Mongolian Mining 2010 - Global Business Reports

Mongolian MiningMining is not new to Mongolia, but its location amid emerging Asian economies puts the spotlight on its vast resources.

A REPORT BY GBR FOR E&MJ

2010JULY /AUGUST 2010

TABLE OF CONTENTSMongolia: Open for Business ....44Regulatory Framework ..............47Commodities ..............................48Thermal and Coking Coal ..........49Copper........................................55Oyu Tolgoi ..................................55Gold ............................................58Service Chain ............................58Uranium......................................61Society ......................................62

This report was researched and compiled by Global Business Reports (www.gbreports.com) for Engineering& Mining Journal. Editorial was researched and written by Mark Storry ([email protected]) andAlexandra Ashikhimina ([email protected]). (Photo of Erdenet courtesy of Alexandra Ashikhmina)

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44 E&MJ • JULY/AUGUST 2010 www.e-mj.com

Mining in Mongolia is nothing new, butafter years of being overlooked the spot-light is now on this vast country’sreserves. British exploration teams wereactive in Mongolia over a century ago andmore recently, exploration during theSoviet era discovered various mineralresources, some of which have beenexploited. Various joint ventures werestarted with Soviet capital and expertise,the most important of which is ErdenetMining Corp. (EMC), located in the city ofthe same name (which was created for theminers). EMC remains a key element ofthe Mongolian economy and is one of thetop 10 copper mines in the world.Nevertheless, Mongolia’s resources re-main largely untapped, as to date thereare only a handful of large-scale invest-ments. Ivanhoe Mines’ investment in theOyu Tolgoi project, which is studied laterin this report, could change all of this.

Mongolia is a land locked countrysquashed in between the two giants ofChina and Russia. While Mongolians

have had a proud history, fondly remem-bering the great empire builder, ChinggisKhan, more recently the country was col-onized by its two neighbors. The People’sRepublic of Mongolia began its transfor-mation to a Western style democracy in1990 when the Soviets left. In the imme-diate aftermath, in common with manypost-soviet societies, the economy col-lapsed, inflation rose to astronomical lev-els, food shortages were rife andMongolia and its people suffered.

Since then, the economy has seen aconsiderable upturn, but Mongolia remainsa poor country and around one-third of thepopulation live in poverty. Recent yearshave seen a rise in wealth inequality inMongolia. On the bumpy streets ofUlaanbaatar the destitute and homelessmake way for expensive imported SUV’swhich shuttle their owners to a rapidlygrowing array of foreign restaurants.

While the old generation grew upspeaking fluent Russian, the next gener-ation of Mongolians look to the West in

terms of ideas and education and southto China for a market. Professor Punsal-maagiin Ochirbat, the first President ofMongolia, now head of the Ochirbat foun-dation, a pro-mining research body, said,“We all know about China’s phenomenalgrowth rate and its demand for resources.Russian demand for minerals products isless and Russia has considerable naturalresources, so we see China as being themarket with the greatest potential.”

George Tumur, one of the new genera-tion of Mongolian mining leaders current-ly heading Hunnu Coal, also sees thepotential of the Chinese market. “Energydemand is increasing everywhere, espe-cially in China, which is the largest mar-ket geographically located next toMongolia. It just makes sense to takeadvantage of this, but it has to be donein the right way.” He goes on to arguethat Mongolia’s positioning right next tothe northern Chinese manufacturing basemeans it makes clear sense to developprojects in the country.

MONGOLIAN MINING

By Mark Storry and Alexandra Ashikhimina, Global Business Reports

Mongolia: Open for BusinessIf international mining companies can trulyproject a long-term vision, they can play acrucial role in the country’s development

Gold Mining in Northern Mongolia. Operations by the Mongolor Company, probably in the Yeroogol (river) in about 1925. (Photo courtesy of Kelly Cleur)


Mongolia’s mineral resources includegold, coal, copper, molybdenum, tin,tungsten and uranium. To date coal,copper and gold are the commoditieswhich have attracted the largest invest-ments. Laurenz Melchers and Jim Dwyer,who heads the Business Council ofMongolia, defend Mongolia, despite therisk, as a good mining investment desti-nation. They point to the reformed taxregime, the presence of major multi-nationals such as Rio Tinto, increasedstability and an improving economicalframework. Dwyer, an ex-Wall Streetbanker, who came to the country to helpprivatize the banking system, said,

“Mongolia went through some difficul-ties in 2009—most countries did. Thebanking system suffered from a highnon-performing loans ratio and the realeconomy dipped. Since then though, wehave seen Mongolia bounce back strong-ly and here in the business council weare bullish on Mongolia’s economicprospects.”

Peter Long, general manager Asia,Sedgman Engineering Technology,agrees. “We are headquartered in Beijingbut we will be opening an office inMongolia,” Long said. “We are commit-ted to China but we find Mongolia an eas-ier place to do business than China.”

One important factor Mongolians liketo remind foreign investors is thatMongolia is not a backward country des-perate for foreign expertise and know-how. “There are several mines inMongolia which have been operating fordecades and this means that Mongoliahas its own specialists in mining andmineral processing,” said Ivan Lopatin,country head, Weir Minerals.

“All of these huge deposits which areattracting so much interest overseas arenot new,” said Gandush, CEO, GobiExploration, a local exploration companyoffering geological services. “The hugecoal deposit in Tavan Tolgoi has been


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Energy Resources’ coal handling and preparation plant, currently under construction in Mongolia, will be arranged similarly to what is shown here, but will be enclosed for protectionagainst the elements. Annual plant capacity could reach 15 million mt.

