My Interview with D. Zorigt, Minister of Mineral Resources in Mongolia
Blog: Yurts, Yaks and other adventures on the Silk Road - 19 September 2009
By: U.B. Green
The raw text of my interview with Minister Zorigt (Ministry of Minerals and Energy)
How much could this OT produce in monetary terms?
ZORIGT: We are talking about quite signifcant numbers. We have done our numbers for the next half century. If the price range is around $4000 per ton we are talking about a total number that includes tax revenues, fees etc. A ballpark figure is 28 billion dollars. This is a significant number. That is in real terms, not NPV terms.
On an annual basis we are talking about 58 million tons of ore produced. Per annum this means around 800 million dollars at peak performance, if we look at the dividends as well as taxes.
Why did the government back off its attempt to acquire 51% of Ivanhoe shares?
ZORIGT: The government has all sorts of negotiations. In these negotiations we have heard various ideas from both sides. I don’t want to go into the details of it because we are in the final stages of the agreement. The only thing I can say is the outcome is fair and mutually beneficial to both sides.
What does Mongolia plan to do with the $250 million in advance taxes?
ZORIGT: This money will be used to fulfill the promises of the two parties made during the last election. These two parties are now part of a coalition government. It will be done through enacting various social welfare laws or it will be done through a sovereign welfare fund, which is called the Mongolian development fund. There were many promises made during the campaign, which need to be met.
Can Mongolia continue to give these cash payments? Would it not be better to invest in infrastructure?
ZORIGT: Of course there are longer term interests for Mongolia. But first, let me ask you a question, where are you from Michael?
The US.
ZORIGT: Do you know of any schemes where the government pays the tax payer? Provides the tax payer with financial assistance during a time of economic crisis in the US?
Absolutely, I was paid $600 last year. But generally the government does not give out money to each and every citizen.
ZORIGT: Certainly, and there are longer term interests. We are talking now about big plans for the infrastructure development. We need to build a railway down south in the Gobi for the mines to be developed. We need to have a road there, we need to have a power plant there. Mongolia is one of the largest countries in the world so we need infrastructure to connect these places But lets remember one thing. This is a democratic country and the core value of the democratic society is the trust between the citizens and the government. The whole notion of the democratic government is that government is elected by the people. And the election promises that were made cannot be easily thrown out. It should not easily be thrown out. Parties should work to earn the trust of the people. This is the backbone of a democratic society. I can give you hundreds of examples of elections in western countries where promises were made to the people. This reflects the real situation in every country. What I am trying to say is that there are real infrastructure needs and certainly there will a government to meet those infrastructure needs. But there are also social requirements and promises that have been made. And we consider ourselves a successful democratic country. For the past twenty years we have been holding free and fair elections, multi-party elections. And we certainly need to uphold these values. The trust that has been put into the parties and into the electoral system is very important.
Getting back to OT, when do you expect exploitation of the mine to begin?
ZORIGT: We certainly have a timetable in the agreement that within two years all the finances must be completely secured. Then the construction period should be achieved in five years. So it will be a maximum of seven years. But certainly the plan as it is written in the feasibility study, which we are discussing right now is to go ahead much quicker. So we are expecting that sometime by 2012 or 2013 production will begin.
How much will it cost to build the mine?
ZORIGT: Well, so far there has been a significant amount of money invested. If we discount that number, then we are left with a figure of four billion dollars needs to be invested over the next five years after the signing of the agreement.
When do you expect money to start rolling in?
ZORIGT: Money will start flowing to the government from day one. Because of all sorts of import taxes and VAT taxes that we have in place. For the first year we will see at least $100 million dollars just from these taxes. So the money will be flowing to the government quite soon. The taxes will be on the import of the equipment and other taxes.
And money will flow from the supply chain?
