Mongolia losing its resources luster as Ulaanbaatar scares investors

By Paul Bartholomew in Melbourne

October 14, 2013 - As some tell it, the Mongolian capital of Ulaanbaatar used to be full of bankers and consultants all trying to get a piece of the action in a country expected to become a serious resources player.

But the landlocked central Asian country has noticeably lost its allure in recent times. Delegate numbers at two Mongolia's flagship investment conferences held in September -- Invest Mongolia and Discover Mongolia -- were well down on previous years, according to sources who attended the events.

While investment appetite in global commodities has been subdued generally over the past 18 months or so, Mongolia has its own set of discreet problems, some of which appear to be self-inflicted.

These have undermined investor confidence in the country's resources sector and are curbing development of its metallurgical coal and iron ore sectors.

Analysts say foreign investor confidence in Mongolia will not fully return until the deadlock is broken regarding Rio Tinto's Oyu Tolgoi copper-gold mine, which is widely regarded as the country's bellwether resources project.

Rio Tinto mothballed development of the major (stage 2) underground component of the mine in August because it was unable to agree investment and revenue terms with the Mongolian government.

ResCap analysts said in a September research note that Mongolia's options for receiving significant injections of foreign direct investment (FDI) would be "extremely limited" until the Oyu Tolgoi issues had been resolved --"particularly given the current weak coal price environment, depreciating currency, long list of other issues and the global economic environment."

According to Independent Mongolian Metals & Mining Research, FDI has plunged 45% -- August 2013 versus August 2012 -- and Mongolia is burning through its foreign reserves to keep the economy afloat. (See related chart: Mongolian foreign direct investment (mil mt): January 2011 - July 2013)

David Paull, managing director of Aspire Mining, which is developing the Ovoot coking coal project in northern Mongolia, described Rio's Oyu Tolgoi project as the "single biggest driver of sentiment" on Mongolia, and said the lack of progress had hurt the share price of all miners operating in the country. But he said the government has been broadly supportive of Aspire's project, which could become a 5 million mt/year operation in 2017.

Other important issues that need resolving include proposed changes to the country's mining laws and the status of 106 license holders, who at the start of 2013 lost their rights to undertake exploration work on the affected areas.

This latter case has affected 66 local and 11 overseas companies, and is understood to include international metallurgical coal companies such as SouthGobi Resources and Gobi Coal & Energy.

The 106 mining licenses -- which cover an area six times the size of that already subject to active mining licenses -- were deemed by the new government to have been awarded illegally by officials belonging to the previous administration, and therefore must be resubmitted for competitive tender.

At this stage there is no timeline for when this may occur and it leaves the current owners of the licenses in a state of limbo, unable to advance their projects.

Sam Spring, who covered a number of Mongolian projects as an analyst before taking on the role of president and CEO of Kincora Copper, said companies affected by the halt to exploration had been "caught up in a criminal court case that is treating [the situation] like an administrative court matter, and acting outside of its jurisdiction."

"Security of tenure and a transparent legal system are key cornerstones for both domestic and foreign investment and as such this matter has far greater potential repercussions than just the exploration activities on 106 licenses, or the possibility of incorrect or corrupt activities of a few former government officials," he said.

"No one knows what's going on and it means a whole season of exploration will be lost," Spring added.

While the outcome for the 106 mining licenses remains fuzzy, the market is hoping for more positive news on the contentious mining law changes when the Mongolian parliament returns for its autumn session.

President Tsakhiagiin Elbegdorj told the World Economic Forum Strategic Dialogue on Future of Mongolia in Ulaanbaatar in September that he had decided to "take his hands off the law on minerals."

This was interpreted by some as acknowledgment that the mining law drafted in January -- which included proposals to raise the tax rate on strategic deposits above 50% and give the Mongolian government ownership of up to 34% of projects -- was unworkable and deterring investment.

Independent Mongolian Metals & Mining Research analyst Dale Choi said in a September 16 note that the existing minerals laws, dating from 2006, were likely to be retained.

But an irregular parliamentary session that ran from September 16 through September 27, which was expected to address the issues and calm investor nerves, came and went without any changes being made.

Shanghai-based CLSA analyst Ian Roper believes the Mongolian government became too arrogant and demanding of mining firms. Its populist stance resulted in a strong statements that scared off potential investors.

"It's not a stable investment environment when you don't know what the mining regulations or changes to taxes will be from one year to the next," he said.


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