Nov 06, 2021

Byambajav L: Mongolia is unique in levying the royalty on minor elements

- What is the difference between mineral resources and reserves? How are minerals processed and sold in Mongolia?
- Minerals Law of Mongolia describes “mineral” as “any usable naturally occurring mineral concentration that was formed on the surface or in the subsoil as the result of geological evolutionary processes.” “Mineral deposit" is defined as “mineral concentration that has been formed on the surface or in the subsoil resulting from geological evolutionary processes, where the quality and proven reserve is economically feasible to mine by production methods.”
Here, you see the phrase “reserve that is economically feasible to mine.” However, mining is a popular subject in Mongolia and any mineral deposit that is discovered gets sensationalized and compared to Oyu Tolgoi. In the name of environmental protection and patriotism, the operations of many deposits have been ceased even before we knew whether they were economically profitable.
 
There is also a widespread confusion among people. We mistake minerals in the ground for wealth and become protective of these reserves. In fact, wealth is created by turning these reserves into mineral products that are financed with investors’ money. Those who invest and work in the mining industry are wealth creators.
 
Mongolia extracts a few types of minerals and sells on domestic and international markets both in concentrates and raw. For instance, small percent of total extracted coal and iron ore is either washed or processed for national and international buyers. Copper, zinc, zinc-lead, and fluorspar ores are concentrated and exported. In addition, small amount of tin and tungsten concentrates are exported.
 
For many years, we have been talking on deep processing of minerals and production of final products. Except a project producing pure copper using “heap leaching- electrolysis” technology at oxidized ore from Erdenet copper mine, Mongolia does not have any metallurgical industry that produces pure metals from ores and concentrates. A private company worked several years to produce zinc-in-metal from zinc concentrates, but it did not succeed. Since the 1980s, we have been talking about establishing copper smelter. The biggest challenge in relation to copper smelter is the sulfuric acid which is most possible by product after smelting, and that emanates out of the copper smelting process. Mongolia does not have any industry that uses sulfuric acid. Producing fertilizers mixing sulfuric acid with phosphorite ores is an option, but this is almost impossible in our case.
- Why is it impossible?
- There is a phosphorite deposit called, “Burenkhaan,” that is well studied and ready for extraction. This deposit, however, is in Khuvsgul province, a mining-free zone. According to the Constitution of Mongolia, mineral deposits are considered state property. However, special interest groups hinder operations in these mining deposits. Sulfuric acid can be separated differently in the smelting process. However, such an approach is costly and reduces the smelter’s profit. Therefore, it is best for Mongolia to produce and export concentrates. In fact, metallurgical production is capital heavy and environmentally harmful. There is, again, a misconception that smelting is beneficial while it is not.
 
The mining industry operates through a complete cycle that consists of [exploration, discovery] extraction, concentration, metallurgy, metal processing, and production. Among these sequences, metallurgy is the least profitable and most harmful stage to the environment.
 
- Which one is the most profitable? Where would you locate Mongolia within this cycle?
- Metal processing and production are considered the most viable sequences. Countries with advanced levels of industrial development, certainly, need to tend to their metallurgical industry. However, the more pressing the reduction of green-house gas emissions and the protection of environment becomes, the more stringent the requirements get for these countries to clean and neutralize sulfuric acid and store safely the chemical waste and slags. Some countries had to relocate their metallurgical plants to countries with weaker environmental requirements and standards.
 
- What are the existing laws and rules that regulate the processing of concentrates?
- Mineral concentrates are a type of commercial good; hence, trading these concentrates are bound to all domestic and international trade related legislations. However, minerals are unique in a way that they are subject to royalty. As minerals are considered properties of the state and its citizens, mining companies that extract minerals must pay taxes and payments to the government. Detailed descriptions and conditions to calculate and impose royalties are stated in the Minerals Law of Mongolia. Royalty is, in fact, not tax; it is payment or rental for use of minerals.
 
