media and legal attacks orchestrated by his political opponent through shady figures,” he said.
While Mongolian politicians agree that the accusations against Batbold may be politically motivated, they also agree that the case raises questions about what has become of billions of dollars in mineral wealth generated over the past decade and a half by a mining boom, as Australian, Canadian and Chinese companies have moved in to develop lucrative deposits of coal, silver, gold and copper.
The Pandora Papers made headlines throughout Mongolia, with the revelations going viral on social media. The country’s two major political parties, the ruling Mongolian People’s Party and the opposing Democratic Party, however, have thus far remained silent on the issue.
According to a report by the World Bank, Mongolia has produced $28 billion worth of mineral outputs since 2004. Of this, taxes and royalties amounted to nearly $9 billion in the past 15 years, while the government has borrowed $8.7 billion, mostly by leveraging its mineral revenue. Of that amount, as of 2019, $200 million remained saved as deposits in the Stabilization Fund and the Future Heritage Fund.
“Mongolia has not only consumed almost all its mineral outputs, but has also borrowed heavily against them, bequeathing negative wealth to the next generation,” the report says. “Mongolia risks resembling a ‘resource curse’ economy in a few years.”
The term “resource curse” was first used by economist Richard Auty to describe how an abundance of natural resources can lead to underdevelopment. It is an all-too- familiar story: A country strikes it rich, but the new avalanche of wealth poisons the political process, corrupts its institutions, distorts the economy and even creates pressures for secession.
For every Botswana, which after the discovery of diamonds has one of Africa’s highest per capita incomes, or Qatar, where the discovery of gas in 1995 has helped to boost gross domestic product to $175 billion from $8 billion, there is a Nigeria or a Sierra Leone, where mineral reserves have been directly linked to dysfunction and even conflict.
Mongolia’s mining boom was the lucky — or unlucky — result of events far beyond its borders. In 2010, Australia’s coal mines suffered their worst floods in decades, halting coal exports to China. Chinese iron ore smelters began to increase coal imports from their northern neighbor. In 2011, Mongolia’s GDP surged 17% in 12 months, primarily due to a coal deposit at Tavan Tolgoi, located 240 km from the Chinese border, and a nearby copper deposit at Oyu Tolgoi.
Today, mining accounts for nearly one-quarter of GDP, and mineral exports represent 26% of fiscal revenue, up from 10% in the early 2000s. Surveys have revealed deposits of coal, copper, gold, rare-earth minerals and uranium worth an estimated $2.75 trillion. For a country with a population of 3.3 million, that is enough to make everyone a near millionaire.
But due to unequal access to opportunities, the boom-bust cycle, and corruption, most Mongolians have been unable to benefit. The country’s poverty rate of 28% and wealth gap remain unchanged from early 2012.
Paul Collier, who studies resource economics at Oxford University’s Blavatnik School of Government, says that governance is the key to avoiding the “resource curse.” Countries that already have strong governance in place when they strike it rich tend to use any windfall wisely, such as what happened with Norway after the discovery of offshore oil. But an influx of resource wealth can be particularly toxic for countries without strong established governance, like Nigeria.
“The real tragedy, however, is countries where the government looks to be strong but can’t handle the stress of all the money,” Collier said. “This is a real tragedy because it can bring an otherwise healthy country down.”
Mongolians are acutely aware that their resource patrimony is in the process of being squandered. What to do about it remains elusive, and the anger has been manipulated into an effective political instrument by some of the most egregious offenders.
The country’s new president, Khurelsukh Ukhnaa, was elected in June after he ran on the slogan, “Mongolia is the owner of its resources,” and showered pensioners with cash from the state budget that he insisted was not an attempt to buy votes.
Beginning last year, when he was prime minister, Khurelsukh paid off 695 billion tugrik ($244 million) worth of pensioners’ debts by selling bonds backed by state-owned silver deposits. Then, a month before the election, the cabinet, under the control of Khurelsukh’s party, transferred 216 billion tugrik to debt-free pensioners. Again the money came from bonds backed by state silver deposits.
Patronage politics have become routine in Mongolia, where elections have turned into cash giveaways and the country has very little to show for the fire hose of wealth that has been largely consumed by political handouts and corruption.
Pensioners, as aptly demonstrated by the 2021 election, are the key to political power. Of Mongolia’s retirees, 75% vote, compared to 50% of 18- to 25-year-olds. In June, Khurelsukh won 68% of the vote.
“The political parties don’t need smart voters who are equipped with critical thinking,” said Gerelt-Od Erdenebileg, a political scientist at Mongolian National University of Education. “They need poor voters that are easily manipulated [with cash] when they need to be.”
