Business Council of Mongolia

Source: English.News.mn, Montsame    Date: May 5, 2010

IMF Country Representative P. Ramlogan told Parliament Speaker D.Demberel on Monday that reported provisions in the revised budget for 2010 violated Mongolia’s agreement with the IMF, and that if these were not reviewed, the Fund “would find it difficult” to continue with the agreement.

That the budget deficit will become 6.4 percent of the GDP was not so important as the Fund had agreed to exclude the costs of bank restructuring from State budget expenses, and when that is done, the deficit remains under the stipulated 5 percent. However, the Finance Minister’s move to include income from increased copper prices in the budget revenue violated Mongolia’s promise to put all extra income into a special fund.

Mr. Ramlogan suggested that the deficit be controlled by cutting down on unnecessary expenditure. He also urged progress in restructuring the banking sector, adopting the fiscal stability law and streamlining the welfare package. He offered to organize a workshop on inflation and monetary policy in cooperation with the Mongolian Parliament.

The Speaker assured him that Parliament was well aware of the need to keep to the agreement with the IMF, but pleaded for “understanding”. The current economic and social situation in the country “does not allow us a chance to put any extra budget income into a special fund,” he said, adding that political imperatives in a democracy at times make it impossible to ignore “widespread popular pressure”. He hoped the IMF would consider the special situation and appreciate why the terms of the revised budget cannot be kept.  He assured Mr. Ramlogan that Parliament would review expense proposals stringently and requested him to recommend to the IMF Board that the Mongolia-IMF agreement be continued for another two years.

Source: E-commerce Journal   Date: May 5, 2010

Some technology companies from countries like South Korea and China have started to open offices in Mongolia, focusing on software development rather than hardware production, and the telecommunication and Internet market represents a small but growing sector in the country. Government initiatives, like the e-Mongolia National Program proclaimed in the mid-1990s, are helping spread Internet awareness and usage throughout the country. There has been successful liberalization of all market segments, partial privatization of the fixed-line incumbent operator, Mongolia Telecom, and establishment of an independent regulator.

As a result, a number of telecommunications companies and Internet service providers have been appearing in the Internet and phone market, leading to increasing competition. MobiCom and MagicNet are the largest cell phone and ISP operators in Mongolia respectively. Intense competition is seen in both fixed and mobile telephony, including local, long-distance, and international, Internet, VoIP, and VSATs. Dial-up still remains the main way of Internet connection, although wireless and broadband internet, recently introduced, has been developing rapidly.

The largest Internet Service Provider is MagicNet. The company was founded in 1992 as a State owned Mongolian Data Company (MDC) and privatized in 1994. MDC is to 90% owned by its employees and owns MagicNet as a subsidiary. The second largest ISP is represented by MobiNet, launched in 2001 by Mongolia’s first mobile operator, the Mongolian-Japanese MobiCom Corporation. There are more than 10 other Internet services providers.

Despite Internet usage growing 1,000% in the past decade, the volume of Internet subscribers in the country was a modest 10.9% by the end of 2009. That may be compared to 1.1% in 2000 and 10.3% in 2007. The E-commerce sector is developing, thanks to Government support and incentives.

Source: Reuters, Bloomberg, Undesnii Shuudan   Date: May 1, 2010

President Ts. Elbegdorj has ordered a halt to the issuance and transfer of mineral exploration licenses, as also revalidation of revoked licenses, until the Government can enact a stricter law on mining investment. The directive, posted on his website, may rekindle some of the uncertainty that for years surrounded mining investment in the country.

