Mongolia’s summer salvage plan

Author Chris Cann

A 100-day ‘action plan’ designed to address the severe frailties that have emerged across the Mongolian economy over the past 18 months is a “very big deal for nearly all Mongolian equities”, according to Mongolian-based brokerage BDSec Joint Stock Company.

The prime minister announced the plan last week. It aims to move through a list of 50 issues over the summer parliamentary session to provide a comprehensive solution to the problems that have scared away all but the most determined foreign investors; pushed the local currency to levels lower than those that previously prompted an IMF bail-out; and forced the government to take on more debt to maintain GDP growth.

The headlining problems from a mining perspective have been the stalled development of the Oyu Tolgoi copper-gold operation, the revocation of 106 exploration licences as part of a corruption investigation, a controversial foreign investment law (since revised), and a high profile law suit worth US$326 million brought by a uranium explorer that had its licence invalidated.

A key component of the government’s plan is to increase mineral production by amending the Mineral Law and lifting the moratorium on exploration licences; starting operations at the Asgat silver mine; taking complex measures to lift coal exports; supporting gold mining; starting oil factory operations; completing coal-to-liquid factory preparations with Chinese cooperation; establishing a council dedicated to economic strength to be managed by the prime minister; and resolving issues holding back the second phase of development at Oyu Tolgoi.

Significantly, it is the first time any government-led initiative has mentioned Oyu Tolgoi, which many still regard as the single most important barometer for mining investment and future prospects in Mongolia.

“While the mention is very brief, locally it is viewed as a meaningful indication we’re in the eighth or ninth inning of this dispute,” BDSec chief operating officer Nick Cousyn said in a note.

“We think the prime minister wants to signal that Oyu Tolgoi is a very important priority, but saying too much on the subject is dangerous. Be it the opposition, the press, [Oyu Tolgoi majority owner] Rio Tinto plc, or us for that matter, his comments are under such scrutiny he can’t risk sending the wrong message at this juncture.”

Though only local press were allowed to attend the prime minister’s address, Cousyn’s contacts had indicated there was a high level of confidence within the government that the measures to be put in place would give investors the necessary assurances that the ship was to be righted and that Oyu Tolgoi would move forward without further delays.

Separately, Toronto-listed junior explorer Kincora Copper Ltd issued a press release outlining the “win-win” solution that the government had proposed for the 106 licences in limbo, of which Kincora has two.

The proposed solution includes compensation for lost time due to judicial processes and returning licences to “compliant licence holders” – a criteria Kincora clearly feels it meets.

“This case has had a major negative impact on investor sentiment towards Mongolia,” Kincora chief executive Sam Spring said.

“The way in which the government responds to investor concerns about the revocation of licenses, we hope, will set a positive and visible precedent as to how future investors will be treated.”

Contrary to the political situation leading in to the most recent elections, Cousyn said the government and opposition were today in agreement that the country’s economic health was the priority. Nationalistic rhetoric had been shelved.

“Political cartoons appear almost daily, portraying the government as dysfunctional and average citizens suffering greatly as a result,” he said. “Mongolia’s largest companies have been laying off workers, including APU, the country’s largest beverage and alcohol company – if Mongolians are drinking less alcohol, you know things are bad.

“It seems the opposition supports the idea of government stability [as opposed to] risking economic crisis by opposing Oyu Tolgoi or trying to bring down the current government.

“Positive implications for shareholders of [Oyu Tolgoi holding company] Turquoise Hill Resources Ltd are quite clear, but this comprehensive solution is a very big deal for nearly all Mongolian equities.

“We think specific actions will also address government overhangs at SouthGobi Sands and Centerra’s Boroo gold [operation], among others.”

Source:Mining Journal