Interview

Gold companies are able to find investments without the Government’s support

We spoke with G. Chintumur, CEO of G and U Gold LLC as representative of the gold mining companies and which has been operating since 2001.

-When did you start your gold production? How many licenses do you hold?

-Our company was founded in 2001. After working on small derivative deposits in the first years of our operation, we obtained two licenses from the current MAK LLC in 2006 for a deposit nearby Uvur Khushuut and Ikher valley with a one-ton reserve. In relation to its shifting operations to the coal sector, MAK LLC transferred its remaining licenses to our company including Tsakhir Valley in Zag soum, Bayankhongor province, and Tegshiin Am along Mandal River in Jargalant soum, Bayankhongor province. The combined volume under these licenses obtained from MAK LLC amounts to nearly 1.5 tons, most of which hasn’t been mined yet. The current legal environment is not making it possible to mine them.   

-Does that mean there are enough reserves to carry out sustainable operations in the future?

-Currently, we have around 800 kg of operating reserve. A large volume of reserves was included under the restriction set by the law with the long name. We are waiting for an amendment to this precise law.

-How is the legal environment affecting your operations? Government authorities are reporting that law and regulations are sufficiently implemented under the Gold-2 program. Do you agree?

-Despite authorities claiming that the legal environment has improved, we haven’t seen any evidence of it. It’s not like we don’t have the law. The 1998 Minerals Law was an excellent document. There weren’t as many ambitions as it is today. The lawmakers followed the examples of countries with a highly developed mining industry. This law provided solutions to many issues. However, it has been picked apart and put together in its current form. 

-Can you provide specific examples of flaws?

-By blocking the conditions to execute the law sustainably, the government is actually deteriorating the legal environment. For example, the Ministry of Environment and Tourism forces us to obtain permission from the local residents in order to carry out operations. Legally, we are obligated to develop our feasibility studies, present them to the local community, make comments, and include them in the detailed environmental assessment. The MOET is supposed to discuss this during the detailed assessment meetings, provide its evaluation, and approve. However, the MOET requires us to bring permission instead of comments from the bagh. When we go to the local community, there’s not a single resident or team that provides this permission. Everything starts from here. The main dispute between local residents and mining companies arises from exactly this problem. This is how illegal activities such as promising large amounts of cash to the local residents start. 

The very government authorities make illegal requirements

However, the law does not regulate this issue. The MOET itself violates the law. Because of this permission from the locality, a lot of companies are shutting down. As the economy grows, it is natural to expect some risks in the environment. Especially for a country that crutches on the mining industry, it is inevitable. The authority responsible for mitigating such risks, regulate proper operations under the law, formulate and implement policies is the MOET. Unfortunately, by preventing mining companies to be independent and directly resolving how their operations should run, the current business environment is being hurt greatly. 

Moreover, our sector Minister is going around talking about mining large quantities of gold within two years without touching neither land nor water. There’s no project that finishes within two years. Largescale gold mining requires major equipment, technology, and investment. However, there’s the question of what happens after putting in massive investment and finishing the project in only two years. This talk shows he does not have a basic understanding of the mining industry. Mining investment directly relies on the deposit’s reserves. For example, the mining capacity is estimated based on the highest return on investment. I can mention an example of this. Mongol Gazar and Gatsuurt LLC worked on two different deposits on the back and front side of a mountain. Mongol Gazar made an investment worth mining two tons of gold per year. On the other hand, Gatsuurt maintained an annual capacity of 400 kg. As a result, the company which put in large investment finished the reserves in three years and had largescale surplus equipment. The other one carried out long-term mining with little investment and maintained a high return on investment. Such mistakes are still being made by some companies today.  

Regardless of existing law, people are misusing and interpreting the clauses which undermine the mining sector

-So, you mean companies should mine the reserves patiently without any rush?

