Economic assessment of the impact ofMongolia’s foreign investment environment        and the proposed new mineral law     ...
Economic assessment of the impact of Mongolia’sproposed new mineral law  Purpose and contents of the analysis   Purpose of...
The contribution ofmining to theMongolian economy
The mining sector became Mongolia’s export engine ofgrowth after the GFC   Mining sector impact on GDP and exports    Nomi...
The growing demand for mining commodities and afavourable business environment in the past haveattracted foreign direct in...
Income from the growing mining sector is a vital sourceof finance for the Mongolian government   Mining sector impact on g...
If the business environment is favourable a number ofmining companies are expected to commissionoperations in the near fut...
Mineral law
The Mineral law is the main regulation affecting the miningsector but there are many other laws that have an impact onmini...
Foreign investment environment needs to be stable in order           to continue to attract foreign capital• The attractiv...
Impact of proposed new mineral law on explorationcompanies is very negative Relevant law article to the mining projects  T...
Despite potential future mining growth implementation ofthe proposed mineral law and any failure to honourexisting investm...
Methodology andassumptions used in theeconomic assessment ofthe new mineral law
MINCGEMv2: A dynamic general equilibrium model with   detailed sectoral, national and government accounts            Metho...
RunDynam software: for recursive dynamic models
Two scenarios were developed under the MINCGEM frameworkto assess the macroeconomic implications of the new mininglaw and ...
Production from the mining sector is projected to be    severely affected under the new mineral law and policy    uncertai...
Price assumptions are based on latest consensusprices from economists around the world   Assumptions : consensus prices (2...
Modeling results
Mongolian economic growth would be 4 percentage points a year lower on average over two decades under the proposed new min...
Mongolian GDP per person growth would be 4percentage points a year lower over two decades underthe proposed new mineral la...
All production sectors would experience significantgrowth under the existing mineral law despite thecompetition for labour...
The proposed new mining law would have significantimpacts on international trade                                          ...
New mining law and policy uncertainty weakens thedomestic exchange rate of Mongolia in the short run andreduces the purcha...
New mining law and policy uncertainty hurts privateconsumption and reduces real wages (purchasing power)                  ...
The proposed new mining law and policy uncertaintywould weaken the government’s financial position and itscapability to ra...
Chinggis bond repayments in 2017 and 2022 would bethreatened by total revenue loss under the new mininglaw implementation ...
The negative impacts of the proposed new mineral lawand policy uncertainty on Mongolia are significant                   C...
Appendix
The Mongolian economy has grown significantly since        the GFC based on mining and service sector output              ...
Although the mining sector is the main contributor to export revenue,    import purchases by this sector are high due to t...
Although the mining sector is not a labour intensive       sector, impact on average wages is high                        ...
Only mining projects already operating will continue to    operate and all exploration projects will be closed given the  ...
Summary FindingsEconomic Indicators (MNT trillion 2013 prices)                                           Now:             ...
The world is divided into 10 economies in MINCGEMMongolia v2    1. Mongolia                   6. Russia                   ...
Each economy is divided into 20 production sectors inMINCGEM Mongolia v2    1. Thermal Coal               11. Livestock   ...
Summary description of new mining law implications  •   HIGHER OWNERSHIP REQUIREMENT_ (1) 75%, 51% or 34% of the shared ca...