ZORIGT: Sure. This is a four billion dollar investment project. As you can imagine Mongolia will benefit from this flow significantly. In the agreement we have certain clauses with regard to energy. After four years the project will take all its energy needs from Mongolia. So it’s an important clause. Water is imporatant, certainly that will come from Mongolia. Roads are important. Value added production will be taking place in this country. We certainly are looking right now and planning for the construction of a copper smelter. It will be built based on this Oyu Tolgoi project. We certainly think that downstream and upstream production will have great benefits for the country.
Do think that Mongolia can be energy independent?
ZORIGT: We currently produce most of our energy in Mongolia. If you are asking whether the increased needs and requirements for energy will be met, yes I think so. Mongolia has significant coal reserves. We are planning at this point to build a new power station in the capital city. And we will have power exporting capacity in the Gobi. We are also talking about building a new power station down south in the vicinity of the OT project. So I think we have considerable energy projects coming up.
Can talk about the prospects of atomic energy in Mongolia?
ZORIGT: The law on nuclear energy has been adopted and the agency has been set up, which is in charge of this matter. Its an independent agency so I think the policy and frame work needs to be discussed.
Will Mongolia build a nuclear power plant?
ZORIGT: As it is written in the policy document this is possible, but in the distant future.
What is happening with the uranium deposit Dornod aimag?
ZORIGT: The question needs to be directed to the nuclear energy agency. They are responsible for the matter.
During Medvedyev’s visit there was talk of building a gas pipeline. Any forward movement?
ZORIGT: The issue has put this forward. Russia has abundant natural gas resources and we certainly hope that we can expand dialogue on this issue.
Windfall profits tax -- why was it scrapped?
ZORIGT: We have been looking into the longer term future of the country. We are looking at the overall health of the mining sector. We have one large copper producer at this point (Erdenet), and that copper producer has been affected by that tax significantly. At the end of the day the calculations show that even if you are not for this windfall profits tax the majority of the revenue would have gone to the government anyway, under the existing tax system, because remember the government is a significant shareholder in that project as well. So what we thought when we were proposing that amendment is certainly the issue of Erdenet, and certainly the long term future of the mining industry. Because it affects not only Erdenet but it also affects the gold miners. That was the main reason why we dealt with this issue.
Did Mongolia earn significant tax revenues while the tax was in place?
ZORIGT: The Mongolian government made about 900 billion tugrik (approx: $750 million dollars). That money has been spent on rural infrastructure development. We have spent it on social welfare programs. About one third of it was saved and we are using it at the time of the financial crisis. So I should certainly say that the positive effects of this tax can be felt through out the country. But at the time of the crisis, at the time when we need to encourage private investment we felt it was important to have greater flexibility in terms of the tax regime.
Did the tax cause gold smuggling?
ZORIGT: Yes, our Central Bank and Customs Office reports that this was the case. It was quite obvious that such activities was taking place.
... This is why from the point of view of the government, we felt it was very important to support the private sector to invest more. Lets remember that Erdenet is a state company and in accordance with this we dealt with the windfall tax. It was for the sake of the private gold miners that we dealt with this windfall tax. So every country has its own choices to make, so at this point of history we have made this decision.
Whatever policies we have had is the result of a democratic process. Those decisions sometimes affect the health of the business sector. A this point we feel its important to support the private investment into the mining sector.
If you compare numbers now to ten years ago. Last year we have had 170 billion tugrik into exploration. Ten years ago it was under 10 million dollars. The doors have never been closed. If you look at the tax environment in Mongolia it is a very competitive environment. We have 25% corporate income tax, at its highest. 10% personal income tax. Competitive rate for VAT and royalties of 5%. There are restrictions on bringing foreign labor, but certainly the government policy is to encourage the construction of big mining projects. So it is a very competitive policy at this point. Certainly I can feel that the investment community is aware of these changes.
Tell me about Tavan Tolgoi.
ZORIGT: It will be a thorough negotiating process, I can’t say what party has an advantage. All the parties that have expressed interest have a fair chance to negotiate with the Mongolian government.
What sectors will be development with mining profits?
ZORIGT: We have large mining operations, and these require power, rail connections, road connections. We are talking about building a railway in the Gobi, as well as a significant power station. We are talking about roads. It’s going to require big financing sources.
