Gold-2: Good ideas poorly implementing

Mongolian Mining Journal finds out from E.Enkhbat, Executive Director of the Gold Producers’ Association, why the  sector thinks the Gold-2 programme is good on paper but poor in execution.

Do you share the popular perception that the Gold programme initiated in 2017 by the so-called “professional” government has not been successful?
Let us start with Gold-1 which was implemented in 1992, under the First President of Mongolia, P.Ochirbat. This played a vital role in helping our economy overcome the huge difficulties during the transition from a centrally planned economy to a free market one. Its success can be measured by the fact that gold production rose from 0.8 tonnes to 10.4 tonnes per annum.

The next milepost in the development of the gold sector was Gold-2000, which lifted production to a peak of 25 tonnes in 2005. Mongolia’s foreign exchange reserve increased and the economy grew. Between 1992 and 2012, Mongolia’s total gold production was 218 tonnes, and gold exports brought in $2.8 billion.

The ascent was followed by a downturn soon after, almost entirely as a result of the 68 percent windfall profits tax levied in 2007, followed by the “Long-named law” of 2009. Gold purchase by The MongolBank dropped to a meagre 2.8 tonnes. Gold price rose to $1800, but Mongolia could take no advantage of the global boom.

The Gold Producers’ Association was established in November 2013 to promote the sector’s reputation and interests, and to allow gold companies to speak in one voice so that the government takes note. We have succeeded in changing several regulations and practices that were hindering the sector’s growth. We have cooperated in initial studies taken up by Gold-2  and given our opinion and suggestions on a regular basis. The association has worked hard, in numerous negotiations with the Government, to lessen the burden of taxes in the sector, by, say, reducing the royalty rate to 2.5%.

Even after all this, why is Gold-2 not achieving results?
Everything looks good on paper, but the implementation is unsatisfactory. The biggest failure has been in the sphere of increasing production. Regardless of what steps we and the Government have jointly decided on, execution is taking very long.
The programme has two phases, the first to run in 2017-2018 and the second in 2019-2020. The first is mostly about financing which has been the main issue for producers since 2014. Some think financing is only about getting a loan that can be paid back after some time with the mined gold. It is much more complicated than that and is the key to increasing our gold reserves.

Exploration is the priority, and because it is full of risks, the state wants to stay away, leaving the work to the private sector. Now, if the private sector has to do large-scale exploration, it needs money to provide itself with the right kind of equipment. In 2017, only five companies managed to get MNT25 billion in loans from the Development Bank of Mongolia. Two of them are our members, which means most others were left out.

This is to be seen against our demand for the past few years, made after detailed calculations, for MNT258 billion in long-term loans at a reasonable interest rate. When we approach a commercial bank with the necessary documentation for a loan, they set conditions too difficult to meet.

Similar complaints are heard about the Development Bank also. Would you take up the matter with them?
The most contentious issues about a bank loan are collateral and interest rate. Most of the rest are related to operational matters. Gold miners use very expensive equipment, but when we offer these as collateral, banks invariably undervalue them. We then have to put up our immovable assets.

Even when companies submit all the requested documentation with their loan application, the Development Bank can take up to three months to take a decision, sometimes asking for additional documents. This is quite in contrast to what we often see when an application is successful. We may then find that a loan given in August is to be paid back in December.  

When a company fails to secure a loan sufficient for all its needs, it cannot but take other short-term and high-interest loans to meet occasional urgent needs that are part of business. These are usually from commercial banks and non-bank financial institutions, but are available only through intermediaries who claim part of the mined gold as their fees.
All this goes to show how the hopes of the Government that Gold-2 would improve our economy are stuck at the mid level by avoidable administrative delays. Our association is planning to hold a meeting with the Ministry of Finance officials to persuade ministers and others to see the gold industry from a different perspective and to support us.

What kind of financing is optimal for the gold sector?
We shall be most helped by loans at a reasonably low rate of interest, against easy-to-provide collaterals, and with a flexible repayment schedule. We want the Ministry of Finance to ensure that borrowings do not cripple our capacity.

The MongolBank bought 20 tonnes of gold in 2017. Was Gold-2 a factor behind the increase?
Eliminating graduated royalty and fixing the rate at 2.5 percent in 2014 was an important step in encouraging more gold delivery. The very next year gold purchase by MongolBank increased by 70 percent and has gone on rising until it hit 20 tons in 2017, the highest in 20 years. Besides, fresh production was started in some areas outside the ambit of the “long named law”. The authorities must comprehend that to reap a good harvest, they must first prepare the ground well.