-In order to keep mining return on investment high, mining capacity is visualized in a trapeze shape on a graph. Reaching the industrial capacity peak starting from point 0, the project should maintain this capacity and gradually go back down to point 0. We tie our investment here. In order to utilize our investment 100 percent, we must ensure equipment wear at the end of reserves. For example, let’s say our company has a reserve of 1.5 tons. Considering that the equipment wear period is 5 years and that we will continue to use them for 3-5 more years, this means ROI will be highest in 7-8 years of the project. If we divide the reserves in eight years, the project capacity is estimated to be at 200 kg gold per year. Even though investment amounts are different depending on the deposit’s capacity, the investment and prepared reserves must finish at the same time. Without planning as such, gold companies pour in large investment for gold projects and are left with so much surplus equipment in the end. This way, the government won’t receive much tax and the company won’t see ROI. Our company planned our structure and investment for not raising outputs beyond 200 kg of gold per year. Currently, we work when we need to and stand down when we don’t. Our latest major investment was made in 2014. For the six years up till today, we only worked for three years. We estimate that we will continue to work for 3-4 more years. Our remaining reserves correspond to this timeline, as well. 

-Gold companies are not open to the public and mostly quite ambiguous. They change their names frequently. What’s the main reason?

-As I mentioned before, it’s related to the legal issues. The very government authorities make illegal requirements. Let me tell you two cases. First, the Minerals Law stipulates that companies may work in cooperation with local administrative bodies and conclude agreements on infrastructure and human resources. However, the local administrative bodies construe this as mandatory. In this way, the issue of whether mining companies should operate goes under the direct control of local bodies and residents. Second, as per the 2015 amendment to the Law with the long name, a new clause was introduced stipulating that license holders may continue their operations by concluding an agreement with the state administrative body in charge of mining. However, the Mineral Resources and Petroleum Authority does not implement this clause. They push it away to the MOET who in turn, push it away to the Cabinet Secretariat in order to enforce a decree. These actions, however, are nowhere to be seen in the 2015 amendment. 

Irresponsible and illegal mining, and issues of anonymous operations and under the table dealing all arise from here. To put it straightforwardly, if government bodies implement the law properly, these issues won’t happen.

-How do you evaluate the Gold-2 program which started in 2017? Do you think it was effective?

-Gold output increase probably has not much to do with the program. However, it created some relief from the Law with the long name. Regardless of existing law, people are misusing and interpreting the clauses which undermine the mining sector  

-Relevant authorities are saying that environmental rehabilitation issues have been fully resolved under this program. Did you carry out rehabilitation on your mined area?

-The Gobi region’s ecosystem is extremely fragile. There’s little likelihood for rehabilitation. Water reserves are limited. It’s often required to penetrate into the underground water or non-return water reserves. On the other hand, the khangai region has a much higher possibility of rehabilitation after mining activities. Companies mostly use natural return or surface water. There are many advantages. In that sense, Mongolia’s mining sector policy must go in the opposite direction.

Our deposit barely reaches the khangai region. However, compared to the Gobi region, we are able to grow whatever plants we want to rehabilitate. There’s no problem. At times when gold prices are high, rehabilitation wouldn’t be a problem. Previously when gold prices were low, rehabilitation was financially very taxing. There’s no company today that ran into trouble by not doing their rehabilitation work.

-How many employees do you have?

-We had around 100 employees at our peak. However, due to standing down for almost two years in the past, we had fewer workers. We have the reserves. We’re just waiting for the right opportunity. Gold companies simply need the freedom to operate

-Under the Gold-2 program, gold companies are eligible for a discounted loan with three percent interest.  260-500 billion MNT is being spent on this initiative. Will this decision be a major support to gold companies?

-To be honest, gold companies have the most accumulated cash reserves. 500 billion MNT is nothing to them. Placer deposit golds go into market circulation very fast. In other words, this type of gold is extracted after stripping off soil and panning. Therefore, it’s sold within only one hour. It doesn’t require many current assets. When it comes to investment, equipment suppliers are providing very good deals and opportunities. Companies are able to purchase equipment by transferring the leasing agreement to purchase agreement. We have a massive opportunity to resolve investment issues without the government’s money. Someone who’s patriotic and principled normally wouldn’t take three % loans. Gold extraction is a profitable business. Therefore, we don’t need this loan at all. 

-So, you’re saying this policy is useless?