Mill complex, open-pits and waste dumps of Boroo Gold Mine. (Photo courtesy of Kelly Cleur)

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known about for a long time. The prob-lem was that it wasn’t economicallyviable for extraction previously. Now thefundamentals in China have changedeverything and made these projectsviable.” The government is currently con-sidering whether and to what degree for-eign investment should be allowed onTavan Tolgoi.

This change in the economic situationhas also given the Mongolian governmenta stronger hand when it comes to dealingwith international investors. In the late1990s and early 2000s, when theMongolian government was financiallyconstrained and mineral prices were low,potential investors could negotiate veryattractive terms to come to the country.Now, the thinking of the Mongolian gov-ernment is that the mining companiesneed them more than they need the min-ing companies, so the framework forentering is trickier and less stable. Whilethis tightening of conditions has beencriticized by many in the sector, the ulti-mate aim of the government is to estab-lish a sustainable mining sector andavoid the twin problems of “DutchDisease” and hot money inflows.

Regulatory FrameworkMongolia has been a market economy fora little more than 20 years. As a result,its regulatory framework is rapidly chang-ing due to both economical and politicalfactors. During the 2009 Spring Sessionand Extraordinary Session of Parliament,the government made 74 modificationsto the current legal framework. Such isthe pace of change, that new legislationor amendments may already have alteredsome of the information below.

Overall, the Mongolian state recog-nizes the importance of foreign invest-ment and encourages it, as is stated inthe Mongolian Foreign Investment Law.Foreign investors and business ownersenjoy the same legal protection as theirMongolian counterparts. Foreign in-vestors can own 100% of any registeredbusiness in Mongolia without a localpartner, except for the projects in whichthe state has a right to participate.

The investment agreement betweenIvanhoe Mines and the Mongolian gov-ernment is believed to be the latestinstance of the government’s commit-ment to attract foreign investment for thedevelopment of the country’s mineralresources. The agreement was signed on

October 6, 2009, following a repeal ofthe windfall tax on copper and gold. Thewindfall tax is considered by many as themain reason for certain companies’ with-drawal from the Mongolian mining sectorsince 2006. The Windfall Profits Taximposed a 68% tax on the portion ofmetal sales price in excess of$2,600/metric ton (or a $1.18/lb) ofcopper and $500/oz of gold (increased to$850/oz in 2008).

“In 2006 the minerals law changedand the windfall tax came into play. Wesaw the exit of a lot of junior companieswho just couldn’t get the financing tocontinue the projects, so they had topack their bags and head back home,”said James Polson, executive director,Australasian International DiamondDrillers (AIDD), currently the secondlargest drilling company in the Mon-golian market.

An enigmatic figure in the Mongolianmining scene, Polson explains he com-bated this downturn by turning to Chinaand Kazakhstan for business and proudlymentions that AIDD, as a foreign invest-ment Mongolian company, is one of thefirst Mongolian companies to export min-ing services abroad. Kelly Cluer, directorof exploration, Altan Rio, saw an oppor-tunity in surviving the windfall tax for thepurposes of pure experience. “We havestayed in Mongolia for a long time and allof these changes have given us extraknowledge and competitive advantageover other companies,” Cluer said.

An important issue for many foreigncompanies is the Labor Law. According tothe recent Labor Law of Mongolia, a com-pany must employ 20 Mongolian employ-ees for every foreign employee. Quotas goup from that level depending on the sec-tor, and there are exceptions under cer-tain circumstances. Any company with amining or exploration license, for exam-ple, has a quota of 10% foreign employ-ees, while for an oil and gas extractioncompany this rises to 80%. “This createscertain problems within the mining sec-tor, especially for service providers whichhave to employ foreigners to educatelocals how to use new sophisticated tech-nology which has never existed inMongolia before. We should employ moreexpats on a contract basis to trainMongolians,” said Professor Ochirbat.

Licensing laws have changed for thebetter with the result that some 5,221exploration and mining licenses had been

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issued, covering a total area of approximately 48 millionhectares (32% of the total land of Mongolia) by the end ofMarch 2009. The president has issued a ban on new mininglicenses, although this is in the process of being revoked. Theroyalties might be soon increased to 7.5% from 5%, but VATwas reduced to 10%. Customs duty is 5% for most goods.Corporate income tax remains 10% on income up to MNT 3 bil-lion (about $2 million) and 25% thereafter. The personalincome tax rate is 10%.

According to the law, the state may acquire up to a 50%share of a mineral deposit of strategic importance if the statehas contributed to the exploration of the deposit at some pointin the past. For all other mineral deposits of strategic impor-tance, the state’s maximum share is set at 34%. It is importantto identify what “strategic importance” is, but the Parliamentof Mongolia is given the ultimate power to determine what qual-ifies as a mineral deposit of strategic importance. Typically“strategic importance” concerns a deposit with a size that mayhave a potential impact on national security, the economic andsocial development of the country at the national and regionallevels or that is producing or has a potential of producing morethan 5% of total Mongolian GDP in a given year.

“Unfortunately, as in many other countries, sometimes peo-ple in Mongolia will do politics not business and newcomersshould be prepared for it,” said James Liotta, attorney-at-lawfor a Chinese-based law firm, Lehman Lee and Xu.