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  1. 1. Economic assessment of the impact ofMongolia’s foreign investment environment and the proposed new mineral law Dr Brian Fisher Presentation to the Business Council of Mongolia, 18 March, Kempinski Hotel, Ulaanbaatar
  2. 2. Economic assessment of the impact of Mongolia’sproposed new mineral law Purpose and contents of the analysis Purpose of the analysis: The analysis seeks to estimate the total impact (direct and indirect) of proposed new mineral law implementation on the Mongolian economy (domestic and external sectors, households and government) Contents: • Role of the mining sector in the Mongolian economy 1 • Proposed new mineral law 2 • Methodology and assumptions used in the analysis 3 • Implications of the proposed new mineral law on the economy (model insights) 4 • Conclusions 5
  3. 3. The contribution ofmining to theMongolian economy
  4. 4. The mining sector became Mongolia’s export engine ofgrowth after the GFC Mining sector impact on GDP and exports Nominal GDP Exports 16 6 MNT t Mining sector Non-mining sector Mining Exports Other exports US$ b 14 5 12 4 10 8 3 6 2 4 1 2 0 0 2009 2010 2011 2012 2009 2010 2011 2012 On average, the mining sector contributed around a quarter of national GDP over the past four years. After OT and TT reach full capacity, the mining sector will make further significant contributions to the domestic economy. The GDP share has not fully reflected the importance of the mining sector in recent years. From 2011, the mining sector has contributed more than 90% of total exports. Coal, copper and gold make up about 80% of mineral exports.
  5. 5. The growing demand for mining commodities and afavourable business environment in the past haveattracted foreign direct investment into Mongolia Mining sector impact on investment Foreign direct investment Major foreign investment in the mining sector 5.0 4 US$ b Mining FDI Non-mining FDI US$ b MMCs IPO and Bond OT CAPEX 4.5 MAK loan from EBRD 3 4.0 3.5 3 3.0 2 2.5 2 2.0 1.5 1 1.0 1 0.5 0.0 0 2009 2010 2011 2012 2010 2011 2012 Of the total FDI inflow, US$8.6 billion or approximately 81 per cent has been injected into the mining sector in Mongolia in the past four years. Of this percentage, OT alone has invested US$6.2 billion of CAPEX in its first phase. In 2012 the Mongolian Mining Corporation (MMC), which owns one of the largest coking coal mines, Ukhaa Khudag, planned for its capital expenditure on infrastructure to rise by approximately US$1.3 billion.
  6. 6. Income from the growing mining sector is a vital sourceof finance for the Mongolian government Mining sector impact on government revenue Key taxes that apply to mining in Mongolia Budget revenue (MNT trillion) 6 Income Tax Revenue from sources other than mining (10%-25%) Export Revenue from mining (including prepayment) Duties VAT 5 (none) Import Withholdin 4 Duties g Tax (5%) (20%*) Mining Tax 3 System Tax Holiday Depreciation (none) (Mainly 10 years) 2 Progressive Royalties 1 Royalty (5%) 37% Loss Carry (0%-15%) Forward 31% 23% 35% 27% (4-8 years) 25% 0 *Subject to double taxation treaties 2007 2008 2009 2010 2011 2012 The government’s reliance on mining sector income has grown higher in recent years via both tax and non-tax income collection. In the past four years the government earned MNT 4.2 trillion in tax income and MNT 0.75 trillion of prepayment from the mining sector. Not only is direct tax income from the mining sector important, tax income from mining service companies is also growing significantly. For example, a total of MNT 283.9 billion has been paid to local suppliers from Oyu Tolgoi LLC in the past three years.
  7. 7. If the business environment is favourable a number ofmining companies are expected to commissionoperations in the near future Strategic Resource Classification Number of projects 40 9 NEW PROJECTS 35 30 25 20 15 10 5 0 2000 2008 2010 2011 2012 2013 2014 2015 copper coal gold iron ore In the coming three years mining companies may implement nine new projects if business conditions are favourable. Coal projects are likely to constitute the majority of new projects. It is estimated that the total investment in these new mining projects could be US$6.3 billion by 2015.
