Oliver Belfitt-Nash in Ulaanbaatar -

High-profile projects are attracting attention to Mongolia's huge potential for the mining industry, prompting the government to start encouraging investment more effectively. A small group of explorers continues to map the country's resources, laying the ground for new investment.

The cold, barren steppes of Mongolia are unforgiving. After a straight five-day drive through -30°C on a chokingly dry winter morning, a few pairs of boots crunch onto the frozen dust and turn towards a pile of yellowish rock in front of them. Most likely the drive will have been for nothing, but there's the chance these explorers have just discovered a multi-million-dollar gold mine.

Recent years have seen Mongolia developing into a thriving new frontier market. In the 1990s, it welcomed a small group of young financiers and resource explorers, but the early birds were bitten by an underdeveloped parliamentary and legal system, leaving with them with little more than thanks from the government to show for their efforts.

Things have come a long way since then. We now see the Oyu Tolgoi copper and gold mine - at $4.6bn the largest financial undertaking in Mongolia's history - boasting development ahead of schedule, whilst an epic share scheme is to dole out 2.8m shares in the Tavan Tolgoi coal mine to the population.

However, the government's role remains somewhat variable, with policy still bouncing between encouragement for foreign investment and placating the electorate via promises of national ownership. While some explorers are still feeling the sting of past nationalisations and legal alterations, 2010 has been a spectacular year for investment, with policy firmly on its side. That said, a recent Rivers and Forests law swept up many issued licenses, providing a warning that this is still Mongolian land.

With elections set for 2012, many expect legal issues to tighten around foreign miners, but at the same time a four-year boom should follow for investors. Hence, as the bigger mines come into production and the government starts to face up to the attention of international investors, behind the scenes some explorers are searching for new pastures green.

Tip of the iceberg

Andrew Stewart heads the local office of Xanadu Mines, an Australian-listed explorer in Mongolia looking for copper, gold and coal resources. Since 2005, the company has been sifting through the thousands of licenses available, collecting data and deciphering soviet reports. They now hold a rich portfolio of prospective assets and eagerly await the next wave of drilling results from a number of deposits. "Compared to mature exploration terrains like Australia, Mongolia is at the tip of the iceberg." he says, spreading out a map of Mongolia on the table. "In Australia, they're having to explore below 1 kilometre underground now, but here we're finding great results above 100m!"

The map divides the huge country into tiny rectangular clusters, a different colour for each resource. Stewart's eyes light up as it unrolls. "We have everything here - copper, gold, tin, tungsten, molybdenum, lead, zinc, fluorite, uranium, oil and, of course, coal".

There are currently 5,234 mining licenses issued in Mongolia. They are spread amongst families, or through small and large companies, until someone takes the plunge and starts drilling. Exploring is a risky business, and the millions spent on digging a hole could easily sink into the ground without a trace. On the other hand, a single set of drills can turn a piece of barren land into a multi-billion-dollar asset. "The Oyu Tolgoi discovery illustrates the enormous exploration potential," says Stewart. "We're hoping to find the next big thing."

Boots on the ground

Today, hyper-spectral mapping and geo-technical surveys have reduced the role played by lady luck. Even so, "we still need our boots on the ground," says Stewart."The soviet surveys are still often used to determine where to start the search, and a great deal of luck is involved. Yet in Mongolia, it seems, the odds are in our favour."

David Dring, CFO of Sharyn Gol, the oldest operating coal mine in Mongolia, says the Russians didn't even bother grading the coal. "There was no need. Coal was delivered straight to the nearest power plant. However, with further studies on Sharyn Gol, what was a 50m tonne operational mine to them has now become a JORC standard high grade 320m tonne thermal coal resource."

"This is another truly world class asset," claims Stewart, pointing to a little known phosphate deposit in the north, "and the area has hardly been explored at all. I wasn't sure about it before, but now I'm a big believer."

The Russian surveys are a useful starting point for many exploration operations, but as soon as cash is spent and further studies conducted, the world of license bidding becomes a game of secrecy. If you know something is there and bid high, others will soon cotton on.

Despite the harsh work conditions and dreaded infrastructure bottlenecks, the opportunities now emerging in Mongolia are likely to attract the attention of those less dedicated to the country than Stewart, who has been working in Mongolia for 10 years through Vale Mining and Ivanhoe Mines before starting Xanadu. "This is a beautiful country to work in, and now it has everything you need. The Mineral Law hiccups in 2003-04 have passed," he declares.

As the Mongolian government's 23 "strategic" assets come into the limelight, there will follow other smaller assets, and a flow of exploration news won't be far behind. For investors to get in before the crowds, it's the explorers they'll be watching.