Another problem encountered by some mining companies isthe environmental law which is believed to be used by the gov-ernment to revoke some “unwanted” licenses. The companiesgenerally need to prepare an environmental protection plan andenvironmental impact assessment to address any adverse im-pacts that their operations may have on the mine site.

“The whole license may be revoked even if a tenth or asmaller part of it is situated in a environmentally protected areasuch as a river or forest areas,” said Altangerel, an attorney andgeneral director, Legal Consulting. “In this case, the govern-ment is obliged to refund the exploration costs, but there are noavailable finances for this.”

Altangerel believes that, for a young democracy, Mongoliangovernment is doing a lot to position itself as a good destinationfor foreign investment. “It’s an exciting time in the Mongolianbusiness world,” James Liotta - attorney in law of a Chinesebased legal firm called Lehman, Lee and Xu Mongolia. “If youare getting in now, you are still getting in early, which makes itmore likely for the business not only to survive but to grow inthis rapidly developing environment. Early is crucial inMongolia as long as you do your due diligence first to avoid anystress or disappointment.”

CommoditiesBefore looking at the commodities sector in Mongolia, we mustconsider the underlying reasons for the interest in Mongolia andthe commodities it can offer. The past 15 years have seen agradual de-industrialization in the United States and Europewith a corresponding but more rapid industrialization in Asia,the lion’s share going to China. To begin with, the coastal areasaround Shanghai were the principal benefit of this movement,however internal Chinese politics has meant there is more andmore focus on the poorer north of China, specifically in steelproduction. Galsandorj, president, Mongolian Exporters’



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Association, believes this boom in the north of China, specifi-cally Gansu and Inner Mongolia province, has resulted in anincreased demand for Mongolian raw materials. He explainsthat Mongolian exports are primarily minerals which account for70% of total exports.

In 2009, Mongolian exports were valued at $1.9 billion, ofwhich $1.3 billion went to China. These exports consist of gold,copper and a variety of other minerals, but coal is the most impor-tant commodity. “In China as a whole, coal is used to generateabout 70% of its energy,” said Turbayar, general director, YuandaGroup, a Mongolian-Chinese joint venture focusing on both theenergy and mining sector via its subsidiary New Asia Mining.“Energy demand in northern China continues to grow robustly.Even though China has coal reserves of its own, for Mongoliathere are considerable opportunities ‘feeding the dragon.’”

The Yuanda Group is currently constructing the first privatepower plant in the west region of the country and intends togrow by offering its services in building and operating powerplants to mining companies as well has working some explo-ration licenses of its own. Batzorig, director, Commod, a con-glomerate ranging from exploration and geological services toequipment trading also believes that China is primarily respon-sible for the current boom. “The presence of Rio Tinto and theinvestment agreement are not the most important factors in theMongolian mining sector,” Batzorig said. “Rather it is the priceof commodities. We have a fluorspar mine, a mining license anda willing partner, but the price isn’t there yet. This is whatcounts, not which majors are investing in the market.”

Thermal and Coking CoalOne of the largest players is the majority state owned Baganuur(some private investment was allowed in the company in 1995).Baganuur has suffered from under-investment. Dambapeljee,general manager, Baganuur, explained his dilemma. “We werecreated under the soviet era as a coal company to supply thedomestic market,” Dambapeljee said. “These coal prices areset by the government and are artificially low. These low prices,designed to reduce fuel prices for the general population, pre-vent us from investing in new equipment and going up the valuechain.”

This problem is not unique to either Baganuur, nor toMongolia, but Dambapeljee has nevertheless been successful inattracting financing which they intent to invest in new machin-ery. These price restrictions on sales of thermal coal inMongolia should be noted by potential investors wishing to takeadvantage of Mongolia’s growth in energy demand. What mostforeign investors are interested in is coking coal demanded forinfrastructure projects in China.

Energy Resources’ rapid development of its projects hasattracted a great deal of attention. Owned by Mongolian giant,MCS Group, as well as investors from other large Mongolianconglomerates and the European Bank for Reconstruction andDevelopment (EBRD), Energy Resources has grown rapidly fromits foundation in 2005. “In all my years here, we have neverseen a client with every single employee totally focused andcommitted to their project,” said Mark Bailey, executive direc-tor, Leighton, which works as a contract miner for EnergyResources.

Energy Resources is currently working a coking coal depositknow as Ukhaa Khunad, located in the South Gobi region



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around 245 km from the Chinese border.Last year output reached around 1.8 mil-lion metric tons per year (mt/y) of cokingcoal, and plans are under way to raisethis to 4 million mt/y for 2010, and 10million mt/y in the longer term. As part ofthe project, Sedgman EngineeringTechnology is building a coal handlingand preparation plant (CHPP) with a pro-posed capacity of 15 million mt/y. “Thisisn’t just an EPC [engineering, procure-ment and construction] job,” Peter Long,general manager Asia, Sedgman En-gineering Technology. “Energy Resourcesis involved deeply in the construction andoperations of this CHPP. They want tolearn how this is done and we have beenvery impressed by their attitude.”

Long expects this project to be thefirst of many for Sedgman in Mongolia.

Energy Resources’ rapid developmentand success has taken the market by sur-prise. Questions remain, however, as towhether Energy Resources will continueto have the financial resources to devel-op this project or will it be forced to seekforeign investments or offer stock pub-licly. Even though Energy Resources’mine is strategically located, it suffersfrom a poor transportation infrastructure.Connections to markets are complicatedwith possible train lines connecting tonorthern China (favored by business) orto the Russian market (favored by thegovernment to prevent over-reliance onthe Chinese market).