  8. 8. Mineral law
  9. 9. The Mineral law is the main regulation affecting the miningsector but there are many other laws that have an impact onmining Legislation relevant to mining projects General Law on Law on Land Environment Subsoil Protection Law on Public Admin Land Law Explosives Law Mining Law on Nuclear Health and Protected Mineral Law Energy Law Equipment Areas Certification Competition Corporate Labour Law Law Law Foreign Law on Law on Land Investment Taxation Fees Law Foreign Long Named Water Law Labour Force Environment Laws^ Law* ^Sending Labor Force Abroad and Receiving Labor Force and Specialists from Abroad *Law to Prohibit Mineral Exploration and Mining Operations at the Headwaters of Rivers, Protected Zones of Water Reservoirs and Forested Areas
  10. 10. Foreign investment environment needs to be stable in order to continue to attract foreign capital• The attractiveness of a country to foreign direct investors is dependent on the domestic investment environment, the stability of the policy regimes in place and the effective tax rates imposed compared with alternative investment destinations.• An uncertain environment where tax rates and other policies are unpredictable and where there is pressure to re-negotiate established investment agreements will be less attractive to investors than locations where policies are stable and predictable and where investment agreements, once established, are honoured in full.
  11. 11. Impact of proposed new mineral law on explorationcompanies is very negative Relevant law article to the mining projects Types of mining companies Summary of law implication • Higher ownership requirement (up to 75% vs up to 50%) • Impractical requirement for local involvement (at 60% Big mining projects: OT, procurement, mandatory cooperation agreement with the community in prospecting and exploration) TT, EMC • Prohibition of high grading (required to extract entire ore without regard to the commercial value) • Reduced financial incentive for investment (stabilization Medium and small agreement is only available to strategic deposits, upfront closure cost payment tying up the capital investment) projects • Reduced security of tenure (if the stabilization agreement ceases to comply with the interest of Mongolia, reopens the agreement and the equity is transferred to Mongolia free of charge) • Prohibitive minimum exploration expenditure requirements Exploration companies (US$100k) • Lack of transparency in the licensing process (Where a tender is rejected or blocked, it locks up potentially prospective ground for up to 4 years)
  12. 12. Despite potential future mining growth implementation ofthe proposed mineral law and any failure to honourexisting investment agreements would restrict investment Likely implication of the draft mineral law on mining companies Impact Implication 1 • Decreased FDI (no investment on Large mining • Higher ownership requirement underground at OT and West Tsankhi projects (OT, TT, • Impractical requirement for local at TT) EMC) involvement • More bureaucracy • Costly operation 2 • Sharp decrease in FDI in domestic • Prohibition on high grading companies listed abroad (no growth in Medium and • Reduced financial incentive for investment production) small projects • Reduced security of tenure • No additional investment in domestic companies (no growth in production) • New projects will not be launched 3 Exploration • Prohibitive minimum exploration expenditure • No additional exploration companies requirements • Potential expropriation of a number • Lack of transparency in the license process of existing small to medium size companies
  13. 13. Methodology andassumptions used in theeconomic assessment ofthe new mineral law
