No choice but to rely on gold

2020  |  May - June   |  029

  • For a small economy like ours, Gold production is like printing dollars
  • Business entities would receive credits with three percent interest

Recognized economists and financial organizations in the world are anticipating an economic downturn in the short and medium period, with prospects growing gloomier every day. The first step to protect our small economy from this large wave of crisis is to increase our foreign exchange reserves. The Gold-2 program aimed at this goal was timely and effective against the economic recession caused by a fall in commodity prices. Gold is a precious metal considered as a foreign exchange reserve with the ability to convert directly to USD. This characteristic keeps inflation caused by money supply at bay and creates a stabilizing effect on the economy. To protect its exports during this time of unprecedented fall in almost all economies around the world, producing countries are becoming more likely to take measures to weaken their currencies. As such, Central banks are set to buy large amounts of gold.   

Mongolia has historically relied on gold during economic crises. Previously implemented programs yielded both good and bad results. During the first Gold campaign of 1992-2000, largescale investment was brought in and annual gold output rose from 0.7 tons to 11 tons, bringing in sizeable tax income into the state budget. However, the downside was environmental devastation caused by neglecting rehabilitation across several thousand hectares of land. 2000-2010 saw an upswing in annual outputs to 24.1 tons. At the time, the gold industry made up almost 20 percent of budget revenues and GDP, bringing in 107.6 million USD to the state budget throughout the Gold-1 program. Yet, the 68 percent windfall tax effective from 2006 shooed away investors, while the Law with the long name passed in 2009 has caused over 200 companies to exit the industry.

As a consequence, gold output went down to the level of 20 years ago. A decision to revive gold purchase was made and gold royalties were lowered twice to 2.5 percent in 2010 and 2014. This proved to be effective. The Bank of Mongolia’s gold purchase soared, greatly supporting the foreign exchange reserves. However, the rate of royalty was raised back to 5 percent effective from 2019. 

For a small economy like ours that relies on the export of only two commodities, gold production is like printing dollars. At the cross-section of undermining factors including plunged foreign investments, interruptions in export revenues, domestic political conditions, and the pandemic crisis, it’s easy for the economy to hit rock bottom. The only saving grace during this time is the gold industry. 


Companies will be provided financing of up to 500 billion MNT 

The Government passed the Gold-2 program to be implemented from 2017 for four years. As evaluation time is getting closer, there should be one last review of whether past mistakes have been repeated or not. Before the start of the program, it was estimated that 33-59 billion MNT would be concentrated in the state budget from royalties, and proven gold reserves would increase by 100-150 tons.  

The program was uniquely positioned to support business entities financially and provide sustainable operating conditions. B. Munkhtur, Head of the Department of Geology and Mining Policy Implementation and Coordination of the Ministry of Mining and Heavy Industries, commented on the program’s implementation “We are planning to end the program in one year. Outcome performance will be released soon. Currently, the program progress is at 73-74 percent. Operations, financing, environmental protection, and socio-economic leverage for the local community were achieved as part of the main target. However, on the question of whether current assets were resolved for entities, the answer is no. As the mining business is high-risk, it was very challenging to arrange its financing.” During the program period in 2018, the BoM’s gold purchase was at a record high of 22 tons. By giving credits to gold companies, gold outputs are expected to rise and the BoM’s purchase to reach 23 tons in 2020 and 25 tons in 2021, according to the Ministry of Mining and Heavy Industries and the Bank of Mongolia. 

As the Gold-2 program is facing difficulties up to this day in achieving its target of financially supporting gold mining companies and ensuring sustainable operating conditions, the Minister of Mining and Heavy Industries has collaborated with the President of the BoM to approve “Plan for ramping up Gold-2 national program”, “Procedure on temporary discounted financing to ramp up and intensify the Gold-2 program”, and the “Requirements related to mining, concentrating, protecting, storing, handling and trading ores and sand that contain gold” on May 20, 2020. The expectation is improved production capacity and increased sale of gold to the BoM by providing discounted credit for current asset financing, making it an important source for accumulating foreign exchange reserves.  