The other main major private coalmining company is Mongolian Alt Corp.(MAK), which initially started out in thegold sector, before moving to coal prod-ucts, as well as planning copper extrac-tion in the future. MAK operates theNaryn Sukhait coal mine located 900 kmsouth of Ulan Bataar, the capital, butwithin 50 km of the Chinese border. MAKoperates an open-pit mine (similar to thevast majority of mines in Mongolia) withan estimated reserve of 220 million mtand current production capped at 3 mil-lion mt/y due to logistical constraints.“We are investing in a raw coal washingplant to improve the value of the com-modity which we sell,” said AvirmedGanbileg, vice president, MAK. “This willrequire considerable investment andresources, but we are convinced it is inthe long term interests of our company.”

Once again, there is no rail nor pavedroad connecting MAK’s mine, which isgeographically extremely close to its JV


with Qinhua Corp. as well as South GobiSands (SGS) mine. Indeed, it is signifi-cant that the Mongolian side of the borderconsists of a dirt road, improved by themining companies but still rudimentary,but once the shipment has passed to theChinese side, it is greeted with a tarmacroad and modern rail links. David Bartel,

Executive Director, SGS, which neighborsMAK’s mine, believes one of the biggestdifficulties of working in Mongolia wouldnot be the mining, but the infrastructureand transport. When SGS and MAK start-ed operations, the border crossing wastemporary, open only three times per year.This has since been increased, but prob-

lems remain. Currently the mining compa-nies are pushing the government toupgrade the border to a 24/7 gate.

In May, the local transportation com-panies that serve the SGS mine were onstrike and picketing the border. This wascosting SGS about $300,000 per day inlost revenue. A curious fact of the local


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The main construction camp and administration center at Oyu Tolgoi (July 7, 2010).


legislation is even though SGS runs a ver-tically integrated mine where even secu-rity and catering are done in-house, theyhave to use a local transportation compa-ny to take the coal to the border. TheMongolian authorities argue transporta-tion is just a small part of the total valuechain, the vast majority being in thehands of the foreigners. By insisting onthe use of local companies for this activ-ity, the government is merely helpinglocal companies to compete and gainbusiness.

In addition to MAK’s solo operations,it has also entered a JV with QinhuaCorp. from China in the development ofanother reserve also located in the sameSouth Gobi region. This JV has givenMAK access to resources and capital itotherwise wouldn’t have had, butChinese entry in the Mongolian marketremains controversial. Unlike theRussians, who are generally looked onpositively in Mongolia, Chinese invest-ment is looked upon with suspicion.Critics in the sector argue that Chineseinvestment is low key, low budget andadds limited value. They protest that nin-jas (a term used to describe small illegalminers) from China illegally enter thesouth of the country to develop mineswithout training the locals, withoutinvesting in the country and without pay-ing taxes. Some locals believe Mongoliangovernment policy is aimed at keepingWesterners in, the Russians down andthe Chinese out.

One of the largest foreign investmentsis the SGS operation located just 42 kmfrom the Shivee Khuren Mongolian-Chinese border crossing. SGS originallystarted under the Ivanhoe Mines umbrel-la, but has since been spun off tobecome a separate company which actsas the coal wing of Ivanhoe Mines.Recently SGS successfully raised C$459million to help finance its operations.Apart from its big brother, Oyu Tolgoi,SGS rivals Mon En Co. and Centerra Goldas the largest international mining invest-ment in Mongolia. To date, Ivanhoe stillowns around 60% of SGS, but the twoare operationally independent from oneanother and indeed, Bartel sees OyuTolgoi as a major rival for Mongolia’s lim-

ited skilled labor force. “We are investinga lot of time and money in recruiting andtraining local staff for our mine,” Bartelsaid. “There are a number of fundamen-tal reasons for this. It helps to smooththings over with the local community ifwe hire people from the area, secondly itis cheaper than flying people down fromUlaanbataar every week, but mostly wewant to be a part of the community. Wewant to have roots here and encourageloyalty from our staff so that they will staywith us for the long term,” said Bartel.

The lack of trained and skilled staff isa lament often repeated throughoutMongolia. “A concern is the lack oftrained labor,” said George Tumur, gener-al manager of Hunnu Coal, an Australianbased Junior focussed on coal. “Mongolianeeds to really invest on this so that thework force is able to handle internationaltechnology and equipment.”

John Karlsen, general director,Wagner Asia, the local distributor of CATmachinery as well as number of otherinternal brands, concurs with Tumur.“Mongolia has chosen the technical routeas opposed to the high employment routethat the Chinese follow whereby hun-dreds of guys with picks and shovels aredoing what 10 guys with machinery cando over here,” Karlsen said. “This meansMongolia can potentially compete on aglobal scale in terms of efficiency, but itdoes present some of our client’s prob-lems when it comes to finding trainedcompetent staff.”


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George Tumur, general manager of Hunnu Coal.

Meeting of the Business Council of Mongolia. Mining Supply Chain press conference October 2009.



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Adi Desai, who covers SGS for Frontier Securities, explainsthat as well as an operating mine exporting both thermal andcoking coal to China, SGS also own 18 exploration licenses withplans to spend around $20 million per year on continued explo-ration. He goes on to add that production targets are currently4 million mt/y for 2010, with ambitious targets of reaching 8million mt/y by 2012. The vast majority of this will be exportedto China.

