Mining Mongolia and China

By Ron Hall

Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. A large share of the country’s economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. During the 1950s, all of China’s individual household farms were collectivized into large communes. To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s and as a result, by 1978 most industrial production was produced by centrally controlled, state-owned enterprises (SOEs), according to centrally planned output targets. Private enterprises and foreign-invested firms were generally barred. A central goal of the Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was generally limited to obtaining those goods that could not be made or obtained in China. Such policies created distortions in the economy. Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced (since they were mainly focused on production goals set by the government). But shortly after Mao’s death in 1976 and Deng Xiaoping became the new leader, the Chinese government broke with its Soviet-style economic policies by gradually reforming the economy according to free market principles and opening up trade and investment with the West, in the hope that this would significantly increase economic growth and raise living standards. As the architect of China’s program of economic reform or what became known as “Socialism with Chinese characteristics, Xiaoping is quoted with saying

“Black cat, white cat, what does it matter what color the cat is as long as it catches mice?”

In the 80’s and 90’s this reform allowed China to open its doors to foreign investment in the country’s vast mineral resources and it reformulated its mining legislation to attract foreign companies into the Chinese mining sector with the hope of speeding up its modernization. The west obliged and foreign miners rushed in seeking joint venture agreements with Chinese partners such that the early 2000’s the number of foreign mining projects was around 300. But as international companies became stymied by an inconsistent and convoluted mining policy and their inability to create relationships of trust with local mining stakeholders coupled with a global minerals recession beginning in 2011, they all gradually all pulled out.

It appears that China no longer courts foreign mining companies possibly because it has already benefited from the desired influx of foreign capital, technology and management techniques and the Chinese government instead is now pushing state-owned mining companies towards restructuring and consolidation to exploit domestic deposits more efficiently and make the sector more competitive internationally. At the same time, it is encouraging national mining companies to seek resources abroad to satisfy the increasing domestic demand for mineral resources.  Many Chinese companies are risk-adverse and seem to be satisfied with the technology and management techniques they have already acquired and are not actively seeking joint ventures with foreign partners. These reactions express a form of Chinese protectionism that frustrates the aspirations of foreign investors attracted by China’s abundant mineral deposits.

In addition, there has been widespread government corruption, financial speculation, and misallocation of investment funds. In many cases, government “connections,” not market forces, were the main determinant of successful firms in China. Many international firms found it too difficult to do business in China because rules and regulations were generally not consistent or transparent, contracts not easily enforced, and intellectual property rights not protected. President Xi embarked on a tough anticorruption campaign, but many analysts contend that government anticorruption campaigns are mainly used to settle political scores with out-of-favor officials. Some analysts contend that President’s Xi anticorruption drive is more about consolidating his own political than instituting reforms.

In addition, there are some indicators that the current anticorruption campaign may be having a negative impact on the Chinese economy, due to hesitancy by some local officials to pursue projects they feel will lead to scrutiny from the central government. Many observers argue that meaningful progress against government corruption cannot occur without greater government transparency, a system of checks and balances, a free press, Internet freedom, and an independent judiciary.

In the meantime, China has set a national target to achieve carbon peaking by 2030 and carbon neutrality by 2060, prompting an active push by the country’s mining sector to pursue industry transition and achieve a low-carbon production plan. At the same time, a drive to ensure the continued supply of critical metals for the next stage of China’s development continues unabated.

In March 2021, China rolled out its 14th Five-Year Plan (FYP) (2021-2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035. To achieve the goal, the 14th FYP calls for greater development of clean energy including wind power, photovoltaic, hydropower and nuclear power, structural reform and elimination of outdated capacity in high-energy-consuming industries such as steel, petrochemical and chemical. The 14th FYP also asks key industries and key enterprises to take the lead in reaching carbon peaking.

As with the trend globally, “green metals,” including copper, nickel, lithium, cobalt and rare earth metals, will be in high demand in China’s push to meet carbon-neutrality targets and the rapid development in sectors such as new energy vehicle, photovoltaics and wind power.

Other than rare earth, China’s demand for imports of other critical metals in the next decade remains high and will be increasingly met by production in the countries that Chinese mining companies invest in, particularly those that are part of the “Belt and Road” infrastructure development strategy.

MONGOLIA

Mongolia is a landlocked country bordered by Russia to the north and China to the south covers an area of 1,564,116 square kilometres (603,909 square miles), with a population of just 3.3 million people.  It has been called the last frontier for large-scale mining projects as the unprecedented success of mines such as Oyu Tolgoi a tier one producer and one of the largest copper-gold deposits in the world, has set the stage for a flourishing precious metals sector. Oyu Tolgoi is one of the most modern and sustainable large-scale mining operations in the world. The mine, which is jointly owned by the government of Mongolia, Turquoise Hill Resources (TSX-TRQ) and Rio Tinto (ASX-RIO), began operations in 2011. Its current infrastructure will allow the mine to operate for decades to come.

Mongolia’s mineral wealth primarily coal, copper and gold – has been valued between US$1 trillion and US$3 trillion and its mining industry employs nearly 4 percent of the population. Much of its 6000 deposits with more than 80 documented types of minerals, including copper, gold, uranium, coal and many others remains of its untouched by modern exploration and extraction methods potential

For nearly many decades, Mongolia’s economy was driven by agriculture. While industrial mining did exist, it wasn’t nearly as prolific or profitable as it is today. In the 1990s, the country transitioned from a Soviet satellite to a free-market democracy, allowing foreign investors to be involved. Following the loss of support from the Soviet Union, Mongolia enacted the Minerals Law in 1997, attracting private investment. In 2002, the Mongolian Ministry of Mining issued nearly 3,000 exploration licenses that spanned almost 30 percent of the country’s territory. By 2011, Mongolia was the fastest-growing economy on the planet. The mining boom brought new wealth to the country, paving the way for economic and social development.

Exploration companies have taken notice of Mongolia’s vast mineral wealth,

Steppe Gold [TSX-STGO] was the first precious metals development company to participate in the Mongolian government’s Gold 2 program long-term initiative to ensure the sustainable development of the country’s gold sector. The program involves the participation and support of several government agencies, including the Ministry of Mining and Heavy Industry, the Ministry of Finance, the Ministry of Environment and Tourism as well as the Central Bank of Mongolia. Steppe has two gold projects: Uudam Khundii and Altan Tsaagan Ovoo.

Other Canadian mining companies active in Mongolia include:

• Prophecy Coal TSX-PCY
• South Gobi Resources TSX-SGQ
• Entrée Gold TSX-ETG
• Erdene Resource Development TSX-ERD
• Kincora Copper TSX.V-KCC
• Turquoise Hill Resources (formerly Ivanhoe Mines] TSX-TRQ