Mongolia’s Gatsuurt project faces uncertainty

According to the Ulan Bator Post (UB Post), the leading English-language Mongolian news site, Parliament’s addressed 2016 mining goals and the development of the Gatsuurt gold open-pit mine. Mongolia, a developing and democratic nation, has heavily relied on its mining operations to help develop its economy. At the same time, Mongolia has struggled to manage its resources leading to disagreements and protests of mining operations. Tavan Tolgoi and Oyu Tolgoi attract the most attention because of controversy surrounding ownership and environmental concerns. Gatsuurt is under development by Canadian-owned Centerra Gold, the company famous for the exploration of the Boroo gold deposit in Mongolia and the scandal-prone and drama-laden Kumtor gold mine in Kyrgyzstan.

The Mongolian government in 2015 designated Gatsuurt a strategic asset which required government ownership and is exempt from restrictions. Despite an exemption for these sites, the government-owned sites would likely impose the same conditions contained within the restrictions from the Law on Water Resources and Forests (Long Form: Law on Prohibiting Mineral Exploration and Extraction Near Water Sources, Protected Areas and Forests and known as the “Long Name Law.” Gatsuurt, located north of Ulan Bator in the Selenge Province, Mandal soum, is an open pit gold mine with 1.6 million ounces of deposit/reserves valued at US$1,300/oz. Gatsuurt is 55 kilometers (34 miles) away from Boroo mill which will process the gold minded from Gatsuurt. Mining remains one of the most lucrative industries in Mongolia. Exploration and development of the Gatsuurt Deposit was suspended in 2010 and Centerra received approval to continue the project in early February 2016. During the suspension Mongolia’s citizens illegally entered restricted areas and mined the deposit.

Questions about the development of the Gatsuurt deposit by Centerra Gold comes amid the backdrop of the Mongolian Tugrik falling to a 2,006 MNT to USD on 28 January 2016.

Questions about the development of the Gatsuurt deposit by Centerra Gold comes amid the backdrop of the Mongolian Tugrik falling to a 2,006 MNT to USD on 28 January 2016. The exchange rate of the Tugrik was 2,007.47 MNT by 2 February 2016. The tugrik has steadily fallen since 2013. Gatsuurt, like many mining projects in Mongolia, is often politicized and nationalist sentiment heavily influence native policy maker decisions. The Prime Minister of Mongolia, Chimed Saikhanbileg, survived a vote of confidence in the Great Hural (Parliament) amid economic decline as Mongolia’s economy after 19 members of Parliament questioned the Prime Minister’s ability to lead after the “May [2015] authorization of Rio Tinto Group’s development of the Oyu Tolgoi copper mine constituted an abuse of power, offering little benefit to Mongolian citizens, delaying dividends and increasing the state’s debt burden,” according to Bloomberg Business. Rio Tinto secured a $4.4 billion finance package for the Oyu Tolgoi gold-copper deposit in December 2015.

The jumpstarting of negotiations and the operations of the mine hope to rejuvenate the Mongolian economy whose growth rate declined after the economic boom of 2011-2012 and a continued slump in the mineral market. Mongolia’s growth decelerated from 7.8% in 2014 to 3.0% in the first half of 2015. Asian Development Bank statistics detailed Mongolia’s economic performance: “gross fixed capital formation dropped by 42.7% because foreign direct investment plunged below 1% of Gross Domestic Product (GDP).” The Asian Development Outlook update puts growth at 3.0% for Mongolia.

For the government to retain control over 50% of Gatsuurt (or a mine in general) the government must “invest [34%] of a mine’s financing” and “if the exploration work for the mine was financed by the state” and would have 34% of the shares if exploration was privately funded.” Mongolian Mining Minister Rentsendoo Jigjid noted that the tax rate of the loans would depend on the price of gold. On 4 February, the Mongolian government set the state ownership interest in the Gatsuurt Project at 34% (the remaining 66% owned by Centerra) and “authorizing the government to complete negotiations with Centerra [Gold] on the terms of such ownership” and “in October 2015, the two parties agreed to a 3% special royalty in place of the state 34% ownership interest in the project.” The 3% special royalty (or smelter interest) was part of negotiations detailed in October 2015. A press release disseminated by Centerra Gold, “the Company will undertake economic and technical studies [(first published in 2006)] to update the existing studies on the project.” The government according to the Mining Minister “will receive 432.3 billion MNT from the mine’s total sales” which is “68 to 70 percent of a mine’s output.”

Tension surrounding the mining of Gatsuurt stems from the possible damage or destruction of tombs in Mongolia, possible contamination of water resources, lack of community investment, and the idea that the Mongolian people will be cheated or will not benefit from the exploration of the mine.

According to Market Wired report, multiple Canadian and Mongolian groups brought violations by Centerra Gold to the attention of the Canadian government regarding violations of key provisions of the OECD Guidelines for business practices. The February 2015 hunger strikes staged by members of the groups Upright Blue Mongols and the Save Noyon Uul Mountain Movement aimed to prevent changes to the environmental legislation, Law on Water Sources and Forests passed in July 2009. Analysis from 2013 about the Law of Water Sources and Forests determined that companies would have to rehabilitate and replenish the land after mining was finished—this condition is standard in many mining and exploration agreements. Past pressures from the civic NGO group, United Movement for Mongolian Rivers and Lakes (UMMRL), will resurface when the mine restarts its operations. In 2010, the Asia Foundation in Mongolia [launched] a new environment program called “Engaging Stakeholders for Environmental Conservation” (ESEC)”, a “three-year program that addressed the development of Mongolia’s mineral sector” while protecting its natural resources from the adverse effects of mining by engaging the government and the local stakeholders.

The future of Gatsuurt will most likely be caught up in political wrangling with operations starting and halting.

Citing Centerra’s Gold web site, the company via Boroo Gold Company gave $4,327,000 or 5.4 billion MNT between the years of 2004 and 2010 through the Soum Development Fund. From 2004 to 2005, the fund provided to the Bayangol soum and the Mandal soum which was extended to cover the Selenge aimag (a first-level administrative subdivision) from 2006 to 2010. For mining operations to continue Centerra must develop a similar local Gatsuurt development fund similar to the Soum Development Fund. Even though Centerra will most likely cover the Gatsuurt area through the Soum Development Fund (Gatsuurt is in Mandal soum) funds will likely have to increase which may results in delays as conditions are negotiated.

The future of Gatsuurt will most likely be caught up in political wrangling with operations starting and halting. The re-starting of exploration of Gatsuurt will most likely face protests. To mitigate the effects of the protests, the government should work with local and community leaders to lessen the effects of the exploration on herders, protests groups, politicians motivated by resource nationalism by writing up community agreements as part of the contract. According to a factsheet produced by Centerra Gold, in the Mandal area (where Gatsuurt is located), there are two community outreach representatives. The Responsible Mining Initiative (RMI), a NGO focuses on sustainable mining.

Mongolian government needs to move towards sustainable development. Centerra Gold’s future of operations in Mongolia heavily relies on business, legislative, and political matters and the potential for Mongolia to aggressively enforce laws particularly the Law on Water Sources and Forests (2009). If operations do begin again (despite receiving the go-ahead), Centerra Gold will most likely face the same experience it did in Kyrgyzstan. Centerra Gold can learn from its experiences and projects in Kyrgyzstan as Mongolia has a friendlier business environment compared to Kyrgyzstan. Economic troubles in Mongolia—heavily impacted by the tumbling regional economy—will influence the government’s decision and in Mongolia, government decisions can favour any group and will most likely shift depending on the circumstances.