By 2012 Bartel expects the Soumber pit to be up and run-ning with a production target of 5 million mt/y. In addition tothis investment, SGS intend to invest $80 million in a coalwashing plant. South Gobi Sands is yet to make a profit and,while it has a considerable cash reserve to draw upon, therehave been unsubstantiated market rumors that Ivanhoe Minesmay sell its stake.

A second property due to come into production in 2010 isProphecy Resource Corp.’s Ulaan Ovoo coal mine. Ulaan Ovoois a 208-million-mt resource of 5,204 kcal/kg low-ash, low-sul-phur thermal coal contained in one massive 35- to 80-m-thickseam. Ulaan Ovoo’s coal is of post wash grade and is located 10km from the Russian boarder and 120 km from the railway.

Headed by the dynamic John Lee out of Vancouver,Prophecy only brought its Mongolian assets online in April2010 but has moved at an incredible rate with a target of pro-ducing 250,000 mt in 2010 and 2 million mt/y in 2011.Prophecy’s model is to contract out in order “to minimize stop-page risk” and make “Prophecy a royalty stock, which the streetloves,” according to Lee. Prophecy has a turnkey, pay-as-you-gocontract with Leighton to mine 2 million mt/y at a cost of$12/mt and a 1.5-million-mt/y rail transport agreement. Therail agreement should allow them to sell either to the Chinesemarket, or as intended at present, to the international marketvia Russia’s East coast ports.

A recent road haulage survey estimated it should cost$10/mt to $12/mt to ship the coal giving an “all inclusive min-ing and transportation cost into Russia… (of) $25/mt.” Coal ofUlaan Ovoo’s grade is selling at Vladivostok for about $80/mtand is estimated to be in the $50/mt range in the Russian mar-ket leading Lee to note that “whatever way you look at it, weshould be able to extract a handsome margin from UlaanOvoo’s coal.”

Prophecy’s second project, Chandgana, is a massive 1-bil-lion-mt, 4,300-kal/kg coal property. Chandgana is very much inthe planning stage with the property held under an explorationlicense, but it has the potential to change the game forMongolian coal.

“The plan is to build a power plant and we have beenapproached by two bona fide Chinese parties who are interest-ed in building a 4,200-MW power plant at the site which wouldrequire 20 million mt/y of coal,” Lee said. The site is only 100km from the Mongolian nation grid (itself linked to Russia);while there is currently a power deficit in Mongolia any mega-power plant would require substantial power infrastructureinvestment and access to China. “We are 700 km from theInner Mongolian [Chinese] grid, obviously there would be powerloss but it is still very viable….(and) the basic economics of itare fantastic,” Lee said.

Slightly further down the timescale is Mongolian EnergyCorp.’s (MEC) project in Khushuut in Western Mongolia, whichis expected to begin coking and thermal coal production in



August this year. “We were the first HongKong-listed company to come toMongolia,” said Mohan Datwani, generalcounsel, MEC. “We consider ourselves tobe the pioneers of combining Mongolia’smineral wealth with the access to capitalavailable in Hong Kong.”

“MEC came to the market in 2007,”said James Schaeffer Jr., CEO, MEC.“Since then we have acquired 330,000hectares of concessions in the west of thecountry. We have 19 exploration licenses.Our flagship project is located in theKhushuut region of Mongolia, which con-tains a total of 149.2 million mt of in-placecoal resources using JORC standards.”

MEC’s senior management team isquick to point out that, unlike the southof the country, the coal found at theirdeposit is of high quality with significantquantities of coking coal. Gordon Poon,director of corporate development andinvestor relations, MEC, highlighted thedifferences between their projects andthe ones in the south. “We believe growth

in Xinjiang is more robust than in otherregions of China where there is the possi-bility of a bubble,” Poon said. “Wealready have an agreement with BaosteelGroup for our baseload output and that isa solid start.”

MEC has already hired contract minerLeighton to conduct mining operationsand Mohan Datwani estimates they willinvest around $2.85 billion in the coun-try over the 19-year mine life; this willinclude a washing plant and an airstrip.They are also confident the border cross-ing will be upgraded in time for miningoperations. Schaeffer said they wantMEC to be a global energy company, withfurther projects in China (MEC alreadyhas one project in the Xinjiang province)as well as continued exploration in hardminerals as well as coal.

Tumur is a well regarded veteran ofthe mining sector and is the former headof Energy Resources operations. Hisbusiness strategy involves bringing onboard local partners which avoids certaindifficulties with licenses. “We did notwant to get into the licensing tenders, soour partners are the local small compa-nies which needed funding and develop-ment support. So we provided investmentand expertise to begin joint ventures with

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James Schaeffer, CEO of Mongolian Energy Corporation.



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them,” Tumur said. Licensing can be adifficult issue, according to Tumur, par-ticularly for foreign companies. Typically,individual speculators with no knowledgeof mining and very limited financingacquire them and then try to flip them.

