Mongolia Eyes Rewriting its Mining Rules

Mongolia is overhauling its approach to mining, aiming to extract greater value from its abundant mineral resources. The government is considering to dramatically expand the list of "strategic" deposits, potentially adding 39 (Annex II list) to the existing 16 (Annex I list), reveals this ambition. 

While boosting the nascent National Wealth Fund is a central objective, this move also risks unsettling existing operators and redefining future investment. Crucially, the proposed expansion requires parliamentary approval and is far from a done deal.

The impetus for this expansion is clear: to channel more assets into the Wealth Fund and deliver greater returns to citizens. The 39 additional deposits targeted for inclusion, previously considered secondary as per the 2007 resolution, are now viewed as economically significant, each potentially valued over 5% of Mongolia's GDP, according to Uchral. 

However, with a dynamic economy, defining and measuring the ongoing contribution of each deposit relative to GDP presents a persistent challenge. 

Government negotiator Batzandan, tasked with securing agreements with private companies operating these deposits, has begun audits and enlisted consulting firms. Preliminary discussions have already commenced with some companies, including MAK regarding the Nariin Sukhait coal mine. While Batzandan initially aimed to conclude talks with Annex I strategic mine owners by May 1, 2025, the potential inclusion of Annex II deposits will likely prolong negotiations considerably.

Further complicating the situation is the evolving strategy for securing value from these resources. While direct state ownership remains a possibility, there are increasing signs of a shift towards higher royalties or product sharing, mirroring the recent uranium agreement with Orano. Even that deal, while ratified, continues to face some parliamentary opposition. Should this approach, championed by Uchral, gain broader legislative support, it could establish a precedent for future negotiations, favoring less state equity in exchange for increased special royalties.

Meanwhile, MP Uyanga offers a radical alternative: a flat 2% levy on the sales revenue of all mining operations, regardless of their strategic designation. This approach, she argues, offers a simpler, more transparent, and potentially more lucrative revenue stream for the Wealth Fund. 

It also sidesteps the complexities and potential political pitfalls of selectively designating strategic deposits. However, this proposal faces a steep uphill battle in parliament, where nationalist sentiment strongly favors greater state control over key resources.

The recent comments by State General Auditor Zagdjav regarding Oyu Tolgoi add another layer of complexity. Zagdjav questioned whether the Sovereign Wealth Fund receives an equitable share of resources extracted from areas outside the licensed area, a joint venture with the Canadian company Entree Gold. While not representing official government policy, Zagdjav’s remarks highlight the potential for reinterpreting existing agreements, a prospect that could generate uncertainty among investors.

Mongolia faces a difficult choice: prioritize short-term gains through increased state control or cultivate a stable and attractive investment environment for long-term prosperity. The government’s decisions in the coming months will have profound implications for the future of Mongolia's mining sector and the country's overall economic trajectory.