AMEP Experts series are designed to increase the accessibility of quality content and reports produced by industry experts and create a dialogue on and around key issues, such as royalty on minor elements in Mongolia. Dr. Pietro Guj is the third guest of Australia Mongolia Extractives Program’s online interviews. You can watch his interview on YouTube (https://youtu.be/wWbe_9diDaI) and here are the interview transcripts.

Uyanga Bazaa, AMEP Communication Adviser: Welcome to #AMEPExperts series. Today, we have Dr. Pietro Guj, Professor of Mineral Economics at the University of Western Australia. Dr. Guj, thank you for taking time to talk with us.
Professor Pietro Guj: Thank you.  I’ll enjoy this interview.

UB: You were in charge of royalty policy in Western Australia. You have also conducted a global review of mineral royalties’ regimes for BHP-Billiton. I’ve also seen that you advised the Kingdom of Saudi Arabia in their restructuring of fiscal regime. Can you tell a bit about yourself to our viewers?
PG: Yes. When I was Deputy Director General of the Department of Mines and Petroleum, one of my tasks was to supervise policy coordination and administration of royalty and I became very interested in the field. Since then, I’ve had a lot of opportunities to engage in discussions, studies, and international debates in countries including those that you mentioned, primarily, for the World Bank, also for the UN, and the IMF.

UB: To start our conversation, can you tell, especially, for our non-mining background viewers what are the royalties. What do people need to know about when it comes to royalties?
PG: Yes. It is a very simple concept. The mineral belongs to the citizens of the country and the mining companies have to pay for the removal of the non-renewable resources. They are, in effect, capital assets that belong to all the citizens. It is logical that mining companies should compensate people for gained income. So, royalties are the price that mining companies have to pay to buy these resources.

UB: Australia Mongolia Extractives Program, AMEP 2 engaged Dr. Guj on conducting research on minor elements related to royalties in Mongolia. So, what was the issue in Mongolia you were asked to research?  What didn’t the research consider? 
PG: First of all, we better understand that there are many types of royalties in the world. The most common of them is so called “value-based royalty,” which is applied in Mongolia. This means that the royalty is levied on the sales value of the minerals that are sold.  Within that type of royalty, there are different ways in which royalties are administered. The value can either be actual realized value of sales or, as in the case of Mongolia, sales value is determined by multiplying the volume of minerals sold by unit price and this is the system in Mongolia. Mongolia is not based on realized value of sales but on an estimated value. Under the Mongolian legislation, particularly, article #47, there is this concept of sales value. What happens is that when this article is interpreted in a very strict manner, any metal contained in a product that is sold would be subject to royalty. This, of course, includes range of minor metals, which may not receive any payment. In fact, in some cases, some of the metals represent penalty in the process of smelting and refining. The mining company factory receives lower value for the main product because of the presence of these minor metals. Of course, that doesn’t make sense. For instance, in Mongolia, royalty has been charged on the content of aluminum in iron ore concentrates. In fact, aluminum creates massive problem in the steel blast furnaces because it creates slag and increases the cost of operation. So, what happens is that the Mongolian seller of the iron ore, actually, incur the penalty, but at the same time, the government did levy royalty on the aluminum content, and even on the sulphur. So, these are very illogical, and, in many ways, unfair interpretation of the law and they had to be addressed. 

UB: So, what were the main points in your report? What did you advise the Government of Mongolia to solve these issues? 
PG: I approached the problem in two parts. One, of course, remove the royalties from any penalty mineral. The second part was to determine criteria as to whether the royalty should be levied on other minor minerals, particularly, in the case where the concentration of (minor minerals) in concentrates and other products were so low as to make the potential extraction unfeasible. In the end, what happened   is that we came to the conclusion that those two groups of minor metal should be exempt from royalty. To start the implementation of such policy, we created an annex to the report which indicates some of the typical metal for which royalty should not be applied in different types of concentrates.  
 
UB: You mentioned, earlier, and took an example of iron ore company and that they were being penalized as well as imposed royalty on their aluminum when they export the metal. So, what happens to those companies if they are continuously being imposed royalties but also, at the same time, being penalized for minor elements? What kind of effect would there be in terms of attracting foreign investment, but also, just to continue operating these kinds of mines? 
PG: From the point of view of the companies, of course, they will be less profitable and therefore, less competitive in a market where they have to compete with other producers that are not subjected to that type of royalty. Incidentally, when doing the study, I reviewed the royalty approach for minor metal in the majority of the jurisdictions in the world and Mongolia was unique in interpreting the legislation in that manner. So, it makes those who are in the field less competitive in terms of attracting foreign direct investment in the country. In addition, the amount of revenue which is collected from these minor metals is relatively insignificant whereas the administrative processes that are in place to collect that revenue imply a lot of activity, particularly, to control chemical assays of the products. 
If royalty were removed from minor metals, then the administrative processes will become more transparent and more efficient, the compliance cost would be much lower for both the industry and the government. I may add the suggestion that minor metals of the precious kind, like silver and gold should not be part of this recommendation to remove the royalties. The majority of silver and gold are, actually, paid for by the smelters as credits. Companies receive payments so there is no reason why they should not pay royalty on them. So, our recommendations are really referring to non-precious minor metals.
 
UB: I see. I also saw in your report that you have conducted cost-benefit analysis. So, for example, what happens if Mongolia removes some of these royalties for non-precious metals and those called penalty metals. What kind of benefit could Mongolia expect in case they remove these royalties?
PG: That is a very interesting question because it is easy to calculate what revenue would be foregone and, as I said, it is not particularly high. My estimate was 2.6 million dollars. That is, the counteracting side, both in terms of savings on the administrative procedures and the removal of perceptions for potential investors in Mongolia, is that the system is not company friendly would be removed to some degree. It is difficult to quantify; I think there would be quite significant benefit. Insofar, a real irritant and inhibiting factor would be removed. So, the perception of the royalty regime in Mongolia in the eyes of potential investors would improve leading to more exploration and discoveries given that Mongolia has very high potential in geological sense.

UB: Do you have anything else to advise the Mongolian Ministry of Mining and Heavy Industry in addition to what we have discussed so far? 
PG: Yes. I think this is a brilliant opportunity because the mining company would welcome these kinds of changes. It is a brilliant opportunity to sit down with them and consult, and perhaps, make it the start of the process which will bring about greater consultation and cooperation between government agencies in charge of mining taxation and the mining company. Many of these problems must be resolved with candid, honest, and open conversations.
UB: Thank you so much, Dr. Guj, for taking time and talking with us today. I appreciate your time and I wish you all the best.  Have a good day.
PG: Thanks very much.  It has been a pleasure.  Goodbye.