Mining minister discusses the economics of mineral resources “ Starting next month, the country’s economy will tend to grow “

On August 9, Mining Minister D. Gankhuyag met with journalists, exchanged views on the present situation in his sector and responded to journalists’ questions. 
-How can you characterizethe present situation in mining production and sales? How are you going to compensate for holes in the 2013 budget income?
-The fulfillment of the income plan to state budget from mining sector, as of the first seven months in 2012, was 75.5 percent. Mongolia profits $46 million from exporting one ton of gold, in the first seven months of this year it exported 3.4 tonnes gold and gained $143 million. In regards to copper concentrates, no significant changes occurred compared to the same period in 2012. But when Oyu Tolgoi production increases in the coming months, we believe copper exports, will significantly increase by the end of the year. The export of such mineral resources like molybdenum, zinc and iron remains at the level of the last year, but some have notably grown. Compared with last year’s petroleum export, it increased almost two times in monetary results. The situation is difficult in regards to coal and spar. Ten million tons coal were exported in the first seven months of 2012 gaining a profit of $1.1 billion; but as of 2013, we exported about 8 million tonnes of coal and gained a profit worth $582 million. The amount of coal exports in-kind decreased by more than 20 percent, but in price resulted 2-fold. The export of spar was also down by more than 20 percent both in-kind and price result. As of 2013, we are working to repay the debt of the previous government (Oyu Tolgoi’s $250 million, Tavan Tolgoi’s $350 million, Erdenet’s $200 million in loans taken in advance) and on the other hand to create State Budget income. We will strongly support a policy to increase export amounts in-kind, to bring mineral resource processing to international standards with surplus value-added, to reduce transport cost expenditures, increase the purchasing country and companies competitiveness in export products, resolving transit transportation issues; in other words, we will strongly support the competitive quality of our sector. Mongolia’s transport expenditures are 2 times high than in railway as soon as possible. Regarding spar, technological solution needs to be improved and new sales opportunities need to be found. Export facilities must be classified in the long-term mining sector with an aim not to be dependable on coal and copper. The ministry will actively support prospecting and exploration activities in new branches like rare mineral elements or non-traditional oil and petroleum. 
-Economists explain the slackening of Mongolia’s economic growth by falling prices of mining products. What are the foreign and domestic factors influencing this? 
- As of the first quarter of this year, the GDP (in reality or the price compared to 2005) grew by 7.2 percent against the same period in 2012. This is the latest indication following the 4th quarter of 2010. The GDP of the same period in 2012 was up by 14.6 percent. Despite slackening of economic growth, the scope of growth remains to stay high by the average growth of most of world countries. The average growth of the countries in the world is not reaching 3 percent, some states have minus index. The slow speed of economic growth of Mongolia is caused by a drop in China’s demand and the fall of coal prices by almost 40 percent. -How long will the present situation continue? 
- Starting next month, the country’s economy will tend to grow. For example, Oyu Tolgoi LLC this year is going to sell 300 thousand tons of concentrates winning nearly US$1 billion in income. Works to be financed from the Chinggis bonds will facilitate the implementation of production and development in the infrastructure sector and production in other objective sectors. Financial investment and its influence on the economy will take time. The program implemented in cooperation with Mongolbank willl also effectively impact Mongolia’s economy. The GDP of Mongolia will expand due to the growing scope of exports by the Oyu Tolgoi company and new projects financed from Chinggis bonds, and we are confident that with the growing economic indications, we will be able to occupy a deserving place in the world among other countries.
-According to economists, the price of mineral resources in the world market over the last two years is going down. Will this undesirable news influence the economy of Mongolia and make it worse? 
- Yes, I agree with what you said.Coal prices fell almost two-fold. Today, the mining sector of our country creates 20 percent of the economy, 40 percent of the budget income and 90 percent of export income. Because of significant price reduction of some minerals like coal and spar, it has been speculated that this affects the whole economic sector. It’s better to accept that a hypo heated economy is returning gradually to its normal and stable state. Coal price growth which was one of the reasons for the sudden economic growth of Mongolia in 2011 and 2012 was a temporary event caused by changes that occurred in China and on the international market. Today we have understood that policy in the mining sector and in economy of our country must not rely on the empty form of economic growth caused by a one-time price increase. Instead, we must carry on a policy of reliable, competitive and cost-saving that will fit and match the concrete situation of the country.
-Foreign investment in the mining branch has fallen. Some explain this as a result of government policy. What can you say about that?
