Mongolia’s aim of quadrupling its rail network will send coal, copper and rare earths to nations such as Japan and South Korea under a plan to reduce dependence on the Chinese market and boost economic development.
The landlocked nation’s drive to lay 5,700 kilometers (3,542 miles) of track across the country and to Russia’s Far Eastern ports stands to benefit such companies as Australia- listed Aspire Mining Ltd. (AKM) and Canada’s Prophecy Resource Corp. (PCY), said Richard Harris, chief executive officer of Hong Kong-based Quam Asset Management. His firm has raised $20 million for a Mongolia-focused fund that will start investing in a few months.
“The missing link in the Mongolian gold rush now is transportation infrastructure,” said Roland Nash, who helps manage about $150 million of Russian stocks at Moscow-based hedge fund Verno Investment Management Ltd. “The key for the Mongolians is to attract investments from as many different countries as possible to lessen their dependence on China.”
A mining boom in the world’s most sparsely populated nation promises the greatest influx of wealth for Mongolia since Genghis Khan conquered much of the known world in the 13th century. Mongolia’s benchmark MSE Top 20 Index is the world’s best performer in the past 12 months and its currency, the tugrik, the fifth-biggest gainer against the dollar.
Economic growth may surge to 23 percent in 2013, more than twice the forecast expansion in China, as large mining projects begin production, the International Monetary Fund says.
Giant Neighbors
Agriculture and mining each account for about 20 percent of gross domestic product. Aside from coal and copper, the country also holds oil, potash, iron ore and uranium, as well as rare earths used in electronics, wind turbines and smart bombs.
Mongolia has grown increasingly dependent on commerce with China’s 1.3 billion people since the 1991 breakup of the Soviet Union: More than 75 percent of exports went to its giant neighbor in 2009, according to European Union figures.
The relationship hasn’t always been easy. During a 2002 Mongolia visit by the exiled Tibetan leader, the Dalai Lama, trains were held up near the China-Mongolia border, a reminder of the country’s vulnerability to pressure from the rulers of the world’s second-biggest economy.
“Using the Russia route, Mongolia will have better access to a global market rather than just dealing with China,” said Chris Weafer, Moscow-based chief strategist at UralSib Financial Corp. “You need that to maximize the commercial value of its goods. Otherwise China dictates prices.”
Precious ‘Necklace’
Mongolia this year is to start building a 400-kilometer link from the Tavan Tolgoi coal basin and Oyu Tolgoi copper deposit, two of the world’s biggest untapped resources, joining with an existing rail line north to Russia and south to China.
The planned network eventually will stretch directly from Tavan Tolgoi to China and Russia and extend the railroad west and north to link with untapped metals deposits, according to Eurasia Capital, Mongolia’s biggest investment bank.
“A necklace of resource deposits lies across the south of Mongolia and the idea is to connect it to rail, connect it to China, and have options with a route via Russia,” said Eurasia Capital analyst Dosbergen Musaev. “It’s a policy that defines what Mongolia will do over the next decade.”
To prove Russia offers a realistic outlet, trucks filled with coal from Tavan Tolgoi drove to Ulan Bator, where their cargo was loaded onto a maiden 30-car train that left for Russia’s biggest Far East port, Vostochny, on Oct. 28 last year.
‘Historical Event’
The “historical event” shows that Mongolian coal can travel via Russia to South Korea and Japan, OAO Russian Railways Chief Executive Officer Vladimir Yakunin, who attended a launch ceremony for the train, said in a statement posted on the company’s website.
For now, Mongolia trucks its output into China. That won’t be possible when production at Tavan Tolgoi and Oyu Tolgoi comes onstream, Musaev said, given the scale of the projected output.
Tavan Tolgoi’s owner, state-controlled Erdenes MGL LLC, expects coal production of as much as 30 million tons a year, according to a presentation made in Moscow in November. That’s more than the record 25 million tons from all of the nation’s coal mines in 2010.