What measures are being taken to ensure that Mongolia’s environment won’t be damaged?
ZORIGT: We attach great value to this issue. We are nomadic people and our lifestyle is indelibly linked with nature. This is why we believe that having a mining industry that is friendly to the environment is an important issue. We have a professional inspection agency which is inspecting all kinds of agencies involved with the mines.
Can you speak about the ninja miners and if anything is being done to regulate their activities.
ZORIGT: I should say first that these 100,000 people are employed in this business. These families are working their way out of poverty. These 100,000 people are not depending on the government for an income or social welfare. They are not waiting for the government to dole them out. We think the goverment should offer a proper legal framework for them to work without damaging the environment, within the proper legal framework, in terms of labor practices, for example not allowing child labor. We are working on the draft legislation on this matter and we have set up a group that involves various stakeholders, including civil society groups. Under the government regulation what you can do is work under the gold fields set up for gold mining. You just can’t do it anywhere. Local governments should provide this land, but still there are thousands working outside these regulations. Their life is not easy. Probably for many of them it would not be their first choice, if they had a choice, but we have to appreciate the fact that these people are working hard. A proper legal frame work needs to be set to protect their health, to protect the environment and make sure that there are proper legal practices.
How will Mongolia develop its resources over the next 5-10 years?
ZORIGT: Mining is the backbone of the Mongolian economy, it accounts for close to 30% of its GDP and 70% of its exports. Mining industry is important but we have to diversify so there will be different mines in different locations so they can affect regional development and give an impetus to infrastructure development. Private investment has to be encouraged, both foreign and domestic, which is why we have a competitive regime. We have other projects in the pipeline, such as the iron project near Darkhan, and the Shivee Ovoo coal project in Dornogobi. Mongolia makes around 30 million a year in oil, but this is just the exploration stage.
...I believe this is a very exciting time for Mongolia. Over the past two decades we have talked a lot about how to develop this country, how to make sure we have a free and prosperous society. I think now we have a real chance to make it a prosperous society. We think that Mongolia can be a mid-developed country. GDP was around $1800 in the year 2008. Our goal is to have GDP at $15,000 by the year 2015. We have to work very hard to reach that goal. If you ask me for a vision of Mongolia’s future there are many countries around the world which have developed based on their natural resources. I myself spent almost two years in Australia. So like to believe that Mongolia has great many similarities to this country, or Canada for instance, or Norway, which uses its natural resources to speed up its development. I think that we have a great chance, given our political system, our natural resource endowments to become a country that has an economy that is market based and a social welfare system that takes care of its own people when its needed.
Democracy is the cornerstone of all that we can achieve, a free and open society is one that does not come easy. But we have been able to achieve that. Through this open and transparent process we will be able to develop policies that are attractive to all groups. Two years ago we established an agency dedicated to fighting corruption. I am optimistic. For Mongolia the antidote to corruption is its open society, democracy, transparanency and participation of all the stakeholders in the decision making process. We are aware of that.
CAN YOU TELL ME ABOUT YOURSELF?
I studied in Russia in the late 80s, early 90s. I was there when the Berlin Wall fell. It was an exciting period for all of us. I studied at the Moscow Institute of International relations. I also studied in Australia at the Australian National University, Asia Pacific research school. I got a Masters Degree in International Relations. I have a legal background. I am 38. I believe that my generation, people in their late 30s, is tasked with creating a modern, civilized and prosperous country. It is an important task. I believe that there are many young people around the country, if you look at the business community in the country, most of them are headed by people in their late 30s, early 40s. This is a time when we have to give our best effort.
I have two daughters. My daughter will study in Beijing.
Frankly speaking there is not a lot of spare time for me to do activities outside work. When I have free time I spend it with the kids. I grew up in Ulaanbaatar. I am city boy. My grandfather is a nomad, my uncle is a nomad. My father comes from Tov Aimag, near the Gobi. He grew up there. Then he went to work for the governement. He trained as an electrical engineer. He worked in the power stations.
