Armando Torres: Success of Oyu Tolgoi, its new power station and Tavan Tolgoi IPO means faster growth for Mongolian economy

-Let’s start our conversation with an introduction of your family? 
-My wife has been here with me since we arrived in Mongolia. My children are already independent as my son is 28 years old, and my daughter is 24. They both finished their university and now live in Australia. Our family has traveled a lot. We have lived in four different countries throughout my career. I am Brazilan and I started my career working  in South and North of Brazil. Then I worked in Spain for five years. Prior to coming to Mongolia I worked in Australia for 12 years. 

I graduated in 1990 as a process chemical engineer. Then I completed a masters degree in 2000 in process optimization. After working at Alcoa (Aluminum Company of America)

for nearly 21 years, I moved to Rio Tinto for a Chief Operations Officer - Bauxite Alumina role responsible for the Global Operations. That was in 2011.  

In 2016, I was offered a great opportunity to serve as Managing Director of Oyu Tolgoi and a member of the company board. I`m very happy with this opportunity personally and professionally.

My wife and I are excited to live in Mongolia. It is a country of great history, traditions and people. Our children like spending time here as well. My son has visited us and we spent couple of days in a ger together. My daughter is planning to come this March. Professionally, it is a unique opportunity in life to help build a nation, to witness such growth.

I fully realize how crucial OT is. Delivering this project well will set up Mongolia for a successful economic future, and building human capital and facilitating other investment.

-Actually, we don’t know much about Brazil, we picture the warm weather with rich mineral resources. Also, Brazil is part of BRIC. Can you tell us more about your country?
-Brazil is a fascinating country and rapid developing economy. People are working hard to succeed. It`s a big country with population of more than 200 million people. I could say that nature and good weather are a gift from God. 

Brazil is famous for its clean water and good soil. Education, mining, agriculture, livestock sectors are well developed. 

Brazil has the potential to become one of the strongest economies. Now we are in the process of turning democracy to be more efficient and are still learning. There is a lot to learn to shift from emerging market to the stable economy. 

-Last year you attended meeting of CEO club members, during which you mentioned that Brazilian and Mongolian families are very similar, family members are more connected and take care of each other at all times.
-Yes. That`s true. There is a strong connection between family members. Brazilians respect elders. It`s a deep-rooted tradition. And the society is vibrant, quite like in Mongolia. People enjoy socializing, getting to know each other. It is very open and friendly environment, and foreigners are accepted quickly. Mongolia has warmly embraced me and my family here. Spirit of the society is similar.             

-When did you visit your hometown last time?
-Last June we went to see our mothers and my brothers. We had a great time there.

-What do you miss most? 
-I miss watching football, especially matches in the Brazilian league. I miss the weather. But I have already learned to enjoy the life in different countries. Enjoying the place you live in is essential for happiness. I am really glad to have an opportunity to live in Mongolia.

-Do you dance? I think Brazil is famous for dancing.     
-My wife is a dancer. So I learned to dance. Actually, my hobby is football and I play guitar. I also like reading and walking. My work days are quite hectic. For me, taking at least one day to relax is very important. On Saturdays, I spend all day with my wife. It is important for me to be with my family, mentally and spiritually, not only spending time with each other. I like to be close to my family.

-Aside from close family connection there is one more similarity between Mongolia and Brazil. It is a huge gap between the rich and poor. A few years ago, I saw a picture of Brazilian city, luxury villas and slum districts were in such close proximity with only a tall wall separating them. We can see the similar situations here in Ulaanbaatar as well. Has that changed in Brazil?
-Social inequality is one of the challenges in Brazil as an emerging economy. The solution is increasing the employment and investment. Other aspect of the social inequality is education. Primary education is not enough. Society must have the potential to attract investment, so we have to build the human capital. This in turn requires a stable political environment. 

-Brazilian Presidential Election was held on October 7. Did you have a chance to vote online?
-Unfortunately, no. We can vote only through our embassy. The closest Embassy of Brazil is in Beijing, China. 

-How many Brazilians live in Mongolia?
-If I am not wrong, there are 12 or 13 Brazilians in UB. Our Chief Development Officer, Marco Pires is a Brazilian too. For me it was a pleasant surprise. Our community in UB is small. 