Andrei Mikhnev, country manager at the World Bank, cites the bank’s estimate that for every dollar of mineral wealth that has been generated during the past 20 years, Mongolia has consumed 99 cents and saved a mere 1 cent.
Buying elections wholesale began in 2008, when the MPP made a campaign promise to pay $700 to each citizen from mining revenues. The following day, its opponents, the Democratic Party, pledged $1,000. The amount would have totaled 60% of the country’s entire GDP at the time.
The MPP won and as a result in 2011 the government borrowed $350 million from the Aluminum Corp. of China, better known as Chalco, with the aim of fulfilling its election promise, and repaying the loan with coal. But when the world price of coal subsequently fell by nearly 50%, Erdenes Tavan Tolgoi, a state-owned enterprise that owns the coal deposit, struggled to repay the loan, taking six years to make good on it.
“Mongolia didn’t spend mining revenue that was already gained,” said Dorjdari Namkhaijantsan, country coordinator of the advocacy group Natural Resource Governance Institute. “The country borrowed money based on the belief that it would gain that revenue from mining in the future.”
The spending got so outrageous that in 2012, parliament amended the election law, prohibiting political parties from directly paying voters and promising cash. But there was a loophole: The law only prohibited promising cash, it did not prohibit promises to repay loans or offer dividends from mining companies. In 2017, presidential election winner Battulga Khaltmaa, whose term expired in June 2021, vowed to pay off all citizens’ debts with revenues from the Tavan Tolgoi coal mine.
This was followed three years later by Khurelsukh’s bid to pay pensioners’ debts when he was prime minister. In addition to winning the presidency this year, the pledge aided Khurelsukh and his Mongolian People’s Party to a landslide parliamentary victory in 2020, winning 62 of the body’s 76 seats.
A month before that election, Erdenes Tavan Tolgoi paid 70,000 to 100,000 tugrik to each citizen, calling it a “dividend.” The payments have left the company unable to make basic investments, and it has had to borrow to complete an unfinished railway line, power plant and coal washing plant.
Off the grid
While Mongolia’s GDP has increased at a rapid clip — averaging a 6.5% increase per year between 2010 and 2020, according to World Bank statistics — most residents do not feel like they are experiencing an economic boom. Instead, they are struggling to keep up with an endless cycle of price increases.
“In Ulaanbaatar, you can’t live unless you have a side income from your full-time job,” said Sansartuya Bazarsad, a mother of two and a botanist at a National Park. She and her husband have a monthly salary of 1.3 million tugrik. Thanks to their herder parents, they do not have to worry about meat or wood to burn.
Such rapid economic growth initially led to a sharp decline in poverty from 38.7% in 2010 to 27.4% in 2012, though the rate remains at 28.4%, according to the latest survey by the World Bank, in 2018.
In the past 10 years, lifestyles in the capital have greatly changed. Coffee shops, Pilates studios, shopping malls, high-end international hotels and specialty shops targeting the environmentally conscious and vegans have sprung up.
The Bazarsads moved to Ulaanbaatar nine years ago and bought their house and land for roughly $16,000 in the ger district, where residents live in traditional yurts surrounded by wooden fences, and where homes are not connected to the city’s central heating and sewer systems. Residents get water from wells and burn wood and coal to heat their homes. Some 1.5 million people in Mongolia, roughly half the population, still live in these tents.
Her family spends $385 of their monthly earnings repaying loans, leaving $70 for necessities at the end of the month. Saruultuya, their daughter, was born with a cardiac condition, so they receive 190,000 tugrik a month for her treatment. Sansartuya also sells Russian beauty products on the side.
With a total monthly income of 1.6 million tugrik, the family is in the top 25% in terms of household income.
Mongolians characterize their middle class as having a mortgage and a 10-year-old secondhand Prius from Japan but no savings. If a family member is diagnosed with cancer or a similarly serious disease, they say they must sell everything to pay for medical care. According to national statistics from 2018, only 23.7% of the population had a savings account.
“I write down every expense in a notebook to make our finances wise,” Sansartuya said. She and her husband bought a 10-year-old Prius a few years back but needed to use the car as collateral for a loan to pay for their daughter’s cardiac surgery.
The only thing Sansartuya wishes is that banks could give her lower interest rates. “Almost 40% of my loan payments only cover interest,” she said. “It would be such a big support for us if the credit interest rate were to drop.”