I like soccer a lot, but I don’t play so well anymore! I still like to watch the sport.
How much could this OT produce in monetary terms?
ZORIGT: We are talking about quite signifcant numbers. We have done our numbers for the next half century. If the price range is around $4000 per ton we are talking about a total number that includes tax revenues, fees etc. A ballpark figure is 28 billion dollars. This is a significant number. That is in real terms, not NPV terms.
On an annual basis we are talking about 58 million tons of ore produced. Per annum this means around 800 million dollars at peak performance, if we look at the dividends as well as taxes.
Why did the government back off its attempt to acquire 51% of Ivanhoe shares?
ZORIGT: The government has all sorts of negotiations. In these negotiations we have heard various ideas from both sides. I don’t want to go into the details of it because we are in the final stages of the agreement. The only thing I can say is the outcome is fair and mutually beneficial to both sides.
What does Mongolia plan to do with the $250 million in advance taxes?
ZORIGT: This money will be used to fulfill the promises of the two parties made during the last election. These two parties are now part of a coalition government. It will be done through enacting various social welfare laws or it will be done through a sovereign welfare fund, which is called the Mongolian development fund. There were many promises made during the campaign, which need to be met.
Can Mongolia continue to give these cash payments? Would it not be better to invest in infrastructure?
ZORIGT: Of course there are longer term interests for Mongolia. But first, let me ask you a question, where are you from Michael?
The US.
ZORIGT: Do you know of any schemes where the government pays the tax payer? Provides the tax payer with financial assistance during a time of economic crisis in the US?
Absolutely, I was paid $600 last year. But generally the government does not give out money to each and every citizen.
ZORIGT: Certainly, and there are longer term interests. We are talking now about big plans for the infrastructure development. We need to build a railway down south in the Gobi for the mines to be developed. We need to have a road there, we need to have a power plant there. Mongolia is one of the largest countries in the world so we need infrastructure to connect these places But lets remember one thing. This is a democratic country and the core value of the democratic society is the trust between the citizens and the government. The whole notion of the democratic government is that government is elected by the people. And the election promises that were made cannot be easily thrown out. It should not easily be thrown out. Parties should work to earn the trust of the people. This is the backbone of a democratic society. I can give you hundreds of examples of elections in western countries where promises were made to the people. This reflects the real situation in every country. What I am trying to say is that there are real infrastructure needs and certainly there will a government to meet those infrastructure needs. But there are also social requirements and promises that have been made. And we consider ourselves a successful democratic country. For the past twenty years we have been holding free and fair elections, multi-party elections. And we certainly need to uphold these values. The trust that has been put into the parties and into the electoral system is very important.
Getting back to OT, when do you expect exploitation of the mine to begin?
ZORIGT: We certainly have a timetable in the agreement that within two years all the finances must be completely secured. Then the construction period should be achieved in five years. So it will be a maximum of seven years. But certainly the plan as it is written in the feasibility study, which we are discussing right now is to go ahead much quicker. So we are expecting that sometime by 2012 or 2013 production will begin.
How much will it cost to build the mine?
ZORIGT: Well, so far there has been a significant amount of money invested. If we discount that number, then we are left with a figure of four billion dollars needs to be invested over the next five years after the signing of the agreement.
When do you expect money to start rolling in?
ZORIGT: Money will start flowing to the government from day one. Because of all sorts of import taxes and VAT taxes that we have in place. For the first year we will see at least $100 million dollars just from these taxes. So the money will be flowing to the government quite soon. The taxes will be on the import of the equipment and other taxes.
And money will flow from the supply chain?
ZORIGT: Sure. This is a four billion dollar investment project. As you can imagine Mongolia will benefit from this flow significantly. In the agreement we have certain clauses with regard to energy. After four years the project will take all its energy needs from Mongolia. So it’s an important clause. Water is imporatant, certainly that will come from Mongolia. Roads are important. Value added production will be taking place in this country. We certainly are looking right now and planning for the construction of a copper smelter. It will be built based on this Oyu Tolgoi project. We certainly think that downstream and upstream production will have great benefits for the country.
