Mongolian government working to diversify the mining sector by developing production of strategic metals

A fledgling producer of iron ore, molybdenum, fluorspar and zinc alongside its big three minerals – copper, gold and coal – Mongolia’s extensive deposits hold significant promise for further diversifying output. However, moving from exploration to mining for new minerals such as uranium and rare earths will depend on high-level government support. While output of resources such as iron ore, molybdenum and fluorspar is growing, with new capacity coming on-line, the production of more strategic minerals is further off.

Metalurgical

Despite depressed global commodity prices, exports of metallurgical minerals such as iron ore to China have surged. Although exports of molybdenum doubled from 3200 tonnes in 2007 to 6700 tonnes in 2009, they have since slumped to 4000 in 2014, according to figures published by the Ministry of Mining in early 2015.

Meanwhile, exports of zinc have suffered more from depressed demand, declining from 141,000 tonnes of zinc concentrate in 2012 and 131,000 tonnes in 2013 to 99,400 tonnes in 2014. The most significant growth has been in iron ore exports, which rose from 200,000 tonnes per year in 2007 to 6.73m tonnes in 2013, though exports declined slightly to 6.3m tonnes in 2014.

Leveraging capacity on the 20m-tonne-per-year Trans-Mongolian Railway and the declining quality of Chinese iron ore to supply steel mills in north-west China, Mongolian producers aim to breach 20m tonnes per year by the decade’s end. Of the nine magnetite iron ore projects, six mines, with 45% Chinese equity, produce roughly 3m tonnes per year of concentrate and 3.74m tonnes per year of low-grade ore.

With proven reserves of 1.17bn tonnes fragmented across its territory, the short life of larger mines is a handicap. Eruu Gol, which alone accounts for some 16.5% of the sector, is expected to expire by 2023. Owned by China Investment Corporation, it aims to raise annual output from 5m tonnes in 2013 to 8m tonnes by 2016. Meanwhile, state-owned Darkhan Metallurgical Plant’s (DMP) 229.3m-tonne Tumurtei mine has ramped up production to 3m tonnes per annum since resuming operations in 2011, and opened Mongolia’s second iron ore concentrator with capacity of 3m tonnes a year in mid-2014. Its smaller Tumur Tolgoi mine, located to the south, produces 300,000 tonnes per year.

Given depressed prices for low-grade ore in particular, miners have had to focus on efficiency and scale to survive. “Although slumping iron ore prices have affected Mongolian producers’ profitability, we have focused on improving efficiency by expanding capacity,” J. Batzorig, Altain Khuder’s director of mining and processing, told OBG.

While the two northern mines rely on constrained rail freight capacity for their exports, other mines along the south-eastern border of the country export by truck. The first concentrator was opened by Altain Khuder at its Tayan Nuur mine some 90 km from China, which increased output six-fold to 3.5m tonnes per year in the five years to 2014. This is expected to expand to 4.2m tonnes a year once its $100m wet iron ore concentrator opens in 2016.

Two junior exploration firms – Australia-listed FeOre and Haranga Resources, backed by Indonesia’s Lippo Group – expect to start producing in 2015 in the north near Eruu Gol, but will remain constrained by the railway’s existing capacity (see Transport chapter). Over the longer term, the government aims to use DMP to develop the downstream domestically, including steel production. Having taken over the 230m-tonne Selenge deposit as a strategic deposit from its previous holder, China’s BLT, DMP plans to invest some $700m by 2017 in wet and dry concentrators, as well as a steel mill.

Fluorspar

The world’s third-largest producer of fluorspar with 1.01bn tonnes of identified resources, Mongolia’s output decreased from some 429,000 tonnes per annum in 2012 to 338,000 tonnes in 2013 before rebounding to 374,900 tonnes in 2014, according to the Ministry of Mining. While not one of Mongolia’s main exports, its rising price increased the segment’s value from $45m in 2007 to $103m in 2012, before falling to $83m in 2013. A handful of mid-sized mines have traditionally dominated the field, although new capacity should boost output.