CopperCopper in Mongolia is big, dominated bythe most important company inMongolia; the state owned EMC. It wasformed in 1978 and is a JV betweenMongolia and Russia. The Mongolianstate has a 51% stake. EMC is builtaround a world class copper-molybde-num-porphyry deposit located around400 km from UlaanBataar, toward theRussian border. Fomenko Alexander, firstdeputy general director, EMC, explainedthe importance of EMC. “We considerourselves to be the most important min-ing operation in Mongolia,” Alexandersaid. “We produce around 25% of thecountry’s foreign exchange, we use 25%of the country’s power and we are consis-

tently making profits which go directlyback to the Mongolian people, unlikeother mining operations.”

Kelly Cluer, founder and head ofexploration, Altan Rio, a Canadian hardminerals exploration company, arguesthat despite 30 years of opportunity,EMC still captures a maximum of 75% ofthe intrinsic value of the copper. “Inessence, Mongolia is selling its crudemetal concentrates to China at a fractionof the metals value and buying backmanufactured products after the all ofthe value has been added,” said Cluer.“The country is forfeiting all downstreampotential for adding value, spawningspin-off industries and creating addition-al jobs.”

Within the sector however, EMC isseen as a national champion. While manystate companies have been encouragedto look for foreign investment, there is lit-tle enthusiasm for privatizing EMC, espe-cially when copper prices are strong.“EMC has such a long history of mining

and level of expertise that now isn’t theright time to privatize it,” said Ganbaatar,director, Geomasters, an integrated pro-fessional high-tech geophysical and geo-detic surveying company. “EMC is alsoan example of one of the very few com-panies where the top management isMongolian and with today’s high copperprices EMC has the money to invest, sothere is little benefit for them to look forprivate investment.”

Oyu TolgoiOyu Tolgoi (OT) is the largest undevel-oped porphyry-copper-gold resource inthe world. After more than nine years ofnegotiations, changes in the law, accusa-tions and demonstrations, the agreementallowing exploitation was finally signedon October 6, 2009. It seems that thewhole country, as well as outsiders inter-ested in Mongolia, were waiting for thiswith the kind of excited anticipation thatusually precedes a general election. In away, this is what it was, such are its



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potential consequences for the nation.Oyu Tolgoi has an estimated mine life of40 years. It is also the largest develop-ment project and foreign investment inthe history of the country. “The capitalestimate for the project between now and“first ore” is $4.6 billion, to be spentover the next three years. To date we haveinvested around $1 billion, largely ondrilling,” said Keith Marshall, CEO, OyuTolgoi, which is owned 66% by Ivanhoe

Mines and 34% by the Mongolian gov-ernment. Rio Tinto in turn has a consid-erable stake in Ivanhoe Mines. Ivanhoeand Rio Tinto are supplying the cash andexpertise.

There can be no doubt that Oyu Tolgoihas brought a lot of positive developmentto Mongolia: new technology, new skillsfor the workforce, training and jobs forthe local community, new infrastructureand even a completely new method of

mining, block caving. Block caving iscomplex form of underground miningthat requires a huge up-front investmentto excavate grids of tunnels into the orebody. “Given the block mining method tobe employed, there are only a few com-panies in the world which could conductan operation of this scale in this loca-tion,” Marshall said. “In addition, wehave already mined a 1.3-km deep explo-ration shaft with the help of Redpath ofCanada as our chief contractors.”

“Everybody is looking forward to theproject’s beginning,” said Odd Reknes,country manager, Atlas Copco. “It is thekey to the economic growth of Mongolia.If Ivanhoe, Rio Tinto and the Mongoliangovernment get it right, the Oyu Tolgoicould greatly help the development ofboth the mining sector and theMongolian economy in general.”

Atlas Copco and Rio Tinto haveformed an alliance to develop auto-nomous drilling solutions for surfacemining as well as tunneling concepts forunderground block cave projects, and forOyu Tolgoi specifically.

Tulguldar Tsogtsaikhan, manager,Micromine in Mongolia, an Australiancompany providing exploration and min-ing consulting services for clients aroundthe globe, believes Oyu Tolgoi could ben-efit the country. “It could be a great

Baganuur supplies 40% of Mongolian coal needs and more than 60% of the needs of the central region.

Micromine Geologists doing site investigation on Toromkhon gold deposit.



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development for the country providingthings are done correctly,” Tsogtsaikhansaid. “What will make it interesting isOyu Tolgoi wants the best; the best sup-pliers, the best technology and the bestpartners.” Tsogtsaikhan said this can bedifficult for some Mongolian companiesas they were brought up under a com-munist environment when coal wasmined to produce energy, not to make aprofit.

Some companies have arrived inMongolia just for this project, such asMajor Drilling, whose current operation isfocused on Oyu Tolgoi. “On the OyuTolgoi site, we have been operating non-stop since 2002 even through the coldwinter months,” said John Ross Davies,country manager, Major Drilling. Despitethe harsh winters and language barriers,he hopes to work more with the nationalcompanies of Mongolia in the future andcontinue local training as well as learningfrom Mongolians.

Christian Blunck, country manager,Sandvik, also hopes to become a serviceprovider for Oyu Tolgoi. “It is currentlythe main project in Mongolia and a greatdrive for us in the long run, but there is alot of alternative business activity in theservice mining sector also.” Blunckhopes to firmly establish his company inMongolia and work with other projectsalongside Oyu Tolgoi.

Naturally, Oyu Tolgoi faces a lot ofcriticism and pressure from various socialgroups in Mongolia. Some do not trustIvanhoe Mines to operate the biggestproject in the history of the country;some are unhappy they are not getting anadequate piece of the pie. Unfortunately,

Odd Reknes, country manager of Atlas Copco.



