Will 2017 meet Mongolia’s mega hopes from mega projects?

Mongolian Mining Journal

2017-03-31 14:06 GMT+8

In late 2016, the price of coking coal surged, the oil industry outlook brightened, and there were positive signs in other commodity markets also. As producers and exporters celebrate the return of good times, however temporary these might turn out to be, Mongolians have another reason to feel optimistic about 2017, when work on several mega projects, including Tavan Tolgoi and Gatsuurt, is slated to begin, after years of false hopes, dashed expectations, and broken promises. Let us see how things stand with some of these projects that will change Mongolia’s economy and Mongolians’ life in many ways. 

GATSUURT

Ts.Dashdorj, the present Mining Minister, is the fourth in a series to try to bring the Gatsuurt deposit into the economic cycle. D.Zorigt initiated the talks with the investors on developing the deposit, but the tenure of D.Gankhuyag was marked by growing opposition to the project. R.Jigjid soothed popular feelings and took some real steps towards operating the mine by getting the mineral law amended to allow the state to forgo its 34% ownership in
favour of receiving 3% special royalties. Draft investment and deposit development agreements were prepared but things then slowed down as elections drew near. How quickly will the current government be able to fulfil expectations, and boost morale in the mining sector?  

Progress might not be easy. The NGO Save Noyon Mountain moved court and in May 2016, the extraction
licence of Gatsuurt mine, issued to Centerra Gold by the MRAM, was suspended. The company appealed against the ruling to The Capital City Administrative Court, which refused on 9 February to hear the case, sending it back to the primary court.

On the other hand, there have been two positive developments in recent days. In one, the Ministry has set up a working group charged with preparing the deposit development and investment agreements with Centerra Gold. This replaces the working group formed in 2015, which became defunct with the coming of the present government. In the other, the Mineral Resources Professional Council earlier this month approved a revised feasibility study of the Gatsuurt deposit. 

The Gatsuurt mine holds 50
tonnes of gold in about 17 million tonnes of ore. There could well be 26 tonnes more of precious metal and the mine lifetime would be around 10 years. The project would need a total investment of $215.9 million, while operational costs would be $1026 million. Estimated sales revenue would be $1769 million and the state budget would get $432.3 million in tax and other payments. It will have around 1000 workers. 

OYU TOLGOI

The Oyu Tolgoi expansion project will be the strongest pillar of the Mongolian economy in 2017. Turquoise Hill Resources, which owns 66 percent of the mining project, has said this year’s capital expenditure in the open pit mine and the underground mine would be $100 million and between $825 million and $925 million respectively. 

In December 2015, Rio Tinto raised $4.4 billion from 15 commercial banks with government support. The banks are ready to lend up to  $6 billion and might be willing to give $1.6 billion more. Whether Rio Tinto takes these further loans or not will depend on what the market situation does for Oyu Tolgoi’s own financial capacity. 
The underground mine is the heart of the project where 80 percent of Oyu Tolgoi’s total reserve lies. Sales would start in 2021 and full capacity
of  production would come in 2027. 

TAVAN TOLGOI

How all efforts to operate the Tavan Tolgoi deposit in a big way have failed ever since S.Bayar’s government took it under state ownership in 2008 is a story well-known. The latest round was flagged off last October by J.Erdenebat’s government, which gives the impression of being really serious about the job. 

There are many obstacles on its path, even though the time is propitious with coking coal prices rising. The rise followed the Chinese government’s sudden decision in mid-2016 to reduce the number of working days in domestic coal mines from 330 to 276. However, the government had second thoughts as prices kept going up, and it soon began to re-extend the operating days. The result has been that some market experts are taking coking coal price trends as not being reliable. However, even if there is no spectacular recovery as in 2008 and 2011, coking coal prices will remain reasonably high, and not hit the bottom anytime soon.

That makes it all the more important to raise production at Tavan Tolgoi. A working group was set up in the Ministry of Mining and Heavy Industry late last year to resume discussions with the “old acquaintance” consortium, which consists of Energy Resources, Sumitomo, and Shenhua. Maybe this time will be lucky, and Tavan Tolgoi would be freed of the jinx. Much, of course, depends on how prices move. All parties would lose interest if the expected commercial returns are not high enough. In any case, so much has to be done – finalizing the investment process, completing studies, developing infrastructure etc. – that expecting any spectacular benefit from Tavan Tolgoi this year could be unwise. 

THE TAVAN TOLGOI POWER PLANT AND CHP-5

The investment agreement for the Tavan Tolgoi 450-MW coal power plant was signed in June 2016, with MCS Power as the domestic and Marubeni as the foreign investor. Little has progressed since, except for successful negotiations with Oyu Tolgoi LLC to buy 70% of the generated power. The rest would be used
at the Tavan Tolgoi and Tsagaansuvarga projects. We can only hope that work on the power plant will move forward this year but it seems several details are still to be worked out to the satisfaction of all the parties involved. 

Failure to progress in building the Combined Heat and Power Plant – 5 has been attributed to lack of finance, the market situation, and political disagreements. Several other coal power plant projects have also been on the drawing board for long. The government should take a quick decision on which of these it would take up first. 

The proposed projects include the Baganuur power plant, Bodi Group’s Buuruljuut coal power plant, and the Shivee Ovoo power station. Buuruljuut will be built by the private sector, but Baganuur, Tavan Tolgoi, and CHP-5 are government projects. However, only the Tavan Tolgoi power plant is mentioned for development in the government’s Economic Recovery Programme (2016-2020), while the others are just said to be under study. Prime Minister Erdenebat should be knowing the need to start work on at least some of these, as a power-hungry China would welcome long-term agreements on buying electricity from Mongolia.

The only good news is that work has finally begun on
expansion of CHP-3. That would alleviate to a certain extent the country’s shortage of energy and heat. 

THE RAILWAY AND OTHER PROJECTS

Last December, the government announced a list of energy, road and transport projects to be implemented in 2017.  Among them are the 45.3-km railway from Nariinsukhait to Shiveekhuren, the 281-km railway from Zuunbayan to
Khangi port, the 192-km railway from Choibalsan to Khuut mine, and the 234-km railway from Khuut mine to Bichigt port. Later, Road and Transport Minister D.Ganbat expressed his hope that work on the Nariinsukhait-Shiveekhuren segment would start in the spring. When completed, SouthGobi Sands, Mongolyn Alt, and Usukh Zoos can then use the railway to transport their coal. The 45-km heavy and paved road now used has a capacity of just 11 million tonnes per year while these companies can together produce over 30 million tonnes. However, construction is likely to be delayed beyond the planned one year, as many related issues are still to be sorted out. 

The Zuunbayan-
Khangi track is likely to have a wide gauge, according to the draft resolution on ensuring implementation of the state policy on railway transportation submitted by the government to the Parliament. Rough estimates put the total cost of construction at $1 billion. Mainly iron ore would be transported through the railway. 

It is unlikely that this would see the Ministry of Mining and Heavy Industry make any real progress on  ‘ambitious’ projects such as the oil refinery, the copper smelter, and the steel plant, besides conducting some preliminary studies. Actual construction could begin only after the money is found and in the present situation, this might take quite some time. 

B.Tugsbilegt

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