  14. 14. MINCGEMv2: A dynamic general equilibrium model with detailed sectoral, national and government accounts Methodology of the economic analysis of proposed new mineral law Database: GTAP8 database Methodology: Dynamic CGE Highest Impact:2020 XXX: 2025 (MINCGEMv2) (Computable General Key features Equilibrium) 1 GTAP v8 database with a base 1 Dynamic multi-region, multi- CGE models ensure that the most year of 2007 and covers 129 sector CGE model developed by BAEconomics important economic identities countries/regions across the and constraints (extremely world and 57 commodity groups 2 Capable of simulating economic important for simulating long- term scenarios): scenarios over a long time 2 The MINCGEMv2 expands the horizon. Each time step is one • GDP measured by the GTAP commodity groups to 71 year expenditure approach and the and was aggregated into 10 income approach; economies (Mongolia, China, 3 Demand for commodities in the • Supply of capital, labour and Russia, India and others*) and 20 model is determined by the natural resources; commodities social accounting matrices of the • Market clearance of individual  Mining (thermal coal, met coal, modeling regions, the prevailing markets; copper, gold, oil, gas, coke, economic conditions and policy CGE models are structured on • The relationship between the petroleum and other minerals) settings the basics of supply and demand. current account and the  Agriculture (crops, livestock, Each sector of the economy is capital account; 4 linked by supply structured on CGE models are and use of • The relationship between fishing and forestry) factors and intermediatedemand. the basics of supply and inputs. government expenditure and  Manufacture (Processed Food, Each sector of the economy is taxes; Copper refining and linked by supply and use of are respected during each manufacturing, other CGE models account for the factors and intermediate inputs. manufacturing) simulation time step. industrial flow-on effects 5 CGE models account for the CGE models contain detailed  Electricity triggered by shocks in other parts of the flow-on and the industrial economy effects industry cost structure and  Transport bilateral trade information in their economic feedback effectsother triggered by shocks in that databases such that substitution  Construction are of the economy and the parts neglected in many between commodities and  Public Administration, Defense, government policy analyses that economic feedback effects competition between economies Health and Education are neglected in many can be modelled explicitly  Other services government policy analyses CGE models have several features making them the most appropriate tool for policy and scenario analysis*see detail in appendix
  15. 15. RunDynam software: for recursive dynamic models
  16. 16. Two scenarios were developed under the MINCGEM frameworkto assess the macroeconomic implications of the new mininglaw and instability in the investment environment Assumptions in the alternative scenarios New mineral law and Existing mineral policy uncertainty law scenario scenario 1 • All the existing mining projects will be • The current mining projects will be Mining operated including the projects of operated* but new exploration projects will production exploration companies be severely affected 2 • Commodity prices are based on • Commodity prices are based on Mining consensus prices and discounted to consensus prices and discounted to prices Mongolian border price Mongolian border price • Additional FDI investment in the mining sector • Determined endogenously by an 3 • Thermal coal - US$1.4 billion alternative sectoral growth pathway Mining FDI (exploration • Metallurgical coal - US$1.2 billion with lower FDI investment in the & expansion) • Copper - US$8.7 billion mining sector 4 • Endogenously determined with the inclusions of • Determined endogenously by an additional infrastructure projects alternative sectoral growth pathway Infrastructure • Coal washing plant: with lower FDI investment in and lower projects • ETT and MMC demand for infrastructure projects • Power plant: • Tavan Tolgoi and Chandgana * - Oyu tolgoi will only operate open-pit mining ** - Tavan tolgoi will only operate East Tsankhii
  17. 17. Production from the mining sector is projected to be severely affected under the new mineral law and policy uncertainty Assumptions : Mining production volume (coal and copper as main commodities) New mineral law and policy Existing mineral law scenario uncertainty scenario Coal* Coal* 200 200 Mt Mt 150 150 100 100 50 50 0 0 2005 2010 2015 2020 2025 2030 2005 2010 2015 2020 2025 2030 Paid Copper Paid Copper 1.2 1.2 Mt Mt 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2*included HCC, 0.0 0.0SSCC, thermalcoal and washed 2005 2010 2015 2020 2025 2030 2005 2010 2015 2020 2025 2030coking coal, Bef0re 2011 Mongolia’s thermal coal was mainly used in domestic consumption (power and heating). Thermal coal exports began at the end of 2012 (November).