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many people in Mongolia believe the foreigners are simply dig-ging money, Mongolian money, from the ground and taking itout of the country. With the help of its shareholders, most crit-ics hope that Oyu Tolgoi will be an example of a well-organizedmining operation meeting international standards in Mongoliawhich will give the local people an opportunity to learn every-thing they need for future large-scale projects.

GoldThe Gold sector in Mongolia is dominated by one company—Centerra Gold’s fully owned subsidiary, Boroo Gold. CenterraGold’s investment was one of the first significant foreign invest-ments in the country, as well as being one of the few to havemade money and one of the most controversial. Between thebeginning of production in 2003 and 2009, Boroo Gold hasextracted 1.26 million oz. This output far outmatches any otherexisting gold mine, with Oyu Tolgoi’s gold operations the onlyother large development. Centerra Gold also owns 100% of theGatsuurt exploration property. “We are in Mongolia for the long-term,” said John Kazakoff, president, Boroo Gold. “We havefirm plans to develop the Gatsuurt property. We are one of thetop five taxpayers in Mongolia and we are committed to makingthis work.”

Whether Boroo Gold will receive a mining license to goahead with the Gatsuurt development remains uncertain. BorooGold was involved in two major controversies; they suffered abitter strike, which included a small hunger strike in 2009which shut down the mine. Miners were angry that their sever-ance packages, necessary once production declined as themine reached the end of its life, didn’t reflect the profits of thecompany. “We pay four times more than the standard miningwage in Mongolia, but gold mines by definition don’t have the50 year life span, say, Oyu Tolgoi will have,” said Doug Khan,director of finance, Boroo Gold. “Thus layoffs are necessary.”

Regardless of the rights or wrongs of each side, BorooGold’s operation became unpopular with the Mongolian min-ing community.

The second controversy regarding Boroo Gold was its insis-tence of signing a stability agreement when it arrived in thecountry. Boroo Gold arrived at a time when gold prices were lowand when the Mongolian government was very keen to attractforeign investment. Boroo Gold was able to negotiate favorableterms. With the continual rise of the price of gold, the Mongoliangovernment’s attitude changed. In 2006, Boroo Gold was forcedback to the table to renegotiate the agreement and since thenhas suffered from severe criticism regarding the level of tax thecompany pays (the stability agreement exempted them from thewindfall tax). Boroo Gold were guilty of nothing more than nego-tiating a good deal, but at the same time Boroo’s difficulties rep-resent the deeper underlying problems in Mongolia between theforeign investor and the Mongolian mining community.

Service ChainThe growing Mongolian service chain consists of multinationalcompanies, Mongolian companies with international capital andMongolian companies with local ownership. For a small, tech-nologically under-developed market, Mongolia has no nicheplayer which it can claim to be a leader of any particular sec-tor, nor a manufacturer of any but the simplest equipment.Mongolia remains a location for sales and demand rather than



MONGOLIAN MINING

R&D or as a global exporter of miningservices. But Mongolian companies areslowly ascending the value chain.

One such company is Tanan-Impex, adrilling company headed by Choibat, whoexplained the advantages of working withMongolian companies. “The reasonSouth Gobi Sands decided to work withus in 2004 wasn’t only due to the fact wewere one of the few drilling companieswhich could handle the size, but alsobecause we Mongolians know our land,”Choibat said. “The drilling season herelasts between March and November anddrilling companies need to move fast.”

Batmunkh, chairman, Blast Co., aspecific explosives company, puts hisgrowth down to his focus on manufactur-ing his products rather than acting as adistributor. “We are focusing on buildingfactories rather than being a serviceprovider or a distributor,” Batmunkhsaid. “When you are a manufacturer thecards are in your hands and you candecide when you want to play them rather than being at some-one else’s whim.”

Naranbaatar is also a believer of investing heavily in his com-pany, Glogex, a mining consultancy hoping to move into contractmining. “For the mining contract services I have been very clear

that we will not be purchasing Chinese equipment,” Naranbaatarsaid. “We will be purchasing Cat equipment from Wagner Asia.We want an experienced partner with the best equipment and weare not afraid to pay more if that is what it takes. The problemwith some Mongolian companies is that they see Chinese equip-

A detonated blast using products from Blast Co., a rapidly growing Mongolian explosives supplier that has intentions ofmoving into the manufacturing end of the business rather than remaining just a service supplier.



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ment at 1/3 of the price of Western equip-ment and don’t take into account theincrease in productivity and the lowermaintenance costs of the latter.”

Wagner Asia was one of the first com-panies to benefit from foreign investmentin the market and has gone on to becomemore than just the Cat distributor.Wagner has been in the market for more

than 10 years, longer than most foreigncompanies, meaning they have both aloyal client base as well as a loyalemployee base that has been trained upover those years. Newcomers into themarket, such as Zimine, a joint venturebetween Murubeni (a large Japanesetrading house) and Tavan Bodt Grouphave to pay well to poach staff.

One of a new brand of Mongolianleaders is Gantumur, general director,Ochir Undraa, a Mongolian conglomerateinvolved in the supply of mining equip-ment and blasting via its subsidiary,Mera. Gantumur’s experience previouslytold him there was a gap between theworkers and the managers. “We havedecided to work within a very progressivestructure whereby we encourage commu-nication and interaction between all peo-ple in the company so that we can har-ness the best ideas to move our compa-ny forward,” Gantumur said. He alsoindicates corporate social responsibilityis an important factor in movingMongolian companies forward, but fewothers have so far followed OchirUndraa’s lead.

