Mongolia's Uranium Strategy: A Shift Towards Royalties

Mongolia's uranium sector, dormant for decades, is stirring to life as the country readies a comprehensive strategy to exploit its tenth-largest global reserves. The government, under the guidance of Cabinet Chief Secretary Nyam-Osoryn Uchral, aims to launch the uranium project alongside France’s Orano Group.

By moving from a 34% direct stake in their joint venture, “Badrakh Energy,” to a royalty-based system with potentially only a 10% preferential shareholding, Mongolia intends to secure more predictable revenue without the headaches of direct involvement. This pivot reflects a broader lesson from Mongolia’s challenging experience with Rio Tinto’s Oyu Tolgoi mine, the country’s largest mining project, where managing direct investment proved complex and contentious.

At the heart of this new approach is a tiered royalty structure designed to yield substantial returns as uranium prices rise. A base royalty of 5% is supplemented by a special royalty of an additional 5%, and an escalating royalty kicks in as uranium prices climb. For example, when uranium prices reach USD 81 per pound, the total royalty could rise to 14% according to Uchral.

This financial mechanism aims to ensure that Mongolia benefits as the value of uranium appreciates, with proceeds funneled into the National Wealth Fund to support critical public services like healthcare, education, and housing. While preliminary, projections indicate this setup could bring Mongolia around USD 1.88 billion in revenue over the life of the project.

To implement this strategy, the government is fast-tracking amendments to the 2009 Nuclear Energy Law. Key updates include shifting from direct equity ownership to royalties, extending investment agreement durations from 10 to 20 years, and instituting a sliding royalty rate that adjusts with global uranium prices. Another significant provision in the proposed law is a ban on the import and transit of radioactive waste, underscoring Mongolia’s commitment to public and environmental safety.

The government’s proposal has ignited lively debate within parliament. Supporters argue that the shift aligns well with Mongolia’s “Vision 2050” development goals, fostering economic growth, foreign investment, and technological advancement while also diversifying Mongolia’s economic ties beyond China. But concerns loom large, echoing issues from the Oyu Tolgoi project, with parliamentarians calling for:

- Transparent negotiations and a rigorous focus on national interest.

- Thorough environmental impact assessments and public consultations, given the constitutional provision that Mongolia’s mineral wealth is the property of its people.

- Independent expert analyses to evaluate the project’s economic viability.

- Close scrutiny of tax stability clauses and potential effects on broader economic policy and national security.

- Protection for domestic businesses amid heightened foreign investment.

Some lawmakers are also wary of potential Russian interference. They suspect Russian interests have had a disruptive influence on Mongolia’s energy sector, prompting worries that Moscow may not welcome Mongolia’s new energy partnerships with the West.

Geopolitically, the uranium deal with France reinforces Mongolia’s partnership with a country it regards as a “special privileged partner.” France, a significant global player in nuclear energy, is expected to boost Mongolia’s reputation on the international stage and help it diversify exports, mitigating its economic reliance on China. But Russia’s close proximity and historical role as a regional energy heavyweight add complexity to this relationship.

As the proposal advances through parliament, the government is under pressure to secure an agreement that balances foreign investment with public interest and environmental protection. Finalization of the Nuclear Energy Law is expected shortly, paving the way for the government to formalize its investment agreement with Orano before the end of the year.

If successful, this partnership could set a precedent for a new era of resource management in Mongolia, balancing economic growth with the preservation of national interests.