In September 2013 US-based Firebird Management’s Berkh Uul joint stock company signed a partnership with Canada’s Prima Fluorspar to develop its Delgerkhan mine, with 10m tonnes of 33.47% ore reserves. Starting in late 2014 Berkh Uul expects to produce 120,000 tonnes per year. Meanwhile, Mongolia Minerals Corporation is developing the Dai Uul fluorspar project in Dornogobi, with the necessary water infrastructure built in 2014. Fellow junior ARViN Monspar reported successful results of 16.5m tonnes of proven high-quality acid spar at its two licences south-west of Choir in January 2014.

Strategic Minerals

Mongolia’s competitive advantage could yet prove to be in minerals tied to Western countries’ national security, such as uranium and rare earths. With up to 31m tonnes of ore containing most of the 17 rare earth elements, 16.77% of global reserves, according to estimates by the US Geological Survey, Mongolia boasts five main deposits and 246 occurrences.

China already controls an estimated 97% of the world’s supply of rare earths, so when the country imposed tight quotas on rare earth exports in 2010, key American and Japanese industrial buyers were forced to seek supplies in the US and elsewhere. This market dynamic bodes well for Mongolia, which has significant potential to develop rare earth production thanks to its plentiful reserves.

The Luugiin Gol, Mushgia Khudag, Khotgor and Khalzanburgedei deposits hold a combined 6.6m tonnes of deposits, according to Eurasia Capital, though the country remains underexplored. In 2013 the Mongolia National Rare Earth Corporation was conducting a drilling programme at Khalzanburgedei under the supervision of Australia’s Micromine to determine the resources at the deposit. According to Russian geologists, who had previously evaluated the area, substantial deposits were thought to be present to a depth of some 250 metres.

Another of the country’s strategic minerals is uranium. With 170,000 tonnes of reserves, according 2013 figures from the Ministry of Mining, Mongolia has significant potential to develop yellowcake production. France’s state-owned Areva is best placed to develop a first in-situ leaching mine at its two licences near Sainshand, which hold a combined 60,000 tonnes. Having invested $140m in exploration efforts, in late 2013 a new 66:34 joint venture with Mitsubishi, Areva Mongol, partnered with state-owned MonAtom in its own 66:34 vehicle, Areva Mines, to develop the 2000-3000-tonnes-a-year project by the start of the next decade.

Under the 2009 Nuclear Energy Law that created it, MonAtom is entitled to a free 34% stake in all uranium projects in the country, de facto deemed “strategic”. While the memorandum of understanding was signed a year after Areva’s initial mining licence application, the consortium was still awaiting approval from the National Security Council.

The project has substantial backing, however, including from physicist and former prime minister, N. Altankhuyag. Progress on other uranium exploration has also stalled, from 16 licence holders including Rosatom subsidiary AtomRedMetZoloto (ARMZ), SinoU subsidiary China National Nuclear Corporation and small independents like Canada’s Denison Mines, Red Hill Energy and Western Prospector.

Potential Aplenty

The country remains vastly underexplored, with the World Nuclear Association estimating up to 1.47m tonnes in likely deposits. Yet, Mongolia’s historic uranium mine, at north-eastern Dornod, remains in legal limbo. Producing 535 tonnes from 1988 to 1995, the 24,780-tonne deposit was taken over by a 68:21:11 consortium of Canada-listed Khan Resources, ARMZ and the state in 2003.

Following attempted hostile takeovers of Khan in 2010, the newly established Nuclear Energy Agency ruled in late 2010 that Dornod would be developed by a 51:49 venture of MonAtom and ARMZ, which planned a 2000-tonnes-a-year mine at a cost of $200m. Work was halted as Khan awaited a tribunal of the UN Commission on International Trade Law to decide the settlement amount. The compensation, announced in March 2015, came to $100m.

While Mongolia is diversifying its mineral output, rising exports of metallurgical commodities only expose its economy to the sustained downturn in Chinese steel demand. Over the longer term Mongolia’s national interest lies in developing production of strategic minerals, which will require strong political backing. With uranium and rare earth prices forecast to rise from 2020, and large uranium mines in Niger and Kazakhstan being decommissioned then, investors will be eager for such projects to launch.

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The Report: Mongolia 2015

Mining chapter from The Report: Mongolia 2015

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