Key event: The Central Bank of Mongolia reported its gold purchases have reached to 8.3 tonnes, up by 14% y-o-y basis, and is further expecting that this year annual purchases will be 20% higher than that of the previous year.

Implications: As set by amendments to the 2014 Mineral Law, the stipulation that gold miners must pay royalties of 2.5% for selling to the central bank will expire on 01 January 2019. Whether it is further extended or not, the gold miners may need to sell their gold before the expiration date in order not to expose themselves to a higher royalty.

Outlook: This year Mongolia’s international reserves and foreign exchange rates are expected to be boosted by the significant gold purchase of the central bank. This is largely thanks to the increased production by gold miners and daily gold purchase rates of the Central Bank which are set to be in line with that of the London Metal Exchange.

It was reported that the Central Bank has delivered their recommendations to the draft revision of the taxation law, proposed by the Ministry of Finance, which includes a recommendation to extend the effective period for the royalty payment of 2.5% for the gold miners who sold their gold to the Central Bank or authorized commercial banks. The expiration date for the current rate is 01 January 2019 and this became effective on 24 January 2014 as per the amendments to the Mineral Law.

Due to the prolonged exchange rate volatility and the prevalence of gold smuggling in Mongolia, the government and the regulators have been subject to fierce criticism and political pressure for a number of years by the business community and the general public.

However, since the amendments to the Mineral Law in 2014, the gold purchase by the Central Bank continuously increased year by year which supported Mongolia’s international reserves and maintained foreign exchange rates until today.

Lately, the Central Bank has been taking various measures to increase gold purchases. Those measures include providing working capital to the gold miners through the “Gold-2” program, buying gold from local producers at the international rate, and running public campaigns such as “From local gold to the National Treasury” to educate stakeholders regarding the importance of selling gold to the central bank.

Additionally, it was reported that the Central Bank is aiming to set up approved gold verifying and buying centers (“Refineries”) locally which would be scattered around the country as branch offices of the Central Bank. It is understood that once those local refineries are established, the local miners will not need to come to Ulaanbaatar to refine and sell their gold. This would save a lot of time and money for the local gold miners and boost the Bank’s gold purchases.

Beyond this, the Mongolian Gold Producers Association is of the opinion that the government should revise its two-tier corporate taxation system if the country of USD 11 billion economy is to support its gold production and boost its international reserves. Currently, Mongolia has a corporate tax rate of 10% for business entities if their taxable income falls below MNT 3 billion, the marginal rate increases to 25% beyond this threshold. The Mongolian gold mining industry believes that the threshold is too low. As it is barely the equivalent of selling 30 kg of gold, the miners are likely to be forced to sell their gold to the Central Bank through individual miners, known as “ninja miners”, in order to reduce their tax burden.

If these regulatory hurdles are not resolved in favor of the gold miners they may face tough legal and market circumstances next year. This could gravely damage Mongolia’s gold industry and international reputation, just as was done by the Windfall Profit Tax Law and, The Law on the Prohibition of Exploration and Mining in Headwaters of Rivers, Protected Water Basins Zones and Forested Areas, also known as “Long Named Law”, in 2006 and 2009 respectively.

Published Date:2018-08-02