Do think that Mongolia can be energy independent?
ZORIGT: We currently produce most of our energy in Mongolia. If you are asking whether the increased needs and requirements for energy will be met, yes I think so. Mongolia has significant coal reserves. We are planning at this point to build a new power station in the capital city. And we will have power exporting capacity in the Gobi. We are also talking about building a new power station down south in the vicinity of the OT project. So I think we have considerable energy projects coming up.
Can talk about the prospects of atomic energy in Mongolia?
ZORIGT: The law on nuclear energy has been adopted and the agency has been set up, which is in charge of this matter. Its an independent agency so I think the policy and frame work needs to be discussed.
Will Mongolia build a nuclear power plant?
ZORIGT: As it is written in the policy document this is possible, but in the distant future.
What is happening with the uranium deposit Dornod aimag?
ZORIGT: The question needs to be directed to the nuclear energy agency. They are responsible for the matter.
During Medvedyev’s visit there was talk of building a gas pipeline. Any forward movement?
ZORIGT: The issue has put this forward. Russia has abundant natural gas resources and we certainly hope that we can expand dialogue on this issue.
Windfall profits tax -- why was it scrapped?
ZORIGT: We have been looking into the longer term future of the country. We are looking at the overall health of the mining sector. We have one large copper producer at this point (Erdenet), and that copper producer has been affected by that tax significantly. At the end of the day the calculations show that even if you are not for this windfall profits tax the majority of the revenue would have gone to the government anyway, under the existing tax system, because remember the government is a significant shareholder in that project as well. So what we thought when we were proposing that amendment is certainly the issue of Erdenet, and certainly the long term future of the mining industry. Because it affects not only Erdenet but it also affects the gold miners. That was the main reason why we dealt with this issue.
Did Mongolia earn significant tax revenues while the tax was in place?
ZORIGT: The Mongolian government made about 900 billion tugrik (approx: $750 million dollars). That money has been spent on rural infrastructure development. We have spent it on social welfare programs. About one third of it was saved and we are using it at the time of the financial crisis. So I should certainly say that the positive effects of this tax can be felt through out the country. But at the time of the crisis, at the time when we need to encourage private investment we felt it was important to have greater flexibility in terms of the tax regime.
Did the tax cause gold smuggling?
ZORIGT: Yes, our Central Bank and Customs Office reports that this was the case. It was quite obvious that such activities was taking place.
... This is why from the point of view of the government, we felt it was very important to support the private sector to invest more. Lets remember that Erdenet is a state company and in accordance with this we dealt with the windfall tax. It was for the sake of the private gold miners that we dealt with this windfall tax. So every country has its own choices to make, so at this point of history we have made this decision.
Whatever policies we have had is the result of a democratic process. Those decisions sometimes affect the health of the business sector. A this point we feel its important to support the private investment into the mining sector.
If you compare numbers now to ten years ago. Last year we have had 170 billion tugrik into exploration. Ten years ago it was under 10 million dollars. The doors have never been closed. If you look at the tax environment in Mongolia it is a very competitive environment. We have 25% corporate income tax, at its highest. 10% personal income tax. Competitive rate for VAT and royalties of 5%. There are restrictions on bringing foreign labor, but certainly the government policy is to encourage the construction of big mining projects. So it is a very competitive policy at this point. Certainly I can feel that the investment community is aware of these changes.
Tell me about Tavan Tolgoi.
ZORIGT: It will be a thorough negotiating process, I can’t say what party has an advantage. All the parties that have expressed interest have a fair chance to negotiate with the Mongolian government.
What sectors will be development with mining profits?
ZORIGT: We have large mining operations, and these require power, rail connections, road connections. We are talking about building a railway in the Gobi, as well as a significant power station. We are talking about roads. It’s going to require big financing sources.
What measures are being taken to ensure that Mongolia’s environment won’t be damaged?