Rumor has it that this funding requires 260-500 billion MNT. It has two categories: advance payment funding and long-term funding. The advance payment funding will be a no-interest source of financing provided from the BoM to commercial banks who will loan them money to gold mining entities with no more than three percent bank margin. In other words, business entities would receive current asset credits with three percent interest. The credit term will be six months and creditors who have been selected for the program are contractually obligated to submit their gold to the BoM. The amount of funding shall be no more than 30 percent of gold to be mined according to the entity’s mining plan of that year.

On the other hand, long-term funding has an interest equal to the policy interest rate. The bank will add up to 3 percent and credit it to the gold miner for up to 24 months on a repayment condition. It has to be no more than 30 percent of the entity’s gold deposit reserves. Relevant authorities are saying that this funding will be resolved within the year.

B.Munkhtur: The issue of current assets for business entities hasn’t been resolved under the Gold-2 program
Head of the Department of Geology and Mining Policy Implementation and Coordination of the Ministry of Mining and Heavy Industries
   Our policy and operational support in the gold industry have provided results. In 2018, around 22 tons of gold was sold to the Bank of Mongolia. If the financing was supported more assertively, this number could’ve been more. We’re expecting this issue to be resolved soon. It’s too early to give detailed information.
   The Gold-2 program sets out to resolve current assets for business entities. The requirements are a valid license and approved environmental assessment and mining plan. Of course, the Feasibility Study and Reserve Report must be approved as well.

A.Enkhjin: The country needs to increase its foreign exchange reserves 
Head of Resource Management and Financial Markets Department, Bank of Mongolia 
   Foreign exchange reserves act as economic immunity. The more a country can increase its foreign exchange reserves, the more it is immune against external and domestic adverse impacts. 
For an economy like ours that relies on the cycle of the commodities market and has only a few types of export commodities, augmenting our foreign exchange reserves is crucial. Gold plays an important role in this. 
   The BoM purchases gold from gold miners at a market price which is essentially the daily rate at the London Metals Exchange minus the purification costs. In other words, we offer the most competitive price in the world to gold miners who have no need to purify gold overseas or export them. 
   Furthermore, the BoM is working on providing opportunities for gold miners to trade their gold without any difficulties or barriers. The BoM purchased 20 tons in 2017 and increased the foreign reserves by 700 million USD. In 2018, it reached a record high of 22 tons. It is estimated that by providing credits to gold companies, the gold output will increase and the amount of gold purchased by the BoM will reach 23 tons in 2020 and 25 tons in 2021. 


Number of licenses going down, so are the reserves

The current proven gold reserve in Mongolia isn’t significant. For example, the proven reserve at gold placer deposits has a life of only 4-5 years, reports the Ministry of Mining and Heavy Industries. As a result of gold exploration, 175.5 tons of new gold reserves were identified in the past five years and registered into the State integrated fund. 147 tons are the main deposit reserves. The current market value of this reserve which was identified in the past five years is 7.3 billion USD. In other words, Mongolia’s foreign exchange reserve would be increased by this much.

Even though it’s crucial to increase gold reserves further, it’s doubtful whether a supporting policy exists. Especially due to environmental issues, the sector’s ministry and local administration have become hostile towards gold companies.

By May 27, 2020, there are 564 gold licenses in Mongolia according to the Mineral Resources and Petroleum Agency. 464 or the majority of those are owned by 100 percent nationally invested companies. Most of the licenses were issued for Tuv, Bayankhongor, and Selenge provinces. Most license holders are Gatsuurt, Eco Altan Zaamar, Burdel Mining, Boroo gold, Monrostsvetmet, Bumbat, Platinumland, It Gold, and Olon Ovoot.

Of the 2750 exploration and mining licenses at the country level, over 1700 are mining and 1050 are exploration licenses. According to this data, you can see how the stability of exploration and mining operations in the gold sector has been tipped off. 

The sector’s ideal stability is if the number of exploration licenses exceeds the mining licenses. Therefore, the above data suggest a clear imbalance. Secondly, gold licenses take up around 50 percent of all exploration and mining licenses. However, operational ones are actually very few. The number of exploration licenses covers around 5 percent of the territory of Mongolia.  Therefore, if exploration activities aren’t expanded nationally, the possibility of identifying new placer deposit reserves would be lower. The Ministry of Mining and Heavy Industries says that relative to the size and geological formation of Mongolia, it’s entirely possible to discover new placer deposits.

