Mongolia urged to act quickly by metals investors

Published: November 10, 2008

Investors in Mongolia say the country’s lively but fractured political landscape is putting the economy at risk and holding back significant investments by foreign multinationals.

Alisher Djumanov, managing partner of Eurasia Capital Management, which manages a US$40mn Mongolia fund, says: “There’s a paralysis in decision-making in the Mongolian government, which is holding up investments in the mining sector, precisely when the government needs to move quickly.”

Mongolia is a resource-rich country, which at one point attracted 4% of global mining expenditure, putting it on a par with economies like Russia and China.

The copper market was particularly excited by the discovery of the Oyu Tolgoi copper and gold mine in 2001 by Canadian firm Ivanhoe. The company later sold a stake to Rio Tinto, and outlined plans to invest US$3.6bn in the project, making it the biggest single project in the Mongolian economy.

But the project has been hit by several moves by the government. First, it passed a 68% windfall tax on mining projects in 2006. The tax is one of the highest mining taxes in the world. The government has discussed amending the law, but so far has not done so.

Secondly, the government says it wants to take at least a 51% stake in all mining projects, following the lead of Russia and Kazakhstan, who passed similar laws for their natural resources sectors in the last two years.

However, investors have doubts that Mongolia would be able to raise the amount of capital needed to take majority stakes in projects the size of Oyu Tolgoi. Djumanov says: “It’s impossible in the current situation. There’s only been two bond deals from the country, and that was in a much more favourable financing environment. The government needs to focus on reality.”

The local banking sector is not big enough to provide financing for metals projects. The central bank has been discussing a US$500mn bail-out for the nation’s commercial banks, though as of early November, no bail-out had been agreed.

Meanwhile, the price of copper has fallen from over US$4 in May to under US$2 in November. International liquidity has dried up for Mongolia, and the share price of Ivanhoe has taken a hammering.

Some investors believe Mongolia is held back by its rather fractured political landscape. Unlike other central Asian countries, Mongolia is a genuine two-party democracy. But this has not always functioned well, with both parties taking a long time to come to agreements, and often resorting to populist anti-business measures to win votes.

The government is now stepping up its negotiations over Oyu Tolgoi, and is also in negotiations with Canadian firm Centerra over the Gatsuurt mine. But it now looks likely that the government will not agree a deal on Oyu Tolgoi until 2009.

Michael Howard, the former leader of the Conservative party in the UK, and now deputy chairman of Entrée Gold, in which Ivanhoe and Rio Tinto have stakes, says: “We are discussing a range of issues with the Mongolian government, including the size of stake that the government may take in the Oyu Tolgoi mine, and we hope the discussions will be resolved next year.”

Delays in the government’s negotiations with mining investirs has impacted some forecasters’ economic projections for the country. Business Monitor, for example, has said: “We have revised down our medium-term growth forecasts for Mongolia to reflect both the deteriorating global macroeconomic environment and an increasing likelihood that a new mining agreement for the Oyu Tolgoi copper project will be delayed into 2009. With output at the mine unlikely to begin until 2011 and as foreign investment growth is weighed down by constricting global credit, we now expect real GDP growth to average 12.8% annually between 2009 and 2012, down from our previous forecast of 18.8%.”