Jargal Lodoi, 51, is a herder who has moved from the steppes to the outskirts of Ulaanbaatar. The resource boom has raised the costs of traditional herding, which used to be the occupation of the majority of Mongolians. He is also a climate-change migrant, saying the pastureland his goats used to flourish on has dried up. He used to have almost 1,000 goats but last fall sold 550 as meat. He now keeps only 300.
Cashmere is Mongolia’s third-largest export, after copper and gold. Its 30 million goats in 2020 produced 215 tons of dehaired cashmere, and the country provides 40% of the world’s luxury cashmere. The industry employs over 100,000 people, far more than the mining industry.
Jargal moved near the city because there is no more grass for animals to feed on in his native Bayan-Undur, 200 km from Ulaanbaatar. Jargal and his wife, Delgermaa, have two sons, both of whom live in Ulaanbaatar. They bought a two-bedroom apartment in the capital for their sons, using their cashmere revenue.
“Thanks to cashmere, we are able to live a decent life,” Jargal said. “However, it is better for us herders to have fewer but more profitable animals. But I have no idea where to find such extremely productive animals. I have no such knowledge in my veterinary livestock in Bayan-Undur.”
Chronicle of a bust foretold
What is remarkable is how aware Mongolia’s leaders were of the literature on avoiding the resource curse and how anxious they were not to repeat the past mistakes of previous resource-cursed countries.
“Mongolia cannot be Qatar but it will be Niger if we fail to implement vice revenue management,” current Prime Minister Oyun-Erdene Luvsannamsrai said in 2015. “At this moment Mongolia seems to be Niger.”
In the early 2010s, the government established a revenue management strategy and national development plans, along with a budget stability fund meant to smooth budget volatility due to seesawing commodity prices. In 2011 the government started to save some of the revenue in stabilization and heritage funds.
However, funds and plans were not enforced, and the budget continued to be used mainly for politically popular spending. The plans have largely failed. “Although it is natural to see some volatility in resource-dependent countries, macroeconomic volatility in Mongolia is higher compared to other commodity exporters,” World Bank country manager Mikhnev told Nikkei Asia.
The root of the problem may not be economic but rather political. Difficult decisions come up against opposition from an entrenched political class that has done uniquely well during the boom, and few Mongolian politicians are untouched by some sort of scandal.
The best-known is the case against Batbold. Mongolia’s Metropolitan Prosecutor’s Office, along with two state companies and a government agency, launched a civil case in October 2020 that accuses the former prime minister of using several offshore shell companies to siphon hundreds of million dollars from mining operations. The Mongolian government, according to a filing in New York State Supreme Court last November, sought “to recover losses suffered as a result of illegal and fraudulent acts in connection with two of Mongolia’s most prized natural resources, the Erdenet copper mine and the Oyu Tolgoi copper-gold mine.” The latter is 66% owned by Turquoise Hill Resources (formerly Ivanhoe Mines), whose largest investor currently is Anglo-Australian mining giant Rio Tinto.
Using a team of international lawyers, the Mongolian prosecutors have secured injunctions from courts in England, Hong Kong, Jersey and Singapore against Batbold and people named as his proxies in court documents for assets in excess of $70 million, according to the claimant’s attorneys. In addition, they sought an injunction in a New York State Supreme Court filing last November, withdrawing it in January after the defendants agreed not to sell or transfer two condominiums without notifying the plaintiffs.
In written comments sent to Nikkei, the lawyer representing Batbold insisted the accusations were “groundless and false,” part of an organized operation designed to “damage the reputation of Mongolian People’s Party, its leadership, and especially against S.Batbold.”
The lawyer said some state companies named as claimants in the original civil suit have denied they gave consent to their involvement in the case, adding that Metropolitan Prosecutor’s Office “violated the law and exceeded his authority” in launching the suit. A spokesperson for the prosecutor’s office contacted on Oct 12 said the case “is still under investigation” but declined to give further details.
Batbold’s representative added that the New York court declined to freeze Batbold’s assets in the U.S., implying the case lacked sufficient merit. Lawyers working for the Mongolian prosecutor’s office said that the agreement by defendants not to sell or transfer the property pending resolution of the case in Mongolian courts made an injunction unnecessary.
Opposition politicians say the case against Batbold may indeed be politically inspired but that the information the case has brought to light offers a sobering view of Mongolia’s political class. Munkhdul Badral, secretary of the National Labor Party, a third force in parliament, asserted that the legal efforts against Batbold were championed by Battulga Khaltmaa, the former president and Batbold’s political rival. “I have no doubt that Mongolian politicians use tax havens and proxies to hide their illicit assets abroad,” Munkhdul said. “But this might be the first instance where the Mongolian government has used foreign experts and courts to pursue such a case.
