Ch.Otgochuluu: Reducing gold taxes will not affect Oyu Tolgoi

By B.DULGUUN

The following is an interview with a member of Oyu Tolgoi LLC’s board and Head of the Strategic Policy and Planning Department of Mongolia’s Ministry of Mining, Ch.Otgochuluu about Mongolia’s mining prospects this year, tax reduction on gold mining and Oyu Tolgoi.
-In 2013, the price of Mongolia’s main export goods dropped  and state budget income decreased. What can be expected this year, in terms of price of main export goods such as coal?
-Coal prices has decreased 30 to 40 percent on international markets. So far, we haven’t observed any indication that it will rise. This is connected to the rise in number of suppliers to our main trade partner, China. For instance, Russia and the USA are collectively supplying around many million tons of coals to China. Indonesia, Africa and Australia have increased their export amount in order to cut back on tax. In other words, coal companies are increasing their export amount in order to prevent crisis in case coal prices drop even lower.
Competition is increasing with the increase of suppliers. In market terms, there isn’t any condition for prices to rise as there are more suppliers and not much increase in demand. Therefore, market analysts have concluded that there will not be an upsurge in coal prices this year.
In such situations, our nation has no choice but to cut back on spending to counterbalance the negative effects of low coal prices. This is the only way to profit from coal exports. Furthermore, we need to hasten the railway projects and get rid of port related bureaucracies. We need to formulate a long-term strategy and find partners immediately. We might lose our current market position if we don’t come up with a solution for supplying quality products for stable prices in the long term.
-Many of our nation’s biggest exporters have said that the negative prospects for coal producers might result in losses this year, and that the economic hardships will continue. What does the Ministry of Mining anticipate this year?
-The price of coal will change considering many factors. For instance, the economy of the USA and Germany are recovering. Thus, China’s coal imports will increase as their exports recuperate. However, coal imports from our country must not drop as their coal consumption increases. We need to work to prevent this from happening instead of making unreasonable speculations about coal prices by cutting back on expenses and increasing the export amount.
Theoretically, as the USA and Germany recover, China will not only increase its exportation but also its western regions will develop faster. Considering the fact that it’s already in the process of reconstruction, the use of steel and iron ore will increase. Hence, there is a possibility for coal demands to increase this year.
Moreover, Mongolia must receive more foreign investment, increase exportation, and decrease importation. For instance, there is no need to import products such as chalk in the mining sector. We can save some capital if we can produce it domestically.
-How is the copper outlook for this year?
-There’s also a possibility for copper prices to rise. The poor economic growth in China directly effects coal prices in Mongolia. As China develops faster, copper prices increase. However, there is a surplus in copper supply to China’s current demand. China is still importing copper when they have already accumulated an adequate amount for its current use. For these reasons, the competition for copper producers is getting fiercer.
China, Chile, Africa, Peru and Russia all supply copper to China and they all want to ramp up the amount. Mongolia’s policy on copper export will be to increase it as much as possible to maintain our current position in the market. In general, it is safer to look for other markets in the long term. Countries such as (South) Korea and Japan have a high demand for copper. Thus the best long-term strategy for our nation is to figure out a way to supply copper to these countries.
-How much copper did Oyu Tolgoi export last year? How much will it export this year?
-In 2013, Oyu Tolgoi produced some 200 million tons of copper concentrate, and sold it in accordance with its contract. However, there were some problems at border ports last year. We are planning to at least produce and export approximately 600 to 700 thousand tons of copper concentrate this year. This estimation will depend on the capacity of our border points for shipments and road development.
-Shouldn’t Mongolia be focusing on increasing competitiveness rather than price of raw materials?
-Mongolia isn’t able to set prices in the international market or make an impact. Exchange rates fluctuate independent from our market. Our only choice is to enhance technologically to increase efficiency and cut back on expenses and increase productivity. We need to find cheaper transportation, water and energy sources.
-Last year, gold and petroleum exports increased dramatically and exceeded the expected income to the state budget. How are gold prospects for this year? How will the new law on reducing gold taxes, which is being debated at the parliament, affect gold prospects?
-The legislation to reduce royalty on gold is still under discussion. Overall, tax on gold is fairly high compared to other countries; around 10 percent higher than average. A close example is China. Their tax on gold is much lower than Mongolia’s. But export tax on gold is very high in China. Big countries all around the world have similar policies. This means that they want to keep gold in their country as much as possible to stabilize and strengthen their currency rates. Mongolia’s export tax on gold is very high compared to others which resulted in the rise of smuggling and illegal activities related to gold. If we can reduce illegal gold trades by for example, selling it to the Central Bank, exports will decrease.
-State revenue will decrease if gold exports decrease. Wouldn’t this affect the economy negatively? In general, how does reducing tax benefit the economy?
-Gold and MNT are both indicators of Mongolian currency value. Mongolian currency will be more stable if more gold is reserved at the Central Bank which could also counterbalance USD to MNT exchange rates. This is the biggest benefit for the economy. We might lose around 40 million USD in royalty but gain two billion USD in monetary reserve. The biggest policy decision for us today is, whether we should export gold with or without tax, or should we stabilize our domestic currency value.
-How will tax reduction on gold affect Oyu Tolgoi?
-It will not affect Oyu Tolgoi. Currently, Oyu Tolgoi is producing copper concentrate, not gold. There are some contents of gold in the copper concentrate but it’s hard to differentiate in its current state. In other words, concentrate which has some gold content is physically sold to Chinese copper refineries. It is possible to buy gold in a non physical form.   The law on tax reduction on gold will reduce royalty to 2.5 percent, for a duration of five years. This was designed for smaller gold mines. If Mongolia can build a refinery in five years time, and gold miners refine their gold and sell it to the Central Bank, they could be exempted from royalties.
-The state policy for the mineral resources sector is being finalized. What was defined as the sector’s main export good in the policy?
-We are currently debating whether to export some refined mining products and reserve some within the country. Strictly speaking, we can’t export too much when prices are low and import back in ten years when industries recover. Therefore, we need to refine some products, and sell it not for 100 MNT, but for 300 MNT by adding value. This means that we exercise higher taxes on some products to reserve it in the country.
-Can you give any examples?
-It’s not appropriate to export raw iron ore. Firstly, we need to process the raw product. Secondly, we need to reserve it for future domestic needs. But this needs to be decided after the law is approved. Mongolia supplies 20 million tons of coal to China every year. While small countries in Africa produce 200 million tons in a year. China has a large market and we only supply a small percentage.
Mongolia’s approved coal reserve is 23 billion tons, and estimated is around 177 billion tons. It’s more preferable to trade coal while it’s expensive since we can’t refine or consume it in Mongolia. The state income will multiply if we can export 100 million tons instead of 20 million in a year. Even if we sell all the coal in Umnugobi Province, we will still have plenty of coals left.
Mongolia has plenty of coal in reserve. Thus, it’s essential for us to compete in the world market and make others dependent on us.
-There were many ups and downs for Oyu Tolgoi in 2013. When will the financial issue of the underground mine be resolved?
-There were many problems last year. We started exportation after launching the concentrator plant. As soon as exportation begun, we produced amounts equivalent to Erdenet and expanded the economy as much.
There were many pros such as completing the first stage successfully before schedule.
But we are stuck on the financing for the underground mine. The world economic crisis also played a part in this. Oyu Tolgoi project isn’t alone responsible for the snag that the financing for underground mine  caused. A large project is progressing smoothly as planned. We have plenty of time and we will start construction as soon as the financial issues are resolved. The discussions related to this issue are progressing well.

Source:UB Post
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