-What languages do you speak?
-In Brazil, we speak Portuguese. I speak English, Portuguese and Spanish.

-Is Spanish and Portuguese similar to each other?
-There are some similarities, but they are totally different. If you speak Portuguese, it`s easier to learn Spanish, but you need do study. 

-Which Mongolian food do you prefer? 
-I prefer lamb and steak. The livestock here is of high quality. Livestock freely roam pastureland and there is no artificial process to support the growth of livestock. I really like Mongolian meat, cheese and camel milk. I prefer cold camel milk. Cheese is rich with proteins and it`s good to eat when you`re hungry. Mongolian cheese helps me feel better. 

-What would you recommend for first-time visitors to Mongolia?
-Mongolia is really diverse in terms of culture and geography. It is important to get to know Ulaanbaatar. The Sukhbaatar square is one of the most beautiful squares in the world. I would also advise going for hiking in the mountains around. 

Actually, there are so many options. For the first-time visitors, it would be good to spend a couple of weeks in the countryside and stay in a ger with a herder family, if they want to understand Mongolian history and traditions. They will understand how nomads have carried their way of life for thousands of years. Southern Gobi is beautiful as well. Also, I suggest to see Naadam festival. 

-Now I will shift to questions related to your work. Rio Tinto Group has autonomous machines in their mines. Is OT planning to apply AI-based technologies to its mine?
-As our chief executive Jean-Sebastien Jacques emphasized at the International Mining and Resources Conference last November, mining sector needs to re-invent itself. It`s very important to truly rebrand ourselves according to new technologies. One of the major, competitive edges of OT is being a part of Rio Tinto. Rio Tinto has developed and applied the top technologies of the sector. The biggest achievement is at iron ore mines. Rio Tinto remotely oversees the network of its 16 iron ore mines, 1,700km of automated rail system, four port terminals and two power plants, all hundreds of kilometers away from the mines at an Operations Centre in Perth.

Also, Rio Tinto has more than 80 autonomous trucks. We are evaluating and applying all these technologies where applicable here. The most important aspect for Oyu Tolgoi is enhancing our structure to improve data management. Access to real-time data will help our employees, supervisors, managers to make the right decision at the right time and helps to optimize our operations, to address problems via data system. This is the main focus for us now. The block caving technology used in the underground is the most advanced technology and it completely reforms the mine. 

Also, we started a Management operation system project. Every single employee knows what they need to do every hour of the day. The use of AI will boost our efficiency a lot.

-Tax discussion is an ongoing issue. Is there any update?  
-There are three working groups between The Government of Mongolia and Rio Tinto. One of the aspects I would like to highlight is that dialogues and discussions are progressing positively, which is very important. Different points of views exist between shareholders. Related to the tax issue, we received tax act applying to OT with the value of 155 million US dollars in January last year. We have firm position on having paid all taxes based on the agreement signed with the Government of Mongolia. Through the revision of the act we have paid 5 million dollars. Now the ongoing dispute is about 150 million US dollars. Dialogue is still continuing. If both sides cannot reach a common agreement, International arbitration will be considered. It is a standard practice in this industry globally. It is important to mention that OT has been paying taxes in full since the start of its operations. Since 2010, Oyu Tolgoi has paid around 2 billion US dollars in taxes and fees.

18 percent of our revenue is a tax payable to the Government of Mongolia. We strongly believe that we paid all necessary taxes based on the Investment Agreement. The tax stabilization is laid by this agreement. This is our position. Hopefully, the Government of Mongolia and Rio Tinto can reach a common understanding. 

-What is period of the Tax stabilization?
-According to the Investment Agreement, the tax stabilization is valid for the duration of the license we have, which means 30 years. 

-Chief Cabinet Secretary Zandanshatar G. recently stated that the Government has been able to expedite the dividend allocation to Mongolia.  Also, Erdenes Oyu Tolgoi LLC director said Mongolia will start receiving its share of dividends in full starting 2032. Can you comment on this?
-Mongolia is benefiting from OT since the start of operations in 2010 through salaries, taxes, procurement totaling 8 billion dollars. Dividend is only a part of many benefits. Rio Tinto and Turquois Hill Resources have paid their entire investment in Oyu Tolgoi to date, including covering Government of Mongolia’s share. Before any divided can be paid, Government of Mongolia needs to first repay their share of costs.