“I doubt, though, that the current government and ruling party has the enthusiasm to push through this case” as Battulga is now out of office, he said.
Said Rio Tinto: “We operate in line with local and international laws and regulations, and our values. There is no claim or court case in New York in relation to Oyu Tolgoi’s Investment Agreement or Underground Development Plan (UDP). Neither Rio Tinto nor Oyu Tolgoi LLC have been named as parties in the case and these claims do not allege any improper conduct by Rio Tinto or Oyu Tolgoi LLC.”
Mongolian lawmakers in 2018 sought to close some loopholes for corruption by establishing a beneficial ownership disclosure law. It requires mining companies to register their beneficial owners with the National Registration Authority and the National Intelligence Authority.
However, the law has been criticized for lacking teeth. “There is no punishment if companies do not register their beneficial owner,” Erdenechimeg Dashdorj, extractive sector program manager of Open Society Forum in Ulaanbaatar, told Nikkei. She said that since approval in 2018, only 37% of mining companies have registered their beneficial owners. “The law enforcement still has room for improvement,” she added.
Taking action against abuses has met with political pushback from established interests in government. For example, when then-Prime Minister Altankhuyag Norov resolved in 2013 to investigate cost overruns at Oyu Tolgoi, his own party’s members in parliament suddenly voted to dismiss him.
“Altankhuyag’s cabinet was an obstacle for senior officials whose interests were to benefit from several mining deals,” said Temuujin Khishigdemberel, a former parliament member who was minister of justice in Altankhuyag’s cabinet. “The cabinet didn’t make decisions as the officials asked. I can’t deny that there was a corrupt and powerful system that emerged from mining money, and that it is powerful enough to change the fate of the entire government,” Temuujin said.
The next prime minister, Saikhanbileg Chimed, forgave the cost overrun and signed an additional contract financing the second stage of the project, which is an underground mining construction development for $5.3 billion.
“The Oyu Tolgoi Underground Development and Financing Plan, signed in 2015, contained strict clauses requiring the Mongolian government to accept the excess costs incurred in the initial open-pit mine. The government also had to accept that there were no outstanding issues related to these costs, effectively shutting down any discussions about accountability. Sadly, there was no language in the agreement regarding the prevention of further cost overruns, or how to deal with them if they did occur,” said Bayasgalan Enkhbaatar, a member of the board of directors at Oyu Tolgoi since November 2020. Ms. Bayasgalan represents the government’s interests in the Oyu Tolgoi project, of which it owns 34%.
That episode was followed by another, ongoing, confrontation with Rio Tinto. Last December, the company notified the government that the underground mine development project will overshoot original cost estimates by $1.5 billion and be delayed by two years.
The cost overruns represent substantial damage to the government’s interest in the project. Bayasgalan cited calculations showing that the government cannot expect to start receiving dividends from its 34% ownership of the mine in 2032 as originally expected. Rather, due to the delay and the jump in costs, the government is concerned it may not receive any dividend before the mine’s reserves are depleted.
Rio Tinto has solely financed the construction and operation of the mine, and has provided Mongolia with a loan to finance its 34% ownership of the mine. The loan specifies that it needs to be repaid in full before Mongolia can receive any dividend from the Oyu Tolgoi mine. The annual interest rate of the loan is Libor plus 6.5%.
Seven years after Oyu Tolgoi started production, the balance of the outstanding loan payment showed that Mongolia owes $2.2 billion to Rio. Any increase in fixed costs will make it harder for Mongolia to receive any dividends.
Rio argues that the Oyu Tolgoi project pays annually around $300 million in taxes to the Mongolian government from its $1 billion sales income.
In April 2018, Mongolia’s Independent Authority Against Corruption arrested two former prime ministers as part of an investigation into suspected misuse of power related to negotiations over the Oyu Tolgoi mine. Bayar Sanj, prime minister when the original 2009 investment deal was signed, and Saikhanbileg Chimed, prime minister when the expansion agreement was inked in 2015, were both detained. Saikhanbileg was later released from detention for medical reasons but flew to the U.S., where he remains. Bayar was sentenced in 2020 to five years in prison.
Said Rio Tinto, “As with all of the Oyu Tolgoi agreements, we negotiated the UDP in good faith and always acted in accordance with Mongolian and international laws and standards.”
A new dawn?
The scandals have emboldened a new generation of Mongolian politicians who think the situation can be salvaged by getting rid of the previous generation.