  18. 18. Price assumptions are based on latest consensusprices from economists around the world Assumptions : consensus prices (2013 real prices) Thermal coal Coking coal 120 80 US$/t US$/t 70 100 60 80 50 40 60 30 40 20 20 10 0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Copper Gold 400 1,800 USc/lb US$/oz 1,600 350 300 1,400 1,200 250 1,000 200 800 150 600 100 400 50 200 0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Coal price is discounted to Mongolian border price in the model
  19. 19. Modeling results
  20. 20. Mongolian economic growth would be 4 percentage points a year lower on average over two decades under the proposed new mineral law and policy uncertainty New Mineral law impact on the GDP Real GDP (MNT trillion, 2013 price) Average annual real GDP growth (%) 120 14 Existing mineral law scenario Existing mineral law scenario 12.4 New mineral law scenario New mineral law scenario 100 12 9.8 10 80 8 7.6 60 6.7 6 40 4 20 2 0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2013-2020 2021-2030 Under the new mineral law scenario, average GDP growth (2013-2030) would be 4 percentage points lower (7% vs 11%) compared to what it would be under the existing mineral law. This translates to a MNT 358 trillion (in 2013 price) loss over the period 2013-2030 which is 23 times greater than GDP in 2012^Domestic suppliers, employees and government’s import purchase based on revenue from OT БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 20 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  21. 21. Mongolian GDP per person growth would be 4percentage points a year lower over two decades underthe proposed new mineral law and policy uncertainty New Mineral law impact on the GDP per capita Real GDP per person (MNT million, 2013 price) Average annual real GDP per person growth 35 (%) 14 Existing mineral law scenario Existing mineral law scenario New mineral law scenario New mineral law scenario 30 12 10.1 25 10 8.7 20 8 6.1 15 6 5.7 10 4 5 2 0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2013-2020 2021-2030 Under the new mineral law and policy uncertainty scenario, average GDP growth (2013-2030) would be 4 percentage points lower (6% vs 10%) compared to what it would be under the existing mineral law. This translates to a MNT 106 million (in 2013 price) loss in 2013-2030 which is 19 times greater than GDP per person in 2012^Domestic suppliers, employees and government’s import purchase based on revenue from OT БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 21 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  22. 22. All production sectors would experience significantgrowth under the existing mineral law despite thecompetition for labour and capital from the mining sector Domestic Sectors GDP by sectors (MNT trillion, 2013 price) New mineral law and policy uncertainty 120 scenario Existing mineral law scenario Agriculture Mining 120 Agriculture Mining Manufacturing Transport Manufacturing Transport 100 Services 100 Services 80 80 60 60 40 40 20 20 0 0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2013 2015 2017 2019 2021 2023 2025 2027 2029 The size of the mining sector would at least 50% smaller under the scenario with the new mineral law and policy uncertainty. The size of the other production sectors would also be significantly smaller. The positive effects generated by the mining sector is far greater than the potential ‘Dutch disease’ effect. БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 22 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  23. 23. The proposed new mining law would have significantimpacts on international trade External Sectors Impact on international trade (MNT trillion, 2013 price) Impact on exports Impact on imports 35 35 New mineral law New mineral law scenario scenario 30 Existing mineral 30 Existing mineral law scenario law scenario 25 25 20 20 15 15 10 10 5 5 0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 By 2020, the total exports would exceed 12 trillion MNT (in today’s prices) under the existing mineral law. This is about threefold what it would be under the new mineral law and policy uncertainty. Strong economic growth and appreciation in the real exchange rate under the existing mineral law increases the purchasing power of domestic households and thus increases the demand for imported goods. ^only goods import (not included service import) БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 23 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  24. 