The order came into force at 5 pm on April 20. The President had called the heads of Standing Committees and the Director of the Mineral Department to a meeting earlier on the day to explain his decision, calling it “an extreme step taken after careful consideration”. He said he had found during his visits to the provinces that there was widespread anger over how petty violations had taken on criminal proportions.  Mineral resources are connected to national security, but holders of almost half of the exploration licenses do not provide the mandatory annual information about their work. Licenses are used less for exploration than as money-making tools.
The freeze on new mining permits will remain in place until a new law on mineral licenses is adopted by the Government, according to the directive. It was not immediately clear how long it would take to pass a new law, but the directive calls on the Government to hold public discussions on the matter in June. "I order the Government to regularly report to me on the status of the implementation and the ways it resolves the issues," said Mr. Elbegdorj, adding that a final report has to be submitted to the National Security Council by May. In June, citizens will be given information about this through the Civil Chamber. "It is important to urgently develop the law on mineral licenses and have it publicly discussed." Mr. Elbegdorj said that while he remains focused on the development and protection of natural resources, his directive seeks to ensure that that the people of Mongolia remain the true owners of the countries mineral wealth.

Right now, the Presidential directive apparently will not affect the operations of those companies that have valid exploration permits. But it is unclear whether the Government intends to review the validity of existing permits going forward.  The new directive could hinder Khan Resources' efforts to get its uranium mining and exploration licenses reinstated, as the Presidential order also applies to any licenses that have been revoked.

“Our initial estimate is that this should not have any effect on overseas investors in Mongolia, although we’re still looking to clarify some details,” said Mr. Alisher Djumanov, the Beijing-based chief executive officer of Eurasia Capital Management. “The whole system for allocating licenses does need streamlining and it may well be that there is corruption in the way some licenses are given out.”

Mining Minister Dashdorj Zorigt declined to make an immediate comment.
“I think this is just a temporary situation,” said Mr. Alexander Molyneux, chief executive officer of SouthGobi Energy. “The Government is checking mining licenses to make sure they are in order. If your license is in order, like ours is, then there shouldn’t be a problem.”

Last year's signing of a long-awaited agreement with Rio Tinto and Ivanhoe Mines allowing them to proceed with the USD5 billion Oyu Tolgoi copper and gold mine had paved the way for foreign investment in the mining sector. Mongolia has thus far issued 4,706 valid mineral licenses of which 3,610 are exploration permits and 1,096 are mining licenses. The directive noted that most of the permits currently held by companies and individuals operating in Mongolia are held in violation of existing laws.

Source: www.miningweekly.com   Date: May 1, 2010

Laramide Resources, which owns about 13.2% of Khan Resources, has requisitioned a special meeting of the uranium junior's board to introduce new directors to the firm's existing board “to facilitate the best shareholder outcome if the existing takeover offer fails to materialize”. Laramide said it has requested this meeting in consultation with other large institutional shareholders, to respond to recent developments in Mongolia including the extension of the CNNC Overseas Uranium Holding Ltd takeover offer.

Khan agreed earlier this year to be acquired by CNNC, as part of its defense against a hostile takeover offer from Russia's Atmoredmetzoloto. Earlier this month, Khan said that it received notification from the Mongolian Nuclear Energy Agency that mining and exploration licenses for the company's flagship uranium project in the country had been invalidated.

Khan is challenging the decision in court, and has said that it does not expect the developments to affect the takeover by CNNC, but shareholders are obviously concerned. Laramide said that it had not entered into a lock-up agreement with CNNC, but agreed with Khan's board recommendation to accept the CNNC offer, which has been extended to expire on May 25.

Source: The Mongolian Mining Journal   Date: April 30, 2010

The Finance Ministry intends to introduce, subject to approval by Parliament, a new form of taxation from January 1, 2011, immediately after bidding farewell to the old year and with it the 68% windfall profits tax. Increased royalty fees are charged in many countries and the system comes in several ways. It may be linked to the profit level of the companies, or can be imposed depending on the volume of output and sales. The risk in linking it to the profits is that companies may utilize their considerable accountancy skills to manipulate the statement of profit and thus pay less. That is why countries less capable of monitoring complicated and convoluted financial records opt for clearer specifics.

Mongolia has chosen the more certain method of computing the tax depending on the commodity price in the global market. The higher the price, the more the tax. In this, it is almost the same as the 68% tax. However, according to the preamble to the draft law on gradually increased royalty, it is less stringent. The maximum graduated rise will be 5%, added to the basic 5% rate now in force.