Bulgantuya Khurelbaatar, former vice finance minister before she was elected to parliament in 2020, is the face of this bright young generation that says it is fed up with the patronage politics of previous administrations. With her reputation as a corruption fighter, she says Mongolia needs better regulations and better laws to impose transparency, budget discipline and improve the governance of state-owned companies.
“We must not repeat past mistakes, such as increasing spending instead of being optimistic about the next [commodity] supercycle. We also need much more public accountability. I want to encourage people to at least monitor the policies and budgets of the sector they work in” said Bulgantuya.
“We have learned a lot from the growth and depreciation of the mining sector over the years, but we are also aware of the risks. If we get involved in too many giant mining projects, like Erdenes Tavan Tolgoi, and do not learn lessons from the early days, such as the importance of reducing our dependence on mining, we will face much more hardship than we already have,” she added.
Bulgantuya explained that the Future Heritage Fund, established in 2017, was approved to ensure some savings for future generations. The laws surrounding the fund prohibit any withdrawals, apart from management fees, until 2030. For Bulgantuya’s generation, the fund acts as a small but significant symbol of hope for the future.
Coal trade issue of China and Australia hurting Mongolia’s environment
Last year China turned its back on Australian coal; in October, customs officials in China began rejecting shipments of coking coal from Australia. Beijing claimed the turnbacks were due to “environmental quality” concerns, but the act was largely viewed within the context of the ongoing diplomatic spat between the countries.
It proved to be bad news for both economies. Overnight, Australian coal operators lost access to one of their most lucrative export markets, worth $10.4 billion the previous year. In the months that followed, soaring electricity prices left much of China’s southeast without heating or electricity.
While the decision hurt both Australia and China, many third parties benefited, as they stepped in to plug China’s coal shortfall. Countries as far afield as Colombia and South Africa scrambled to send coal to the mainland; more established partners, including Indonesia, Russia, Canada, and the United States, also upped existing shipments dramatically. But with China’s northern steelmaking hubs crying out for coking coal, Beijing couldn’t afford to wait a month or more for shipments to round the Indian Ocean — and so, it turned to Mongolia as a band-aid solution to short-term demand.
For reasons that remain unclear, this “band-aid solution” has continued well into 2021. In March, Mongolian coal exports to China were up by 4,270.5% compared to the previous year. It’s a volte-face from 2019, when Mongolian government policy was squarely aimed at breaking the country’s addiction to coal. With as many as 1,000 trucks heading for China on a daily basis, it seems the Mongolian administration is now committed to the opposite.
Since China began freezing out Australian supplies, the coal business has boomed. The Mongolia Energy Corporation recently announced last month that it has doubled its profits year-on-year, and the Mongolian Mining Corporation similarly announced it doubled its coal export volume across the second half of 2020. Investor confidence was so high that even an Australian-owned venture stood to reap the rewards — Aspire Mining Ltd, which mines entirely within Mongolia, shot up twofold on the Australian Stock Exchange (ASX).
Few in Mongolia, though, are celebrating this development. The nation’s capital, Ulaanbaatar, consistently ranks atop lists of the world’s most polluted cities, and since last October, coal mines perched on the city’s fringes have been kicking up much more chemical and dust pollution than usual.
“To give you an idea of the scale of the issue,” says Ankhbayar Ganbold, country director (Mongolia) at the Nature Conservancy, “Baganuur Coal Mine, which sits within the city limits, produced 4,600 tons of CO2 in December 2019. Across the same month last year, it churned out as much as 18,400 tonnes.”
“The other coal mine within Ulaanbaatar’s nine düüregs, or districts, is Nalaikh — which, at least officially, ceased operations in the 1990s. Since early December, it’s been up and running again. In fact, it’s now the primary local contributor of CO2 emissions and particulate matter (PM) 2.5.”
In the summertime, air quality in Ulaanbaatar often hovers around levels deemed safe, per WHO guidelines. But in the winter, when temperatures regularly drop below minus-40°C, it averages a pollution level 27 times worse than the safety benchmark. Little wonder then that, in October, air quality in Ulaanbaatar again ranked as the worst in the world.
The competition for the list, in 2020, wasn’t all that stiff — lockdowns and reduced transport activity due to COVID-19 saw skies clear over some of the world’s most polluted cities. But “this just hasn’t been the case for Ulaanbaatar,” says Dmitri Sokov, head of international development at the Mongolia Nature and Environment Consortium. “In fact, thanks to the increase in coal exports, it’s been an atypically poor year in terms of air quality — PM 2.5 levels were up 132% across the winter period.”