-Absolutely. Gold companies simply need the freedom to operate. There’s a case where P.Tsenguun, CEO of Altan Taria LLC, refused this issue in relation to flour. He refused to say that businesses should run according to market principles. Gold companies should do the same. As the gold industry gains high profits and the gold prices are high on the world market anyway, how would we look back after taking three percent interest loans from the government? It doesn’t make any sense. Business is business. It shouldn’t run like this. 

- You said gold companies need the freedom to operate. What does this freedom include, for example?

-The ministries should focus on implementing the laws instead of putting out new ones. Champion B.Bat-Erdene introduced the law with the long name just before Naadam and had it passed. No one saw the consequences. At that time, people thought that only a few companies with little economic benefits would be closed. However, no one foresaw that future mining companies were being incubated among the 200 companies. Mongolia is a mining-dependent country. No one thought twice about who’s going to be the owner of our natural resources and who’s going to explore them. I’ll mention one case. MAK LLC and Southgobi Sands LLC operated at Nariinsukhait deposit in Umnugobi province. At the time, these two companies submitted around 200 billion MNT in taxes to the state budget. MAK LLC was left with a cement factory, light concrete plant, and large quantities of investment for exploration. On the other hand, despite paying taxes, Southgobi Sands did not leave anything to the country. Only an empty pit was left. Thus, you can see how nationally invested companies are effective. Sadly, we blocked the road for national companies to develop and grow further through the law with the long name. Many gold companies went under. This did not help environmental protection at the same time.   

There’s a possibility that mid-size companies can be created within only one or two years and large companies within 5-10 years

Mining companies cannot afford to have the concept of tomorrow, currently. After private or state-owned projects including Erdenet, Baganuur, Shivee-ovoo, and Tavan Tolgoi are finished with their reserves, they will just be shut down. There isn’t any reserve that’s planning for the future.

In that case, independent mining companies should be the answer to the question of where will companies will manage Mongolia’s future natural reserve ownership arise. We must start implementing projects that gain profit from the mining industry, carry out exploration to a certain extent, and are on the scale similar to Oyu Tolgoi. How long do we have to wait for foreign investors in the minerals sector and the Parliament to discuss stability agreements anymore? We must have major national mining companies. We only talk about what we can or cannot do. Nothing’s impossible. 

Mining projects, construction projects, and driving a Toyota car are all alike. We only have to pay the money to buy and use the technology, not we can do this or we can’t do that. The world is full of companies offering their technologies. The most important thing is to ensure a legally favorable environment and a system that implements the laws. 

-The Bank of Mongolia received 95.9 kg of gold in February 2019. This multiplied by 10 times in February 2020 to 952.6 kg. Some people attributed this to the border closure. Does gold smuggling across the border still exist?

-The border was closed from February 1. At the end of 2019, gold prices plunged. Companies have been reserving their gold without submitting it. When gold prices revived from earlier this year, they started submitting their gold to the BoM from January 2020. Companies usually work throughout the summer and save their profits. They also keep their gold. What’s the use of extracting their gold, selling them straight away and save the money in the bank? Instead, it’s better to reserve their gold until the prices go up. Instead of smuggling across the border to avoid a mere 5 percent tax, it’s certainly better to sell them to the BoM. Therefore, the rumor that a large amount of gold is smuggled across the border to avoid taxes is overstretched. On the contrary, the previous 68 percent tax was a huge burden. 

-How many tons could the gold submit to the BoM reach maximum per year? 

-There’s not much hope in the next two years, because the working environment has been hampered by the Law with the long name. It will take 2-3 years to redo explorations and start operations of a new deposit. First, we must discover and then carry out careful research. It’s hard to tell if that new deposit would yield anything. This will take considerable time. Most gold companies have the capacity to make their own investments. In order to turn their cash into circulation, gold companies are investing in other sectors, especially construction. Ideally, mining companies should progressively develop into the scale of Rio Tinto. However, the government blocks this development process. If the law with the long name and the 68 percent tax didn’t exist, we would’ve had at least 20 large companies. Today, stable companies will achieve more success instead of largescale mining. Unfortunately, there’s no chance of operating sustainably for them. In fact, companies in the gold sector have a huge potential for growing and expanding. There’s a possibility that mid-size companies can be created within only one or two years and large companies within 5-10 years. Such growing companies are a handful out there.   



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Шинэ дугаар 2020/07-08

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