- How does the Government impose royalties on minor elements?
- Royalties are imposed on the main and minor elements in the concentrate. For instance, copper is the main metal in the copper concentrate while gold, silver, selenium, iron, and aluminum contained in that concentrate are minor elements and all elements are subject to royalty.
 
First, certified laboratory of the National Customs Agency analyzes ores and concentrates and identifies content of main and minor elements, based on which the total sales price is defined by multiplying the content of main and minor elements in the ore or concentrate by global market price or the benchmark price, declared by the Government of Mongolia. Using this sales price, royalties are imposed and paid to the national budget.
 
For example, 2.5% royalty on coal used for consumption or traded nationally and 5.0% royalty on gold and other metals.
 
Moreover, progressive royalty is imposed on both main and minor elements depending on global market price. To state differently, the higher the sales price is, the higher the percentage of royalty is. Let’s take example of copper concentrate. In case the global market price for copper drops below US$5,000 per ton, 5% royalty is imposed. If the copper price ranges between US$7,000 and 8,000, additional 13% royalty is imposed totaling 18% of sales revenues. When the copper price exceeds US$ 9000, the royalty gets to 20%. As such, Minerals Law sets forth the price intervals and royalty rates.  
 
Also, royalty rates differ depending on the level of processing, e.g., higher royalty on ores, lower on concentrates and even lower on pure metal. Let’s take another example on copper. When the price for copper exceeds US$ 9000, 20% royalty is imposed on copper concentrates while this changes to 35% on copper ore and 10% on pure metal copper. This can be understood as a tax incentive promoting deep processing of minerals.
 
- What challenges do mining companies face in complying royalty regimes in Mongolia?
- Both national and international experts say that Mongolia’s royalty regime is easy to adhere to and difficult to dodge. They also state that our royalty regime is efficient and appropriate, in most respect. However, experts agree that Mongolia is unique in levying the royalty on minor elements. There were lawsuits and national mining companies have been repeatedly raising this issue.
 
Internationally, minor elements contained in the concentrate are divided into two categories.
 
First, minor elements in the ore or concentrate that can be separated in the smelter and are economically beneficial are called “credit elements.” The buyer makes additional payment to the seller if the amount of these credit elements in the concentrate is higher than the amount set by international practices. For example, gold, silver, selenium, and tellurium in copper concentrate, or silver and cadmium in zinc concentrates are considered credit elements. If the content of these elements is higher than that of the amount set by international trade practices, buyers pay for those elements to the miners.
 
Second, minor elements on which smelters impose penalties are called “penalty elements.” These elements cause all sorts of problems for smelters and increase their operational cost. It is impossible to separate these minor elements from the main elements given that all available technologies, there is, are used. If the content of these elements is higher than that of the amount set by international trade practices, sellers pay penalty.
 
- Can you elaborate on the part that, “these elements cause all sorts of problems for smelters?” What type of problem do these elements cause?
- That means such impurities decrease throughput of main metals, increase necessary temperature for smelting of concentrates and waste slags thus increasing production cost, such as fuel and electricity costs, and require additional costs for neutralizing and detoxifying environmentally destructive elements, as well as safe storage of these toxic waste.
 
Back to the previous question, Mongolia imposes royalties on both credit and penalty elements in the concentrate, identified by lab analyses. For instance, aluminum in iron ore is a penalty element, but it is subject to royalty. As aluminum is more expensive than iron, penalty aluminum in iron ore account for higher percentage of royalty imposed on iron ore, despite its amount.
 
It is obviously correct to levy royalty on credit elements in ores and concentrates, but royalty on penalty elements, which takes no charge in revenues of mining companies, and even decreases their revenues by smelter-imposed penalties, is not appropriate and unfair.
 
This has been the key challenge that mining companies encounter in complying with existing regulations on mineral royalty.
 
Thank you so much, Mr. Byambajav, for your time and sharing your expert opinion on the subject.

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