This maximum total royalty charge of 10% will be collected from copper when its price is more than USD 8,000 per ton, from gold when its price hits USD1,300 or more per ounce, and from coking coal when its price is USD70 or more per ton. When prices are less than these, the rate will be correspondingly less. This means when copper price is around USD7,000 in the world market, according to the windfall profit tax law, a company is subject to payment of USD2,448 in tax, while it is to pay USD280 according to the additional 4% of the gradually increased royalty applicable. Similarly, if gold price in the world market is around USD1,100 per ounce, the windfall profit tax is USD170, while the gradually increased 3% of royalty will be USD33. The Ministry estimates the gradually increased royalty will earn the state budget MNT95 billion a year.

A windfall profits tax on copper was first proposed in 2006. Worried that the Russians would perceive it as aimed at Erdenet, the Government got the ambit of the tax extended to cover gold as well. This time the net is cast wider. Increased royalties are to be paid on gold, copper, zinc, tungsten, molybdenum, coking coal, iron ore and fluorspar.

Source: The Mongolian Mining Journal    Date: April 30, 2010

Mr. D.Damba, President of the Mongolian National Mining Association, has said unwise laws harm the mineral sector which is the mainstay of the national economy. The mining sector in Mongolia has a history of 85 years, but the country is yet to not have a comprehensive mining law reflecting a long-term policy. “This will not do,” he has said, calling for “a clear, realistic and sustainable policy and a law that will both reflect and implement that policy in the mineral sector”.

The present situation where, “in the absence of an overall view” many laws are being passed that are “against the interests of the sector, leaving miners very frustrated”, is possible “only because the state neither has nor can give a clear sense of direction”. He singled out three recent laws that, “individually and together, are seriously damaging business”. Mr. Damba feels it is “imperative that the State formulates its policy on a priority basis, presents it to the public to allow all concerned, especially our member companies, to review its provisions and make practical suggestions, and then incorporate them on merit in the final draft that will become law”.
Stressing the need for the involvement of professionals in the drafting of laws on technical matters, Mr. Damba said, “With all due respect to them, a group of MPs sitting together and drafting a mining law cannot be the best way to do justice to issues technically complicated and with ramifications hidden from the amateur eye.” The result of this practice has been the law banning mining work in certain areas. “Some in the Government have understood its huge negative impact and are going slow. Can you imagine that we have a law that the Government is embarrassed to enforce?” he said.

Source: The Asian Development Bank   Date: April 29, 2010

The Asian Development Bank (ADB) Board of Directors has approved a USD15 million grant to help improve urban infrastructure and services in the mining and border towns in Southeast Gobi. The grant will directly benefit about 100,000 people in six towns of Omnogovi and Dornogovi provinces, where around 31% of the people are below the poverty level now. Both provinces are poised for rapid economic growth following expansion of mining and cross-border trade.
The population in urban centers is projected to more than double by 2020. "The provision of urban infrastructure and services is currently poor. Many basic services are either inadequate or absent. Insufficient and unreliable urban services add to business and household costs, damage the urban environment, and diminish quality of life," the ADB has said in a statement announcing the grant. Maximizing the benefits for the residents of Southeast Gobi will depend on effective urban planning, management, and service delivery policies and structures being in place.

The project has two parts. The first will fund consultations to make way for infrastructure services reforms, institutional development, and capacity building to strengthen urban planning and policy making, regional cooperation, and project management and project performance monitoring. The second will fund needed infrastructure improvements such as developing water sources, transmission, storage, and distribution facilities, increasing connections to piped water supply and reducing system leakages. Funding will also be provided to increase waste water collection, boost waste water treatment capacity, and enhance other sanitation services.

The total cost of the project is USD21.9 million, with Mongolia providing USD6.8 million and local governments contributing USD100,000 to complement the ADB grant.