Much like Beijing, Ulaanbaatar sits at the bottom of a valley, which traps smog beneath a blanket of warm air. And there’s plenty of smog around to get trapped, since residents of the city’s “ger” districts, who live in yurt tents without access to electricity, have traditionally had to burn sacks of cheap coal in order to cook and stay warm. On average, a ger household burns three tons of raw coal per year.
Hugalu Altan, a textile worker who lives in the western Tolgoit district, recently told SupChina that the past winter was noticeably worse than those in previous years. “It’s horrible living here, particularly this year,” he said. “On cold mornings, I watch the gray smoke roll out toward the hills. That’s why many of the young people like to move away…but this year, they’re stuck.”
Local politicians have been promising for years to fix the issue. They claim that a ban on raw coal — and subsidy on refined coal briquettes — saw a 60% reduction in pollution in 2019. But those gains haven’t carried over to 2021, according to Hugalu. “No one could afford to buy even the cheap [illegal] coal this year,” he said, amid city-wide lockdowns. “So instead they burnt trash.”
In a sense, he’s luckier than others. Living and working on the city’s western fringes, Hugalu is tucked far away from the coal-fired electric plants which ring the east. Many of these, says Sokov, have also benefited from excess coal destined for China. “It’s been a dramatic increase, so it’s natural that there is going to be some degree of internal transfer. I think this is, in part, why we are seeing levels of pollution this year that don’t quite tally with the picture from the last two.”
“It’s a three-pronged problem,” he says, “but the government focuses only on restricting domestic usage, while letting industry run rampant.”
Mongolian Government threatens to terminate investment deal for Oyu Tolgoi mine
Mongolia’s Oyu Tolgoi the world’s largest copper-gold-silver mine is expected to produce 480,000 tonnes of copper per year on average from 2028 to 2036 from the open pit and underground, compared with 146,300 tonnes of copper per year in 2019 from the open pit.
Recently, the Mongolian government has threatened to declare the 2009 Oyu Tolgoi mine investment agreement void if an international tax arbitration is not dismissed. The dispute relates to taxes paid by Oyu Tolgoi LLC, Rio Tinto’s unit, between 2013 and 2015.
The miner says Oyu Tolgoi received a tax assessment for about $155 million on January 16, 2018, from the local tax authority, relating to an audit on taxes already imposed and paid by the unit between 2013 and 2015.
Oyu Tolgoi was already at the center of a protracted dispute between Turquoise and its top shareholder, Rio Tinto, over funding for the underground expansion of the mine. Rio claims Oyu Tolgoi paid $4.8 million in January 2018 to settle the unpaid taxes, fines and penalties for items it accepted. The government has now filed its statement of defence together with a counterclaim.
“The company understands that the principal thrust of the Mongolian government claim is to seek the rejection of Oyu Tolgoi’s tax claims in their entirety,” said Turquoise Hill, the Rio-controlled company that operates the mine.
Although it is not a party to that arbitration, Turquoise Hill said on Monday that it understood that the defence and counterclaim included a request that the arbitral tribunal add both the company and a member of the Rio Tinto Group as parties to the arbitration.
Turquoise Hill said it would oppose the request that it be added to the tax arbitration and that it would defend itself against the counterclaim. The capital Ulaanbaatar also threatened in early January to halt the expansion of the mine, arguing that delays and higher-than-expected costs had eroded the economic benefits the country had hoped for. Turquoise Hill resumed shipments to China last month after the Canadian miner declared force majeure on some Chinese contracts last month due to covid-19-led curbs.
Xanadu to raise money for copper-gold exploration in Mongolia
In order to fund exploration work at the Kharmagtai copper/gold project, in Mongolia, copper explorer Xanadu Mines will raise A$10.2-million in a share placement. The company has received firm commitments for the placement of 163.8-million shares, at a price of 6.2c each to professional and sophisticated investors under its existing placement capacity.
The issue price represents a 15.1% discount to Xanadu’s last closing price, and a 13.2% discount to its five-day volume weighted average share price. The placement is scheduled to settle on April 30.
“We are pleased with the strong support received from both existing shareholders and new institutional investors,” said Xanadu nonexecutive chairperson Colin Moorhead.
“This placement continues to strengthen our share register and fully funds Xanadu to execute its exploration strategy at Kharmagtai. Investors can look forward to a period of strong news flow as we embark on an aggressive drilling programme to define the higher-grade, gold-rich bornite zones at depth and unlock the next stage of development in this globally significant copper/gold project.”
Xanadu said that proceeds from the placement, along with the company’s existing cash resource, would be applied towards the Phase 2 exploration programme at Kharmagtai, targeting higher-grade, bornite-rich zones at depth, as well as for general working capital purposes.