How has this been reflected in the gold sector’s contribution to the budget?
Last year, it stood at MNT49 billion as 20 tonnes of gold were produced. You may say it is not all that big an amount, but the gold had a very special role as it contributed to boosting our foreign exchange reserves by over $700 million and helped strengthen the MNT against the USD. This helps sustainable economic growth in an indirect way. As the foreign exchange reserve builds up, the MNT appreciates against the USD, leading to more purchasing power.

What are your views on granting exploration licences only through selection?
The electronic application system has been given up, but it is not clear how the replacement, the selection procedure, will actually work. Such uncertainties are bad for the execution of Gold-2, though nobody in government appears bothered. Last year, gold producers delivered 20 tonnes of gold to MongolBank, and government authorities claimed all the credit, unwilling to see that policy changes are having only a surface impact.

The consequences of poorly-considered decisions and bad execution will be seen this year. I doubt if MongolBank’s purchase will be more than in 2017, let alone reach 25 tonnes.

Will you demand an extension of the 2.5 percent royalty rate beyond 2019, when it is scheduled to expire?
It has proved to be a good decision, not just because of the delivery statistics but also, and more important, it shut down the expanding shadow economy. We shall try our best to see that the present rate is continued, so that gold purchase by MongolBank increases, and at the same time, gold companies operate smoothly, their efficiency facilitated by a good support system. All gold producers agree to extend the term of the rate.

The Ministry of Minerals and Heavy Industry has said it will make improvements in Gold-2. How seriously does it take gold producers’ comments and ideas?
We shall certainly ask the ministry to focus more on better implementation than on changing concepts and policy. Gold-2 is a special programme, and the Ministry of Minerals and Heavy Industry has to work with other ministries to get the best results.
A core target of Gold-2 is to improve the legal and regulatory environment. We feel there is need to make changes in the Law on Corporate Income Tax. When we remember that 66% of the 20 tonnes of gold were delivered by citizens and 34% by companies, it is clear what an important role ninjas have in the gold sector.

According to the law, entities with annual sales of more than MNT3 billion have to pay 25 percent tax. At the time the law was enacted, Mongolia’s economy was less than $3 billion, but today it has exceeded $10 billion, and the old corporate income tax thresholds are no longer practical. Sales of MNT3 billion are quite low for a gold producer. We have written to the Ministry of Finance to raise the limit.

Amendments to this law are also important for determining the origin of the gold. Individuals cannot identify the origin, and if the gold is recorded as coming from a particular company, its origin will be certain, and the state will be able to monitor the state of gold reserves.

Gold-2 was aimed at eliminating state bureaucracy, but nothing much is seen to done about this. We lose a lot time getting any problem resolved by the Ministry and the Mineral Resources and Petroleum Authority. If they continue to operate at their present sluggish manner, it is unlikely that mining production will meet expectations.

Both exploration and mining can only be seasonal in Mongolia, with preparations beginning in February, and soil stripping only in March. Operations are suspended in September. The winter is the time for companies to plan next year’s work, to finalise proposals and complete all paperwork for submission to the government for processing and approval. However, there has been no work at the Professional Council of Minerals since late November 2017 as it is being restructured. The number of resource reports, mining plans and feasibility studies awaiting approval has been growing by the week.

The President is expected to soon announce his policy on the gold sector. He has already told parliament that he favours suspension of granting any new exploration and mining licence and bringing the sector under complete State control. How did the sector receive this?
The President has the right to initiate a law, and Kh.Battulga’s position has been known to us.  
In 2005, the amount of gold purchase by the MongolBank reached its peak, but following the windfall profits tax in 2006, citizens and businesses chose to smuggle their production across the border, thus severely damaging the Mongolian economy. Since enactment of the “long-named law”, illegal miners, the so-called ninjas, have been much more active and have moved into many fresh areas to dig for gold. When their operation was stopped, it was doubtful if gold companies would rehabilitate the mined land. Ninjas took advantage of the vacuum, and are mining the abandoned sites, causing much and more loss to both the environment and the economy.

Putting the gold sector under state control could see a replay of these stories. Until 2012, gold miners were the “bad boys”, damaging the environment when they mined, and doing no reclamation when they stopped. For the past five years, we have been trying to show the other face of gold mining and, I dare say, we have convinced many that the gold industry has a positive effect on the Mongolian economy.

This may now all change and we may be forced back to square one by what the President is likely to ask for. The pity is that if the state does indeed run the gold sector, that will not just spell the end of exploration work, but will also send skilled and trained Mongolian professionals and geologists out on the streets.