Tensions rise over investment in Mongolia

By bne IntelliNews October 20, 2011

Oliver Belfitt-Nash in Ulaanbaatar -

On October 19, 20 opposition MPs submitted a letter to the Mongolian parliament demanding that the prime minister resign - the same group who have been agitating to have the government renegotiate an investment agreement for the giant Oyu Tolgoi copper-gold project with Ivanhoe Mines and Rio Tinto. Mongolia's politics and its relations with foreign investors are becoming increasingly tense.

The $16bn Oyu Tolgoi investment agreement was signed in October 2009, giving Mongolia a 34% share in the world's largest undeveloped copper-gold project, which is set to become the country's biggest earner. The other 66% was retained by Ivanhoe Mines, who are now 49% owned by global mining giant Rio Tinto. This agreement put an end to years of wrangling between successive Mongolian governments and Ivanhoe, bringing with it hopes that this ushered in a new era of relations between foreign investors and their hosts, with foreign direct investment reaching $1.6bn in 2010 as a result.

But on September 28, a letter was published in the local media from 20 of the 76 MPs in the Mongolian parliament. Its demands were to increase Mongolia's stake in Oyu Tolgoi to 50%, saying that due to rising copper prices the state would not receive enough tax and royalty revenue compared with the profit made by Ivanhoe and Rio Tinto. Inevitably, the international press and investment community were quick to condemn the action, which caused investors, already spooked by the global debt crisis, to withdraw their money from risky places, putting Mongolia squarely in the firing line.

Ivanhoe's shares dropped almost 25% after the news, wiping off about $7.7bn from its market capitalization, which is almost the same as Mongolia's entire GDP, though the shares have since recovered to just above their previous level after Ivanhoe, Rio Tinto and the Mongolian government issued a joint statement soon after to declare the original Oyu Tolgoi agreement would be honoured.

The letter from the MPs also came as copper prices saw their biggest monthly fall since October 2008, dropping 24% on the London Metals Exchange. "These 20 MPs picked the worst possible time to complain about the agreement," Ganhuyag Chuluun Hutagt, vice minister of finance, told bne.

Ivanhoe was not the only victim. Other Mongolian mining firms suffered, with Mongolian Mining Corporation, the country's largest coking coal exporter, falling 45% during September. The local currency, the tugrik, also saw a rapid depreciation against the dollar, hitting this year's low of 1,294 to dollar.

With the next elections due in June 2012, many believe the MPs were playing to the widespread "resource nationalism" sentiment among the population to gain votes. Yet with such a swift rebuttal of their demands, this will have done little to raise their credibility. Although local media has often been wary of the sudden influx of foreign investment and ownership, the majority of parliament support cooperating with foreign investors to bring about the much-needed development in the country.

Although the joint statement did much to calm investors' nerves, not all has been forgotten. Recent events may have caused many investors to re-assess their risks in Mongolia more widely. The country is heavily reliant on China to buy its copper, gold, coal and other resources, and a slowdown in China's economy would be disastrous. "The biggest unknown factor is the Chinese economy, as over 80% of Mongolia's exports are destined for China," says Amar Hanibal, managing director of TenGer Financial Group. "A slowing Chinese economy and real estate market correction may dampen demand for imported raw materials such as copper. There are already signs of stress among Chinese developers, as reflected by the pricing of Chinese real estate bonds. We are likely to see defaults among second-tier players."

Hot coals

Despite all this, Mongolia's government continues its investment push in order to meet the election promise of the Mongolian People's Revolutionary Party to give every citizen as much as MNT1.5m in dividends (about $1,200) from the country's mining boom.

Key to that is the massive Tavan Tolgoi mine, reckoned to be the world's biggest coking coal deposit. On October 13, the Mongolian state-owned mining company Erdenes-Tavan Tolgoi signed the contract with the BBM Operta Group, a joint venture of Germany's Operta and Australia's Macmahon Holdings, to develop Tavan Tolgoi at a ceremony attended by German Chancellor Angela Merkel. Mining will commence in January 2012 at a rate of 3m tonnes of coal per annum (t/y), utilising existing equipment. In the second year, production is expected to ramp up to 6m t/y and will require additional capital expenditure. Once the entire mine and transport infrastructure is established, production is estimated to rreach 15m t/y.

At the same time, the government is pressing on with its plans to carry out an international IPO of Erdenes-Tavan Tolgoi, which is expected in 2012 and set to raise as much as $15bn.

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