Copper production at the Oyu Tolgoi deposit will reach about 600,000 tons a year in its first decade, says Ivanhoe Mines Ltd., which is developing the site with Rio Tinto Group, the world’s No. 2 mining company by sales, and the Mongolian government.
Moving those commodities by truck will be costly. The price of coal sold by Tavan Tolgoi Co. more than doubles to about $61 per ton by the time the fuel arrives at the Chinese border, according to a presentation by the Mongolia Mineral Resources and Energy Ministry made in Moscow in November.
Road, Rail Costs
On top of the $28 per ton in mining costs, the company pays $32.50 for trucking, road charges and loading, the presentation shows. Even with a rail connection, the cost of exporting via Russia versus through China would be higher given the distances involved, Musaev said.
The price will be worth it because the option offers advantages to Mongolia, including the opportunity to further develop its deposits, according to UralSib’s Weafer. Processing Mongolian freight will also help Russia boost its isolated Far Eastern economy, which suffers from labor shortages, he said.
“The future of Russia and modernizing the economy of Siberia and the Far East is closely tied with the Asia Pacific region,” President Dmitry Medvedev said April 15 in Boao, China. Integration in the region “should be comprehensive and involve all countries, without creating new dividing lines.”
Russian Help
In December last year, Russia wrote off about 98 percent of Mongolia’s $172 million debt. Russian Railways owns a stake in AO UlanBator Railways, Mongolia’s national operator, and guaranteed a loan for it from Russian state-controlled VTB Group in October 2010 to buy locomotives.
Russia plans to sell shares equal to about 12 percent of Russian Railways, a company Weafer said stands to benefit from Mongolia’s railway plans. The business may be worth several times its share capital of more than 1.5 trillion rubles ($53 billion), Yakunin said last year.
Aspire Mining is partnering with SouthGobi Resources Ltd. (SGQ) for a coking-coal project, while Prophecy Resource in February was given a license for its Chandgana Tal coal deposit.
“The opening of the rail line is really important for some of the mines to the north,” said Quam Asset Management’s Harris.
Still, while the economy has been growing at an average 6 percent rate during the last 10 years, the expansion has fluctuated “sharply” from 1 percent in 2000 to 10 percent in 2007 and minus 1.6 percent in 2009, the IMF said in a research paper this month.
Boom and Bust
The transition to a market economy in the early 1990s, severe winters and a collapse in copper prices after a sharp rise in 2006-2007 help explain some of the country’s “boom- bust” cycles, it said.
“You have to really do your homework” to pick Mongolian equities, said Javier Garcia, lead manager at Swiss & Global Asset Management of the 70-million-euro Julius Baer Black Sea Fund, 4 percent of which is in Mongolia. “I’m not bearish but I would be extremely selective.”
The nation must avoid developing “Dutch disease,” where the financial benefits of a commodity boom lead to a hollowing out of other sectors, according to the World Bank. In the Netherlands, the discovery of gas in 1960s drove up inflation and damaged manufacturing.
Balanced Growth
Mongolia needs to find a more balanced model of growth, Prime Minister Sukhbaatar Batbold said in Ulan Bator in March. He is trying to boost living standards in a nation where about a third of the 2.7 million population lives below the poverty line.
UlanBator Railways, the company Russia helped, was established in 1949 as a joint venture between the Soviet Union and Mongolia, creating a legacy that includes a shared rail gauge. That gauge, which refers to the width between the tracks, differs from China’s.
The volume of cargo between Russia and Mongolia grew 10 percent to 1.15 million tons in the first nine months of last year over the same period in 2009. The volume of Russia-China rail freight, which transits Mongolia, was 2.3 million tons in 2009, according to Russian Rail.
In Russia’s Far East, Vostochny port plans to expand its coal-handling capacity, according to the terminal’s website. Eurasia Capital estimates Russia will need to spend $2 billion over three years to cope with major coal and ore export volumes from Mongolia.
By striving to boost transport connections with Russia, “Mongolia is making a geopolitical choice and gaining a stronger bargaining position,” Musaev said.
To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net
To contact the editors responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net
Source:Bloomberg news wire service