24. New mining law and policy uncertainty weakens thedomestic exchange rate of Mongolia in the short run andreduces the purchasing power of domestic households External Sectors Impact on terms of trade and exchange rate (index, 2012=1) Impact on terms of trade Impact on exchange rate 2.0 2.0 1.8 1.8 1.6 1.6 MNT depreciation 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 New mineral law scenario Existing mineral law scenario 0.2 0.2 Existing mineral law scenario New mineral law scenario 0.0 0.0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Strong export growth, coupled with steady increases in commodity prices before 2020, triggers a rise in the terms of trade under the existing mineral law scenario. Rising terms of trade is strongly connected to the appreciation of the real exchange rate before 2020. Rising terms of trade increase the purchasing power of domestic households and the welfare of consumers. ^only goods import (not included service import) БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 24 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  25. 25. New mining law and policy uncertainty hurts privateconsumption and reduces real wages (purchasing power) Households Impact on real consumption and real wages (index, 2012=1) Impact on real wages Impact on real consumption 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 New mineral law scenario 1.5 New mineral law scenario Existing mineral law scenario Existing mineral law scenario 1.0 1.0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 By 2020, real consumption private household consumption under the existing mineral law scenario is 36% higher than that under the new mineral law scenario. Fast labour productivity growth, driven by technology transfer from foreign companies and ‘learning-by-doing’ under the existing mineral law scenario is the main driver of real wage increase. By 2020, average real wages under the existing mineral law are about 33% high than under the new mineral law scenario. ^only goods import (not included service import) БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 25 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  26. 26. The proposed new mining law and policy uncertaintywould weaken the government’s financial position and itscapability to raise debt in the international market Government Impact on state budget (MNT trillion, 2013 price) Total tax revenue Tax revenue from mining 5.0 30 4.5 25 4.0 3.5 20 3.0 2.5 15 2.0 10 1.5 1.0 5 New mineral law scenario New mineral law scenario 0.5 Existing mineral law scenario Existing mineral law scenario 0.0 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Under the new mining law, the government will receive considerably less tax from the mining sector and from other parts of the economy. Over the projection period from 2013-2030, the government will receive 37 trillion MNT (in today’s prices) less from the mining sector and 110 trillion MNT (in today’s prices) from the whole economy under the new mining law with policy uncertainty, in comparison with the existing mineral law scenario. Note that dividends from mining projects have not been included in these figures. ^only goods import (not included service import) БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 26 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  27. 27. Chinggis bond repayments in 2017 and 2022 would bethreatened by total revenue loss under the new mininglaw implementation under policy uncertainty Government Impact on state budget (MNT trillion, 2013 price) Total tax revenue loss under the new mineral law and policy uncertainty scenario 0 -2 -4 US$1.5 billion -6 US$13.5 billion -8 -10 *Period of 5yr Chinggis bond ^Period of 10yr Chinggis payment (US$0.5 billion) bond payment (US$1 billion) -12 -14 2012 2013 2014 2015 2016 2017* 2018 2019 2020 2021 2022^ 2023 2024 2025 2026 2027 2028 2029 2030 GoM raised US$1.5 billion in bonds from the international market in 2012 for the economic development of Mongolia. If we assume there will not be any budget expenditure change (decrease based on revenue decrease), budget deficit will be US$1.5 billion more than otherwise by 2017 and US$13.5 billion more than otherwise by 2022 under the proposed new mineral law implementation and policyЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК БҮХ uncertainty in Mongolia 27 ^only goods import (not included service import) COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  28. 