-Another dialogue between Government of Mongolia and Rio Tinto is focused on reducing the interest rate (LIBOR +6.5%). 
-Joint efforts to explore the mechanisms to reduce the rate are being conducted. If both sides find a pathway to reduce the rate, I will be glad. It`s important to take into account what circumstances will define interest rates for mega projects like OT. Risks along the projects are crucial. I hope the sides could find a common ground to this matter.

-Parliament members discussed the draft of Currency Settlement Law. Could you share your opinion regarding this?
-Central bank of Mongolia is a regulatory body. This is a standard international practice. If Central bank overhauls its raison de’tre, it`s a concerning point. Our revenues are processed through foreign banks. This is our obligation according to the project finance agreement. We have to choose banks with higher ratings. Our cash flow must be processed rapidly, regardless of any circumstances. We return the revenues back to Mongolia in the forms of salaries, taxes and procurement activities. OT cooperates with about 1000 suppliers, approximately 700 of them are Mongolian businesses. Since 2010, 2.6 billion US dollars were paid to Mongolian businesses for products and services rendered. And around 2 billion were paid for taxes and salaries. All this fund was processed through Mongolian banks. 

Central bank regulates the sector, so it should be independent from political interference. It`s very important. Because short term, politically motivated decisions can negatively impact in the long term. That`s not good in terms of practices of democracy and attracting foreign investment. But of course, it is up to Mongolia to make a decision

-Last week you signed a power agreement with the Government for the domestic supply of power, after a prolonged talks. Any progress is made with power plant project?
-OT has always been committed to sourcing domestic power and I greatly appreciate that we now have reached a long-term solution for OT, providing wider benefits for the South Gobi region. This is a very important milestone for our business, securing the long-term future of Oyu Tolgoi. The Agreement showcases the commitment of all shareholders, including the Government of Mongolia, to successful delivery of Oyu Tolgoi project. Now we need to make technical and commercial arrangements. We have been importing power from Inner Mongolian Power Corporation (IMPIC), which is a reliable supplier.

The construction of a 300 megawatt plant will commence in 2020. It is expected to be operational by mid-2023. Once it is completed, the plant will fully supply OT’s power needs and a portion of the generated electricity will be distributed among local households. It can also be expanded.. Our sustainable production will begin by the end of 2021. Full ramp up is slated for 2027.

-Are the renewable energy sources being considered to supply OT mines in the future?
-Yes, we are studying the possibilities. But the underground mine is a complex mine, so we have to take that into account. Thousands of workers are working in 1.3 kilometer depth. We cannot afford to put the underground mine operations at risk. That’s why we chose coal power station as the most reliable technical option. We need reliable energy, and we need to be careful with new technologies and in considering sustainability. What proportion of total energy in future will be produced from renewable sources is not clear at the moment, and how much is from coal is not decided. Coal power station is the most reliable technical option. Studies are in early stages. 

-Two years ago, the construction of 5-6 story apartments had had started. Is it finished? Have workers moved in?
-Khanbogd soum is growing rapidly. Ten years ago, there were only 2 thousand residents. Now this number reached 7 thousand. Our strategy is an organic growth as you cannot force people to move. We need to develop attractive conditions; apartments are not our first priority. The priority for us is basic social (electricity, water, sewage, heating) and economic infrastructure (airport, veterinary clinic etc.,). In Khanbogd soum we recently inaugurated kindergarten and school for 640 and 200 children respectively.

The school has implemented the Cambridge curriculum. Very soon Khanbogd soum will be connected with OT site with the Euro standard road. Once we have built basic infrastructure, next step is to work with the Government of Mongolia on how to boost human development and economic plan, then how to attract more people to live there. Building a sense of ownership in the community is more important, rather than entitlement. Our principle is directed to developing the town. We support the cooperation between private and public sectors. For example, OT financed The Gobi Oyu Development Support Fund financed the new school, but the project was executed in cooperation with the local government.

The development of the town is not measured only the number of apartments. Many people ask me when the construction will finish. Apartments are just a part of the town development. We are moving forward very well in a solid step together with province government. Eventually more apartments will be built . The choice is in the hands of people, it is up to them where to live and what to invest in.                               