Martin Quick, CEO and president of Khan Resources.

Horsepower meets horse power: A Caterpillar 793D truck being delivered—900 km across the Gobi desert.



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Mongolian companies also suffer from a weak banking sec-tor and a lack of access to credit which makes it difficult forthem to compete. The Mongolian government recently had tostep in to offer a state guarantee on savings following the col-lapse of two medium sized banks during the financial crisis.Randolf Koppa, president, TDB, one of the better performingbanks in a weak sector, argued the GDP in Mongolia is expect-ed to grow with the mining sector investment. This will meanthe banking and financial services sector will need to get itsact together.

“Raising money for mining projects on the local market isdifficult,” said Gan-Ochir, director, Blue Sky Minerals, aMongolian junior company. “If you have an operating mine it isbest to go to Hong Kong; for exploration, Canada or Australiaare easier.”

UraniumThe Uranium sector in Mongolia is courted by controversy. InMay, Khan Resources, a Canadian junior company, had both ofits licenses withdrawn. Khan Resources’ main focus was theDornod uranium property, which was formerly an operating mineunder the Soviets. Under Mongolian legislation, Khan Resourceswould have been obliged to hand more than 51% of its resourceto the government, however things are looking considerablyworse. Sources within the sector say the Russians were unhappytheir former mine had been sold by the Mongolians at such a lowprice as they were willing to come in to redevelop the mine. TheRussians then launched a hostile take over for Khan Resourceswhich was refused. Since then Khan Resources licenses weretaken away on a technicality and unless its legal battle proves tobe successful, there is a chance that Khan Resources will be leftwith nothing. Martin Quick, CEO, Khan Resources, explained thecircumstances surrounding the controversy, specifically whenKhan was trying to sell its assets. “We had two offers for the

company, a Russian bid and a Chinese bid. We accepted theChinese bid, which was the highest bid and look what happenedto us,” Quick said. Khan Resources has invested more than $20

Southgobi’s Sunset coal open-pit (southern Mongolia). (Photo courtesy of Alexandra Ashikhmina)



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million in the property, but they face anuphill battle getting either its licenses orshareholders investment back.

SocietyMongolia has 20 years experience ofdemocracy, but remains a politicallyuncertain place. Concerning the invest-ment environment, potential foreigninvestors are worried in particular aboutthe 34% stake that the government has inthe Oyu Tolgoi project, Khan Resources’legal issues and whether the tax environ-ment will remain stable. They also closelywatch Centerra Gold’s investment. “Whatinternational investors look for is stabili-ty,” said Mike Lelliott, operations manag-er, Aquaterra East Asia LLC, a water solu-tions company working closely with OyuTolgoi. “They need to know when they in-vest the goal posts aren’t going to move.”

“Whether or not Mongolia fulfills itsgrowth potential depends on whether thegovernment establishes clear and consis-tent frameworks and regulatory regimesthat gives business the confidence toinvest,” said Nick Audin, strategic mar-keting manager, Orica.

Mongolia is a relatively high risk, highreward environment. The unfortunate

problem with Mongolia is that while theinternational investors are looking for sta-bility and a profitable business environ-ment, national interests are concernedonly with what the mining sector is doingfor them. “At the moment there is a feel-ing in the sector that a lot of direct for-eign investment goes straight into a for-eign company hiring expensive ex-patsand then straight out of the country,”said Nyambayar, director, Best Drilling.

Currently there is concern in the gov-ernment that Oyu Tolgoi is not usingenough local contractors. Its two largestcontractors, Redpath and Major Drilling,are Australian and Canadian respectively.There were unconfirmed plans for FluorCorp., OT’s infrastructure contractor, tohire 2,600 Chinese workers to work oninfrastructure projects. In a smaller way,MEC hired a Chinese company to work onits infrastructure in the West of the coun-try. While Mongolia has an unemploy-ment rate of more than 20%, it’s no sur-prise Mongolians feel aggravated whenthey see these companies acting, as com-panies do, in their own interests ratherthan those of Mongolian society. RanjeetSundher, senior advisor, Prophecy Re-sources, summarized the international

point of view: “We come here, we pay ourtaxes, we do the right thing when itcomes to the environment and we can’tdo any more,” Sundher said. “We are notthe government.”

Also in fairness to Oyu Tolgoi andMEC, few Mongolian companies have thecapacity to take on certain operations somanagers must balance between makinga good business decision and a goodpolitical decision.

Mongolia is open for business, thoughconditions can be tough. Mongolia hassignificant natural mineral deposits andeven now companies who enter will beamongst the first. While China’s appetitefor raw materials and energy remainsinsatiable, opportunities will aboundHowever so long as there is a disconnec-tion between the interests of the interna-tional companies and the national will,the environment can be considered astroublesome. If ordinary Mongoliansdirectly see the benefits that the miningsector can bring to them, and internation-al companies truly engage in long-terminvestments which include and cater toMongolian concerns, then internationalmining can play a crucial and beneficialrole in the country’s development.

The Mongolian government is currently considering whether and to what degree foreign investment should be allowed for development of Tavan Tolgoi. Located in the South Gobi desert,this deposit has estimated coking coal reserves of 6.5 billion mt and was originally developed with government funding.


Mongolian Mining 2010 - Global Business Reports

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