Mining in Mongolia

Materials World magazine
1 Feb 2016

Michael Schwartz looks at the mining industry in Mongolia, and its role in the country’s future.

In the August 2015 issue of Materials World, the global coal industry review showed several countries that are heavily dependent on domestic-mined steaming coal for their own energy generation. Some of these countries are now mining enough coking coal to become leading exporters to major industrial players.

One such country is Mongolia. World Coal Association figures for 2014 (the latest available) reveal that Mongolia generates 95% of its energy from coal. Yet, when it comes to coking coal, Mongolia occupies the seventh highest position in the list of producers, albeit dwarfed at 20 Mt/y by the leaders, China (527Mt/y and Australia (158Mt/y). Mongolia’s government values its mineral resources highly, but still needs overseas companies to achieve efficient exploitation.

The contribution of a thriving minerals sector in Mongolia is brought home by IMF figures for Mongolia’s GDP. Having grown by approximately 17% in 2011, the estimated total growth in Mongolian GDP for 2015 was around 4%.

The big name: Oyu Tolgoi

Oyu Tolgoi, one of the world’s largest copper-gold-silver mines, is the most well-known project in Mongolian mining. Located in the South Gobi region, this project has been producing and shipping copper and gold concentrate to Chinese customers since 2013.

Ownership of Oyu Tolgoi is 66% in the hands of Turquoise Hill Resources, which has copper-gold and coal mines in the Asia-Pacific region (the remaining 34% is held by the Mongolian government).

Under an investment agreement signed in 2009 by Turquoise Hill Resources and strategic partner Rio Tinto, the latter is managing the development of Oyu Tolgoi. Figures for the third quarter of 2015 reveal revenue of US$431 million on 226,000t of concentrate – up 2.5% over the same period in 2014, even allowing for lower copper prices. Predictions for the fourth quarter of 2015 forecast a similar increase.

The political background to the Mongolian mining industry, and Oyu Tolgoi in particular, is complex, including environmental concerns as well as corporate social responsibility and allegations of corruption, but as a sign of confidence in Oyu Tolgoi, on 14 December, 2015 Turquoise Hill Resources signed project financing for US$4.4 billion. This is via a syndicate of international financial institutions and export credit agencies representing the governments of Canada, the United States and Australia, along with 15 commercial banks.  

China’s slowdown

The widely reported slowdown in Chinese industrial production has had its effects on many countries, and Mongolia is no exception. Dawson Brisco is Manager, Corporate Development, Erdene Resource Development Corporation, a company with 15 years experience in precious metals exploration in Mongolia. He explains, ‘For commodities like gold, the market in China is still very robust, even at slower growth rates. China currently accounts for about one third of global gold demand and this demand is expected to grow by 20% between 2014 and 2017. Additionally, because China is also the world’s top gold producer, they are the largest manufacturer of gold mining equipment globally.’

Dawson Brisco also noted that, ‘For bulk commodities, like coal or iron-ore, the impact has been much greater.’ This response came in the week when the International Energy Agency cut its five-year forecast for global coal demand by more than 500Mt coal equivalent – a decline in Chinese coal consumption that started in 2014 and will continue.

Coal collapse or not, Mongolia still recognises the value of its mining. Centerra Gold, for example, owns 100% of the Gatsuurt exploration property, located 35km from its now worked-out Boroo mine. In January 2015, the Mongolian Parliament designated Gatsuurt as a mineral deposit of strategic importance, allowing it to move forward.

John Pearson Vice-President of Investor Relations, Centerra Gold, corroborates this, saying, ‘The Government is very interested in and supportive of advancing Gatsuurt.We have operated in Mongolia since 2004, when we put our Boroo Mine in operation. Boroo produced more than 1.9Moz of gold and is now mined out and we put the last tonne of ore through the mill in December 2014. The mill is currently in care and maintenance as we wait for the final approvals to develop our nearby Gatsuurt Project.  We plan to mine the ore at Gatsuurt and truck it 55km to the Boroo mill for processing. It is one of  three near-term development projects in our growth pipeline.

‘We are currently waiting for the Mongolian Parliament to approve the ownership structure for Gatsuurt where the government will take a 3% special purpose royalty in place of a 34% participating interest in the project. Once that happens and we get a deposit development agreement in place we will need to refresh all the permits for Gatsuurt.’

Brisco confirms the trend, ‘The mining sector is a critical component of Mongolia’s economy, accounting for roughly one quarter of GDP, a large percentage of government revenue, and more than 80% of exports. Thus, the government tends to be quite supportive of the resource industry, reflected in several mining-friendly legislative changes over the last two years including a reduction in the gold royalty rate and a new Foreign Investment Law.’

Keeping it local?

Naturally, operators in Mongolia rely on the highest quality staff – and the question of whether such personnel are available locally or have to be imported applies.

Recruitment firm Pedersen & Partners operates 56 wholly owned offices in 52 countries, Mongolia included. Dariimaa Gansukh is the company’s locally recruited country manager and replied to questions from Materials World. She confirmed that there is a special mining school, at the Mongolian University of Science and Technology. In addition, ‘mining companies mostly have their own scholarship programmes. Therefore most graduates usually apply for positions during their internships, meaning that most search companies do not end up placing any fresh graduates, especially for mining.’

When it comes to Mongolia generating the quality and quantity of mining engineers for current projects, Gansukh points out that, ‘mining is still a new sector in Mongolia and, reflecting foreign investment, mining has been a boon in our country. Therefore, mining technology and equipment are a fresh sector, and so Mongolia doesn't have that much experience. The result is that most mining experts are usually from developed mining countries such as Australia and Canada. Mongolians are thus mostly found in junior positions.’

At senior levels, Gansukh is cautiously optimistic, saying ‘I can sometimes see locally-trained personnel being promoted to senior positions at board level or within individual projects. The classic example is someone who speaks fluent English, and who can count overseas experience among 10–20 years experience overall. However, it depends on the company.’

Corporate social responsibility 

Pearson believes not only in the principles of sustainable development but also in following responsible mining practices where operators are developing or exploring for new mines. Regarding Mongolia, he said, ‘We have a long history of corporate responsibility. For example, the Boroo operation provided funds to certain projects within Mongolia with particular focus on the surrounding communities.

‘The mine supported local schools by upgrading their facilities, including the renovation of school dormitories. The company has made improvements to the heating, plumbing and drinking water systems and construction of a new canteen in different villages. Other infrastructure projects include building an agricultural centre and community centres in Bayangol Soum and Mandal Soum, developing local infrastructure including a library, medical clinic and community centres, repairs to municipal streets and provision of dental clinic equipment.

‘A sustainable community development fund and micro loan programme were also implemented to alleviate unemployment and poverty by creating approximately 30–40 new jobs annually and supporting the development or growth of small and family-owned businesses. Between 2011 and 2012, Centerra assisted in building a new modern maternity hospital in the capital city, Ulan Bataar, which has 150 beds and the capacity for 50 intensive care units for newborns.’

Brisco summarises Erdene’s CSR commitment by saying, ‘Erdene has been fully committed to CSR since it arrived in Mongolia in 2003. By acting ethically and responsibly, we have built lasting relationships within the communities in which we operate, and make positive contributions, including co-financing key public works projects, sponsorships, funding refurbishments of local buildings, providing supplies for local medical clinics, and others.’

While the debate over Oyu Tolgoi and the associated political complications tend to dominate coverage of Mongolian mining, it is very apparent that there is an established mining sector in Mongolia ready to generate the minerals that have made mining so crucial to its development.