ZORIGT: We attach great value to this issue. We are nomadic people and our lifestyle is indelibly linked with nature. This is why we believe that having a mining industry that is friendly to the environment is an important issue. We have a professional inspection agency which is inspecting all kinds of agencies involved with the mines.
Can you speak about the ninja miners and if anything is being done to regulate their activities.
ZORIGT: I should say first that these 100,000 people are employed in this business. These families are working their way out of poverty. These 100,000 people are not depending on the government for an income or social welfare. They are not waiting for the government to dole them out. We think the goverment should offer a proper legal framework for them to work without damaging the environment, within the proper legal framework, in terms of labor practices, for example not allowing child labor. We are working on the draft legislation on this matter and we have set up a group that involves various stakeholders, including civil society groups. Under the government regulation what you can do is work under the gold fields set up for gold mining. You just can’t do it anywhere. Local governments should provide this land, but still there are thousands working outside these regulations. Their life is not easy. Probably for many of them it would not be their first choice, if they had a choice, but we have to appreciate the fact that these people are working hard. A proper legal frame work needs to be set to protect their health, to protect the environment and make sure that there are proper legal practices.
How will Mongolia develop its resources over the next 5-10 years?
ZORIGT: Mining is the backbone of the Mongolian economy, it accounts for close to 30% of its GDP and 70% of its exports. Mining industry is important but we have to diversify so there will be different mines in different locations so they can affect regional development and give an impetus to infrastructure development. Private investment has to be encouraged, both foreign and domestic, which is why we have a competitive regime. We have other projects in the pipeline, such as the iron project near Darkhan, and the Shivee Ovoo coal project in Dornogobi. Mongolia makes around 30 million a year in oil, but this is just the exploration stage.
...I believe this is a very exciting time for Mongolia. Over the past two decades we have talked a lot about how to develop this country, how to make sure we have a free and prosperous society. I think now we have a real chance to make it a prosperous society. We think that Mongolia can be a mid-developed country. GDP was around $1800 in the year 2008. Our goal is to have GDP at $15,000 by the year 2015. We have to work very hard to reach that goal. If you ask me for a vision of Mongolia’s future there are many countries around the world which have developed based on their natural resources. I myself spent almost two years in Australia. So like to believe that Mongolia has great many similarities to this country, or Canada for instance, or Norway, which uses its natural resources to speed up its development. I think that we have a great chance, given our political system, our natural resource endowments to become a country that has an economy that is market based and a social welfare system that takes care of its own people when its needed.
Democracy is the cornerstone of all that we can achieve, a free and open society is one that does not come easy. But we have been able to achieve that. Through this open and transparent process we will be able to develop policies that are attractive to all groups. Two years ago we established an agency dedicated to fighting corruption. I am optimistic. For Mongolia the antidote to corruption is its open society, democracy, transparanency and participation of all the stakeholders in the decision making process. We are aware of that.
CAN YOU TELL ME ABOUT YOURSELF?
I studied in Russia in the late 80s, early 90s. I was there when the Berlin Wall fell. It was an exciting period for all of us. I studied at the Moscow Institute of International relations. I also studied in Australia at the Australian National University, Asia Pacific research school. I got a Masters Degree in International Relations. I have a legal background. I am 38. I believe that my generation, people in their late 30s, is tasked with creating a modern, civilized and prosperous country. It is an important task. I believe that there are many young people around the country, if you look at the business community in the country, most of them are headed by people in their late 30s, early 40s. This is a time when we have to give our best effort.
I have two daughters. My daughter will study in Beijing.
Frankly speaking there is not a lot of spare time for me to do activities outside work. When I have free time I spend it with the kids. I grew up in Ulaanbaatar. I am city boy. My grandfather is a nomad, my uncle is a nomad. My father comes from Tov Aimag, near the Gobi. He grew up there. Then he went to work for the governement. He trained as an electrical engineer. He worked in the power stations.
I like soccer a lot, but I don’t play so well anymore! I still like to watch the sport.
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