Rio Tinto signed financing deal with Turquoise for Mongolia’s Oyu Tolgoi expansion project
Claimed to be the world’s largest new copper-gold mines, the Oyu Tolgoi mine is located in Mongolia’s South Gobi region, approximately 550km south of Ulaanbaatar and 80km north of the Mongolia-China border.
Rio Tinto has signed an agreement with Turquoise Hill Resources (TRQ) on an updated financing plan for the $2.3bn underground development of the Oyu Tolgoi copper-gold mine in Mongolia. Under the binding heads of agreement (HoA), Rio and Turquoise Hill agreed to restructure up to $1.4bn of debt payments with lenders. It will also look to raise up to $500m of senior supplemental debt (SSD) for the project from selected international financial institutions under existing financing arrangements.
To address potential shortfalls from the re-profiling and additional SSD, Rio Tinto plans to provide up to $750m through a co-lending facility.
Rio Tinto Copper CEO Bold Baatar said: “This agreement and alignment with TRQ represents a major milestone in the continued development of Oyu Tolgoi, which is expected to become one of the world’s largest copper mines and a significant contributor to the Mongolian economy for years to come.
“Commencing the re-profiling whilst concurrently listening, engaging and resolving the concerns of the Government of Mongolia are critical steps to maintaining momentum on the timely delivery of the Oyu Tolgoi underground project.”
Through Erdenes Oyu Tolgoi, the Mongolian Government has a 34% stake in the Oyu Tolgoi copper-gold mine.
Rio Tinto in Mongolia faces class action suit over Oyu Tolgoi copper project
Rio Tinto operates the mine via its Canadian subsidiary Turquoise Hill, which owns 66% of Oyu Tolgoi. The rest of the mine has been owned by the Mongolian government since the project was launched in 2009.
The largest minority shareholder in Rio Tinto’s Mongolian copper project Oyu Tolgoi has filed a class action lawsuit in New York, claiming the company concealed massive cost overruns and delays. Rio Tinto said that the lawsuit is without merit.
Activist investor Pentwater Capital Management LP is Turquoise Hill’s largest shareholder after Rio with a 9% stake. In its class action complaint filed in the United States District Court for the Southern District of New York on March 16, Pentwater said that senior executives of Rio Tinto and Turquoise Hill “repeatedly assured investors that progress on that development was on plan and on budget and that the deadline for achieving sustainable first production when the mine would begin generating cash flows remained intact.”
“In reality… the underground expansion project was many months behind schedule and hundreds of millions of dollars over budget,” it said in the 160-page filing.
“Ultimately, Turquoise Hill investors incurred massive losses as Turquoise Hill shares lost well over 70% of their value when the true extent of the delays and cost overruns at Oyu Tolgoi came to light,” it added.
Turquoise Hill was not immediately available for comment. The lawsuit is seeking compensation for losses incurred by investors in Turquoise Hill.
The underground mine expansion has been severely delayed by a dispute over funding as the Mongolian government seeks a bigger portion of the profits, even as costs have ballooned due to difficult geology.
Rio in 2019 announced a cost overrun at the project of up to $1.9-billion, expecting total capital expenditure to be in a range of $6.5-billion to $7.2-billion. A year later, it said it would raise up to $500-million through additional lending to develop the mine, which is now expected to start production in 2022.
Unique mining opportunities in Mongolia
Mongolia’s mineral wealth — primarily coal, copper and gold — has been valued between US$1 trillion and US$3 trillion. The mining industry employs 3.6 percent of the country’s population. At the peak of the country’s mining boom, Mongolia’s total exports surpassed US$1.84 billion. Mongolia is a resource-rich country that is at a turning point in its history. Having adapted to a democratic system of government and a market economy, the country’s wealth of mineral resources is now paving the way for rapid economic and social development. The nation has shifted away from an economy rooted in agriculture and herding and is turning instead to a fast-growing mining industry, offering unique opportunities for exploration and foreign investment. Mongolia has been called the last frontier for large-scale mining projects. The unprecedented success of mines such as Oyu Tolgoi, a tier one producer and one of the largest copper-gold deposits in the world, has set the stage for a flourishing precious metals sector.
Supportive trade agreements and international partnerships
In recent years, a number of strides have been made on behalf of the Mongolian government to protect and promote the country’s emerging mining sector. For instance, the China-Mongolia-Russia Economic Corridor (CMREC) is designed to facilitate trade between Mongolia and its neighbours while fast-tracking infrastructure connectivity and regional economic integration. Once completed, the CMREC will position Mongolia as the essential link in newly reinforced trade networks between the East and West, cutting down freight times while introducing new export routes. The Mongolian government itself has invested in railway expansion and the construction of more than 6,000 kilometers of roads.