Our strategy is to tighten the cooperation between public, government organizations and the private businesses for the improvement of the living conditions of the population. I have worked for 30 years in mining industry and observed the development of several towns, which are connected with mining business. Main factors of new town development and sustainable growth are public and private sector cooperation and ownership mindset. OT will operate for nearly 100 years. Our 10-year strategy envisions a sustainable future of Khanbogd soum. It should build its economic capability to be viable beyond OT. This is what we are doing.

-Have you ever been to Erdenet city?
-Yes, I have. I enjoyed the city a lot. Erdenet is a model city established in 1970`s. It`s a different model compared to what we have in OT. And the history, circumstances and timing are entirely different. This city faces challenges as well, beyond the benefits. 

Regulations in Mongolia are quite complex. It is impossible to turn Khanbogd soum into the town overnight. Several steps need to be taken prior to moving in that direction. In order to go forward, we need to consolidate human and economic plan with the Government institutions. We have made investments in Khanbogd soum. It lacked proper water facilities, electricity, road and airport, which have been built. Now it can offer better health and education services. Sustainability is what we seek. In addition, I would like to emphasize that everything we built here is in compliance with top standards. Fourth working group might be established between Government and Rio Tinto for the development of Khanbogd.                 

-Columnist B.Baabar once announced that average salary of OT reached to 3 million tugrugs.
-Oyu tolgoi pays competitive wages by Mongolian and international standards in accordance with the knowledge and skills of our people. It`s not about how much salary we pay, its more about having the right people and teams in place for the  right job.

-Since the beginning of last November, a long queue has formed at Gashuunsukhait border checkpoint. Does this affect OT export?  
-Gashuunsukhait border checkpoint is our access to Chinese market. So, yes, it has not been easy. Although we have our road from mine to border, the access to Chinese customs is through one single gateway. We are working with Ministry of Foreign Affairs and Government of Bayannuur prefecture in Inner Mongolia to discuss the improvements of the trade. I hear Gashuunsukhait is still not an international border.

24-hour operational customs at the border would be extremely helpful. We need to have alternatives as buffer in emergency situations like we have it now. It`s a complex issue. The only possible resolution of this issue is tight collaboration of all parties and the solution must be sustainable. I hope Mongolian and Chinese governments resolve this matter soon. We need to continue to work to bring border efficiency to the next level.

-Lastly, please briefly introduce OT plans for 2019?
-2019 is going to be a tough year as volatility and uncertainty in relation to global trade remains an issue The global economy and market is hardly predictable. Therefore, we need to monitor the trends and be prepared to react properly to any circumstances that might arise. 

China has the highest demand for copper. Huge renewable energy projects are being implemented and China has shifted towards the production of electric cars. On the other hand, we need to expand our markets to Japan and South Korea. We have shipped our copper concentrate to Japan, testing a new market. We are evaluating South Korean market as well.     

Our main focus continues to be safety. We plan to continue the application of the international safety standards for our front-line leaders and contractors and to coach our people. We are committed to helping our 17 thousand workers to grow. 93 percent of them are Mongolians. Future managers and executives are important too. 

Cost control is our priority as the market conditions are becoming more difficult this year. We need to have engagement and support of our employees and suppliers to work efficiently. 

In terms of partnership, we will continue investing in Khanbogd development. We started food production strategy with local herders. We motivate local Khanbogd suppliers to collaborate, to support the strategy. 

We strive to bring more benefits of OT to the Mongolian people. This is a mega project and extremely important for Mongolia, not only in terms of economic, human capital and technology development, but for the foreign policy. 

Important milestone we have to achieve is the commissioning of Shaft 2, which will accelerate the underground development. Shaft 2 will be operational in the first two quarters. Generally, these are the key elements of our 2019 plan. 

We are committed to work with our shareholders to address the issues within the scope of the Agreements, as it is a crucial factor for the success of the project itself. 

The Power Source Framework Agreement is a testament to commitments of all sides to continue implementing the Oyu Tolgoi project successfully.  With the success of OT, power plant and TT IPO the economy of Mongolia will be unrecognizable. Of course a lot depends on the authorities, as the Cabinet, Parliament and the President play an important role.

-Thank you for your time.