28. The negative impacts of the proposed new mineral lawand policy uncertainty on Mongolia are significant Conclusions Under the new mining law and policy uncertainty: •Average GDP growth over the projection period (2013-30) will be 4 percentage points lower (7% vs 11%) compared to what it otherwise would have been under the existing mineral law. •Under the proposed mineral law all sectors of the economy would be significantly smaller Economic than they would be under the existing mineral law. Strong growth in the minerals sector has Sectors significant positive spillover effects on other sectors of the economy. •From 2020 to 2030, total exports will be around 60% lower than what they otherwise would have been under the existing mineral law. Total imports and Mongolian trading firms will Households suffer a similar fate. •By 2030, real private household consumption would be around 30% lower under the proposed law with policy uncertainty. Average real wages would be around 35% lower than Government otherwise. •Lower labour productivity growth is driven by fewer opportunities for Mongolians to learn the latest technology from world leading companies. Technology transfer and ‘learning-by- doing’ are the two key factors driving the economic success in East Asian countries. •Over the projection period from 2013-2030, the government would receive 37 trillion MNT (in today’s prices) less in taxes from the mining sector and 110 trillion MNT (in today’s prices) from the whole economy, in comparison with the existing mineral law scenario thus poising a significant threat to the budget and the government’s ability to implement its programs. БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 28 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  29. 29. Appendix
  30. 30. The Mongolian economy has grown significantly since the GFC based on mining and service sector output Domestic Sectors Mining sector impact on GDP Real GDP (MNT trillion, 2010 prices) Real GDP growth (%, y-o-y) 12 20 Agriculture Mining China Manufacturing Construction downturn 10 Transport Service 17.5 impact 15 Net tax* 8 Coal 12.3 4.0 10.2 growth 10 3.5 8.8 6 2.8 2.8 3.0 2.4 GFC 6.4 5 4 1.8 2.2 0 2 1.8 1.7 1.9 2.1 -1.2 0 -5 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Before 2010, Erdenet was the main contributor to the mining sector. Since 2010, coal sales have increased significantly based on exports from MAK Chinhua, SGS Ovoot Tolgoi, Mini TT, ETT (East Tsankhi) and Ukhaa Khudag. Mining sector’s impact on service^, construction^^ and external sector^^^ is high. As the result net tax increased significantly*Net tax included VAT, excise tax from vodka & tobacco and taxes on foreign trade^Directly: most of mining sector’s suppliers in service sector. Indirectly: most of consumption is contributed to service sector (whole and retail trade mostly) based on money inflow from abroad (mining exportrevenue and investment to mining)^^Infrastructure development based on mining БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 30 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED^^^Mining export contributed around 90% of export and mining equipment and trucks import’ share is high in total import of Mongolia
  31. 31. Although the mining sector is the main contributor to export revenue, import purchases by this sector are high due to the lack of domestic companies that produce final goods such as fuel, electricity and other machinery and equipment External Sectors Mining sector impact on external sector Exports (US$ billion) Imports (US$ billion) 6 8 Copper Met coal Auto vehicles and their spare parts Gold Crude oil Machinery and equipments China 7 Diesel and petroluem Other mining Non mining exports 5 downturn Other imports impact*** 6 4 Coal growth** 5 3 4 GFC* 3 2 2 1 1 0 0 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 The mining sector contributes the dominant share of total exports. About 80 per cent of mineral exports is made up of coal, copper and gold. Mining related imports (mostly trucks, mining equipment, electricity, fuel) have increased significantly in the past few years as the number of new mining projects grew quickly.*Copper price declined by 70% after reaching a peak in July 2008 at the height of the global commodity boom**New big coal mining projects and coal price structural change in 2011 (Before structural change (2010) Border average price is US$50/t , After it US$100/t)***Coal border price declined by 15%, Copper border price declined by 13% relative to 2011
  32. 32. Although the mining sector is not a labour intensive sector, impact on average wages is high Households Mining sector impact on households Number of employees (million persons) Monthly average wage (MNT million) 1.0 Agriculture Mining Manufacturing Agriculture Mining Manufacturing 1.4 Construction Trade Transport 0.9 Construction Transport Service* Otherservice 1.2 0.8 0.7 1.0 0.6 0.8 0.5 0.6 0.4 0.3 0.4 0.2 0.2 0.1 0.0 0.0 2007 2008 2009 2010 2011 2012* 2007 2008 2009 2010 2011 2012 Average salary in the public service increased by ~60% compared to 2011 (highest growth in education and health sector). Average salary in the mining sector fell in 2012 due to the China downturn impact on coal prices.**Electricity, whole sale and retail trade, hotels and restaurant, financial and insurance, public administration, education, health , community and personal service and other services