According to the 2020 World Investment Report published by the United Nations Conference on Trade and Development, Mongolia received more than US$2.4 billion of foreign direct investment in 2019, a marked increase from the year before. Increased attention from foreign investors can be largely attributed to the introduction of foreign policies that have strengthened international relations and bolstered the Mongolian economy.
In 2019, Mongolia’s Third Neighbour Trade Act authorized the duty-free treatment of certain imports from Mongolia to the US, making the US Mongolia’s fifth strategic partner. The Mongolia-US economic partnership agreement aims to increase its workforce and diversify the country’s emerging mining industry. Likewise, the Canada-Mongolia Investment Agreement finalized in 2016 provides greater certainty for Canadian investors. Between 1990 and 2012, Canada was responsible for as much as 8 percent of Mongolia’s total investment inflows. Over the past 25 years, Mongolia has tripled its 1991 GDP per capita. Between 2017 and 2019, the country’s GDP has grown an average of about 6 percent, but the COVID-19 pandemic led to considerable economic downturn as the country took strict measures to protect the populace. However, experts believe that the country’s baseline economic outlook remains favorable, driven by rising demand for coal and copper from China and ramped-up mining operations. Despite the challenges of 2020, the country is expected to bounce back economically given its wealth of untapped natural resources. Mongolia has established a Sovereign Wealth Fund (SWF) as part of an overall strategy to manage growing revenues from mining exports. The country plans to invest more than US$392 million into a Future Heritage Fund every year.
Tapping into Mongolia’s mining boom
For nearly seven decades, Mongolia’s economy was driven by agriculture. While industrial mining did exist, it wasn’t nearly as prolific or profitable as it is today. In the 1990s, the country transitioned from a Soviet satellite to a free-market democracy, allowing foreign investors to get involved. Following the loss of support from the Soviet Union, Mongolia enacted the Minerals Law in 1997, attracting private investment. In 2002, the Mongolian Ministry of Mining issued nearly 3,000 exploration licenses that spanned almost 30 percent of the country’s territory. By 2011, Mongolia was the fastest-growing economy on the planet. The mining boom brought new wealth to the country, paving the way for economic and social development.
Perhaps the best indicator of Mongolia’s extraordinary potential as an underexplored mining jurisdiction is Oyu Tolgoi, one of the world’s largest known copper and gold deposits. Located in the South Gobi region of Mongolia, Oyu Tolgoi is one of the most modern and sustainable large-scale mining operations in the world. The mine, which is jointly owned by the government of Mongolia, Turquoise Hill Resources and Rio Tinto, began operations in 2011. Its current infrastructure will allow the mine to operate for decades to come. In spite of tensions in the background on moving forward with this extraordinary project, the recent news of renewed negotiations and commitment shows how the government prioritizes Mongolia’s growth as a flourishing mining jurisdiction is to its government.
Exploration companies have taken notice of Mongolia’s vast mineral wealth, much of which remains untouched by modern exploration and extraction methods. Mongolia’s mining potential can be captured by its 6,000 mineral deposits, with more than 80 documented types of minerals, including copper, gold, uranium, coal and many others. Companies like Steppe Gold, Kincora Copper and Erdene Resource Development have turned toward Mongolia’s ample reserves as the focus of their next district-scale projects. Steppe Gold was the first precious metals development company to participate in the Mongolian government’s Gold-2 Program, a long-term initiative to ensure the sustainable development of the country’s gold sector. The program involves the participation and support of a number of government agencies, including the Ministry of Mining and Heavy Industry, the Ministry of Finance, the Ministry of Environment and Tourism as well as the Central Bank of Mongolia. Steppe has two gold projects: Uudam Khundii and Altan Tsaagan Ovoo (ATO). As of June 2020, Steppe Gold has produced and sold more than 15,300 ounces of gold and nearly 5,000 ounces of silver, generating US$25.3 million. In February 2021, the company’s 100 percent owned ATO gold mine doubled its resource estimate to 2.45 million ounces of gold equivalent.
Mongolia is solidifying its position as a hub of international trade and investment. The recent appointment of Prime Minister Oyun-Erdene reinforces that position, as he has a history of moving forward with initiatives that have modernized the government and made it more transparent. The country’s underexplored yet mineral-rich landscape offers a wealth of opportunities for large-scale exploration, development and sustainable production. These opportunities are further incentivized by a mining-friendly government, recent trade agreements and other supportive policies.