In 2017, the Minerals Law was amended to allow exploration licenses to be issued solely on the basis of a selection process, with both positive and negative consequences. The positive being the increased income concentrated at the state budget due to the selection process, as well as more participation from more professional and experienced companies. The downside is that foreign and domestic investments have shrunk to an extent due to the risks associated with exploration. 

The difference between geological and exploration sectors is that results don’t come straightway even though decisions were made today. Whether negative or positive, the results usually show after at least three years. This is the nature of the sector. It goes without saying that as the exploration sector shrinks, the issue of exploring new placer mines and enriching the minerals wealth fund gets even further away. Not being able to prove reserves and identify new deposits means the chance of mining more gold will be even lower.

A.Bilguun: Central Banks are buying gold in bulk 
Chairman of the Board of Directors, Mongolian National Mining Association
   Since 2000, gold deposit development projects in Mongolia has relatively intensified. Gold is essential for the stability of the country’s economy and most importantly, the main source of foreign exchange reserves. In recent years, there’s a trend among many countries around the world to make up their foreign exchange reserves with gold.  
   The reason why gold is being prioritized around the world is the trade war between the US and China. It’s expected that issues like trade wars between Asia Pacific nations could adversely impact international currency rates. 
Therefore, it’s commendable that our policymakers have taken considerable steps to increase gold mining and depositing gold for the BoM’s official foreign exchange reserves by properly identifying potential risks. 
    The main aspect of the Gold-2 program is that lowered royalty rates contributed to the selling of gold to the BoM. The current situation surrounding Covid-19 is increasing the importance of the gold industry in our country. The economic crisis due to quarantine measures is expected to hit many countries in the second half of 2020.
   This could harm our main export commodities. Therefore, the Gold-2 program has the potential to create two main advantages. First, it’s crucial to put gold projects into market circulation and intensify mining operations in order to boost the domestic economy and specifically the mining sector. 
   By doing so, the domestic economy will have new sources of purchasing, investment, and tax concentration. Second, it’s essential for using gold or precious metals as foreign exchange reserve currency. 
S.Badarch: Halting explorations casts a shadow over gold miners
Executive Director, Gold Producers’ Association
   Although gold submission is increasing, the legal environment is still unstable. Stopping explorations has cast a shadow over the future of gold miners. Companies who have already invested aren’t sure what to do next. In addition, by giving exploration licenses to a non-professional agency, the sector’s reputation fell and licenses became a trading currency.
   Licenses shall be issued on the basis of the entity’s past history including stable operational experience and history of responsible mining. What’s more, the procedure for issuing licenses on a selection process gives the advantage for major foreign-invested companies, leaving out domestic companies. Therefore, it makes authorities’ promises to support the domestic entities an empty slogan. 


Rehabilitation issue in the gold sector resolved

Issues surrounding environmental degradation and destruction have been around for many years. Fortunately, companies have been carrying out their rehabilitation at 100 percent performance in the past few years. This owes to inspection and monitoring from the government authorities and the local administration on the side, and improved corporate responsibility on the other. Environmental regulations and legal and standard documents have been taken up to a whole new level by the sectoral ministry in the past two years. There’s a systematic process in place for environmental protection, rehabilitation, technical rehabilitation according to technology first and biological rehabilitation afterward.  

Placer deposit operation penetrates 70-80 meters underground. 99 percent of this is backfilled, creating a biological landscape. Afterward, vegetation and trees are planted. However, it’s often that freshly starting mining operations is incorrectly explained to the public, disturbing citizens and misguiding them. As companies are obligated to deposit collateral before starting their operation, the issue of neglecting the rehabilitation process is a thing of the past, notes the Ministry of Mining and Heavy Industries.

We must start implementing projects that bring in money from the mining sector, carry out exploration, and are on the development stage similar to Oyu Tolgoi, begs professionals in the industry.

The gold industry will not slump in the near future, as predicted by international research agencies. The Gold-2 program which brought growth to the BoM’s gold purchase needs a happy ending. Increasing our gold reserves and carry out rigorous mining could be our top priority today.  


Шинэ дугаар 2020/07-08

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