- Not a single draft law hindering investment has been submitted by the present government for the approval of parliament. On the contrary, the legal environment related to strategic branches has been improved meeting the interests of investors. The first stage of the Oyu Tolgoi project which occupied solely 70 percent of the direct foreign investment to Mongolia in previous years completed in 2013. This was the reason for the fall of the direct foreign investment by 33 percent. Nevertheless, new investment is believed to come related with the petroleum refining industry, the power plants to be built along Tavan Tolgoi and other mines, coal refining and other processing projects, with prospecting activities of oil shale and methane gas. Some oil sites with significant reserves have been found in the eastern zone where prospecting activities continue. Relying on the information we’ve received from the Ministry of Economy and Development and Mongolbank, we conducted research investigations. A US$961 billion direct investment was registered in the first half of 2013 in Mongolia, which is less by 43 percent against 2012. Investment in mining decreased 32 percent. Direct investment in other sectors was also reduced. This shows that weakened investment is not only a problem of the mining sector.
-Why is second stage financing for the Oyu Tolgoi project not being allowed? It is reported that the operations of the underground mine is going to stop? 
- The government fulfilled its obligations taken by the investment agreement. There exist problems on the implementation of the contract between the shareholders. For example, excess in expenditures that have been reflected in the feasibility study created risk for reducing Mongolia’s profitability. The government is working to make the project cost-saving and effective. Now talks are underway about investing money to implement the next stageof the project and utilize and put into operation underground mining. The financial issues will soon be resolved at the meeting of the Board of Directors of the Oyu Tolgoi Co., Ltd. and shareholders. The decision of the upcoming meeting must fit the investment agreement as well as relevant laws and regulations. The feasibility study of the project, a part of the investment agreement, says that the required investment of the underground mining will be financed from sales income.
  -What was the reason for expenditure growth?
- According to a joint order of the three ministers of the Mongolian Government, a working group was formed to investigate the reasons for excessive expenditures during the first investment of the OT project which is currently checking and examining the expenditures that were not approved by facts and documentation. The examination, of course, will be resolved in collaboration with investors.
- It become clear that the agreement concluded with Chalco company of China was ineffective. Can you describe the present situation and future of “Erdenes Tavan Tolgoi” company?
- According to the contract on coal sale and purchase signed with the Chalco company of China, beginning in August we transported about 4.5 million tonnes of coal from East Tsanhi to Chalco and are now working to repay the remaining US$170 million debt until the end of this year. By putting the West Tsanhi into economic circulation and exporting about 3 million tonnes coal, we intend to bring additional export income worth US$200 million. As a result of the actions that have been taken for reducing the cost expenses on mining operations in 2013, we intend to cut the cost price of coal extraction by 24 percent to approach US$19. Also, in 2013 the export amount of Tavan Tolgoi coal will increase 3-fold.
-What about bringing prospecting licenses into order that were distributed without any control?
- Bringing prospecting licenses granted over the past 20 years into order without any control is producing positive results. In 2005, prospecting and exploration licenses for mineral resources reached 5,913 and were distributed to cover almost 44 percent of the total territory of Mongolia. As of July 2013, the number of prospecting licenses fell to 2090, mining licenses to 1274, occupying 11 percent of the country’s territory. Reduction of the prospecting licenses and the growth of exploitation licenses prove that mining and exploitation is growing year to year. Mineral wealth never recovers and restores; therefore, we must use the mines with rich reserves that we have discovered effectively. Judging from the experience of other countries, the achievement of a high rate of economic growth lies in its contribution to the general prosperity of the community, in carrying-out the policy of conservation of accumulated wealth, distribution and using it effectively. In general, the geological branch should develop 20- 30 years ahead of mining, facilitating the growth of the country’s treasury fund and stimulating the growth of the country’s values.
-Why is budget income being cut significantly despite the production yield staying comparatively normal? Is this related with the expectation of high prices of mineral resource when approving the State Budget?
- We agree, the mining sector is in need of sustainable and realistic planning. The 2013 income plan in the mining sector drafted at the end of 2012 was too idealistic. Production in the mining branch all over the world is being rolled up and investment is seriously decreasing. The situation is not good in Australia, Canada and other countries where mining is well developed. The biggest mines stop operating and thousands of mine workers fill the ranks of unemployed. Exploration and refining industries close their doors in China, a countrywith abundant mineral wealth.
-Some foreign investors comment that the drop in foreign investment was not only caused by foreign factors, but also by the unstable domestic political situation. Please give us your opinion?
- Outside experts came to the conclusion that aside from unfavorable foreign influence, political actions and laws that were resolved for political reasons before the election facilitated to bring stability in the investment environment into a risk situation. For instance, when the policy document of the so called ‘Law with long name’ and the ‘Law on the regulation of foreign investment to strategic economic entities’ was approved, they were made without proper research and calculation, creating problems in their implementation and causing doubt among investors. Today, we direct our efforts to stimulate and streamline investment and projects that were left when 106 licenses were invalidated by a court decision to put them into economic circulation.

Source: The Mongol Messenger


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