  33. 33. Only mining projects already operating will continue to operate and all exploration projects will be closed given the new mineral law and policy uncertainty’s impact on FDI Assumptions : Mining production value (US$ billion, 2007 prices), by commodity and project type New mineral law and policy1 Existing mineral law scenario uncertainty scenario Mining By commodity type By commodities production 20 Other 20 Other 18 Copper 18 Copper 16 16 Met coal Met coal2 14 14 12 Thermal coal 12 Thermal coal Mining 10 10 prices 8 8 6 6 4 4 2 2 0 0 2005 2010 2015 2020 2025 2030 2005 2010 2015 2020 2025 2030 By project type By project type 20 20 Explorations and other Started other projects 18 18 Not started big projects** 16 16 Started big projects* 14 Started other projects 14 12 Started big projects* 12 10 10 8 8 6 6 4 4 2 2*EMC, OT open pit, TT East Tsankhi 0 0**OT underground, TT West Tsankhi 2005 2010 2015 2020 2025 2030 2005 2010 2015 2020 2025 2030 Mongolia’s thermal coal was used in domestic consumption (power and heating) only before 2012. Exports of this product commenced in November 2012
  34. 34. Summary FindingsEconomic Indicators (MNT trillion 2013 prices) Now: By 2020 we expect: 2012 Existing mineral law New mineral law and policy scenario uncertainty scenarioReal GDP 15.7 38.9 28.2Exports 6.0 21.2 8.4Imports 9.4 26.7 11.2Real exchange rate 1.0 (index) 1.1 (index) 0.7 (index)Real wage (purchasing power) 1.0 (index) 2.5 (index) 1.8 (index) Tax revenue from mining 1.1 4.2 1.3Total tax revenue 4.7 11.7 8.3Real GNP 14.5 36.5 27.1 БҮХ ЭРХ ХУУЛИАР ХАМГААЛАГДСАН © 2012, ОЮУ ТОЛГОЙ ХХК 34 COPYRIGHT © 2012 OYU TOLGOI , ALL RIGHTS RESERVED
  35. 35. The world is divided into 10 economies in MINCGEMMongolia v2 1. Mongolia 6. Russia 7. Rest of Europe 2. China 8. North America 3. Japan, Korea and Taiwan 9. South America 4. India 10. Middle East and Africa 5. Rest of Asia and Oceania
  36. 36. Each economy is divided into 20 production sectors inMINCGEM Mongolia v2 1. Thermal Coal 11. Livestock 2. Coking Coal 12. Fishing and Forestry 3. Oil 13. Processed Food 4. Gas 14. Copper refining and manufacturing 5. Copper concentrate 15. Other Manufacturing 6. Gold 16. Electricity 7. Other minerals 17. Transport 8. Coke 18. Construction 19. Public Administration, Defense, Health and 9. Nuclear & petroleum fuel Education 10. Crops 20. Services
  37. 37. Summary description of new mining law implications • HIGHER OWNERSHIP REQUIREMENT_ (1) 75%, 51% or 34% of the shared capital of the company holding a Mining Licence, must be a Mongolian Citizen • IMPRACTICAL REQUIREMENT FOR LOCAL INVOLVEMENT_ (1) 60% local procurement required – unable to be supported by existing market; (2)Community cooperation agreements required for prospecting and exploration tenements • PROHIBITION OF HIGH GRADE MINING _(1) If companies are required to mine the entire reserve without regard to the commercial value of the extracted mineral it will act as a deterrent to investment in the industry. The definition should include an economic/commercial cutoff. • REDUCED FINANCIAL INCENTIVE FOR INVESTMENT_ (1) The new legislation provides for DDAs to be negotiated for strategic deposits only; (2) Upfront payment of closure costs - requires a deposit of a huge sum of the money tying up capital for the life of the project; (3) Royalty structure (separate piece of legislature) • REDUCED SECURITY OF TENURE_ (1)Minerals of strategic importance/percentage of state equity/equity obtained free of charge (An investor may incur significant costs in exploration and appraisal risk that the GOM will take an unspecified interest in the project) • PROHIBITIVE MINIMUM EXPLORATION EXPENDITURE REQUIREMENTS _ (1) prohibitive min expenditure (US$ 100K) for all but the most successful projects. Mongolian and international juniors not likely to be able to meet min spend requirements. • LACK OF TRANSPARENCY IN THE LICENSE PROCESS_ (1) tender process – prone to corruption. Ability to increase royalties; may be tendency to place this above other criteria such as capacity and experience. Where a tender is rejected or blocked, it locks up potentially prospective ground for up to 4 years.
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