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Dear Subscriber,
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July 21, 2008
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A new era begins for Mongolian
mining
Clare Nutall in Almaty
July 17, 2008
Calm has returned to Ulaanbaatar after
the violent protests that shook the Mongolian capital following the June 29
elections. Unrest on this scale - which left five people dead - hasn't been
seen since before Mongolia's first democratic elections in 1990. But what
made the latest elections different from the previous ones of the last 18
years is that far more was at stake: in the run-up to the polls, both the
Mongolian People's Revolutionary Party and the opposition Democratic Party
knew that the winner would preside over the parceling out of Mongolia's
immense mineral wealth.
The fact that the MPRP, which has
ruled during all but four of the last 90 years, gained a clear majority in
Mongolia's parliament the Great Hural, should be good news for investors. For
the last four years the parliament has been split, with the MPRP holding
the narrowest of majorities, and little was achieved from the shifting
alliances and coalitions. Successive governments have tried and failed to
pass a new mining code.
With the new government, this should
change. As well as the mining code, the government is expected to give the
go-ahead to major mining projects, including Oyu Tolgoi. Like the code, Oyu
Tolgoi has been pending for several years. Meanwhile, its investors Ivanhoe
Mines and Rio Tinto have been spending up to $40m a month just to keep the
works ticking over while awaiting government approval to start production.
Even the riots hasn't dampened
optimism about the future. On the night of July 1, as people took to the
streets, the headquarters of the MPRP was set on fire and government
offices were looted. That night, President Nambaryn Enkhbayar declared a
four-day state of emergency in the capital. However, there has been no
further unrest since the state of emergency was lifted, and international
observers insist the elections were free and fair - as they have been for
the last 18 years. But Alisher Djumanov, managing partner of Eurasia
Capital Management, which runs the pioneering Mongolia Discovery Fund,
stresses it's important not to over-dramatise those events. "We have
been monitoring the situation from our Ulaanbaatar office and are hopeful
about the future. A majority in parliament from the MPRP means they will be
able to do things - change the law and make agreements with the big
mines."
Mine, all mine
Oyu Togloi, Djumanov says, will be a
landmark project. According to Ivanhoe, it is the world's largest and
highest-grade copper and gold mine development project, and is expected to
produce more than 1bn pounds of copper and 330,000 ounces of gold for at
least 35 years. Ivanhoe and Rio Tinto, which signed a cooperation agreement
to jointly develop the Oyu Togloi complex in 2006, have made a commitment
to invest $7.3bn in developing the deposit over a 30-year period.
Oyu Togloi illustrates the sheer size
of Mongolia's natural resources. It also indicates what has made this
election such a high stakes game despite the broadly similar policies of
the MPRP and the Democratic Party. "Both parties have very similar agendas
as to how to develop Mongolia's natural resources," says Christopher
de Gruben, business development director at property investment firm
Mongolian Properties. "The big question is which party would be in
power to actually get the benefits from signing concession agreements and
so forth. Of course, the party in power now will have enormous gains."
Mongolia has some of the world's
largest reserves of copper and coal, and numerous other natural resources.
Historically, its mineral wealth has been little known; exploitation of its
reserves has barely started. However, it is rapidly coming onto people's
radars as soaring commodity prices and worries about shortages have
prompted industry to desperately seek out new sources of raw materials.
Even today, the extent of Mongolia's
mineral resources - which as well as copper and coal include gold, iron
ore, molybdenum, phosphorus, silver, zinc and other sought-after
commodities - has only been guessed at. With relatively little exploration
carried out, official proven reserves are well below estimates of what
probably lies below the Mongolian steppe. Although it has just 20bn tonnes
of proven coal reserves, its estimated coal reserves are actually nearer
150bn tonnes, which could make it the world's largest coal exporter once
these are developed. Similarly, known uranium reserves are around 60,000
tonnes, but according to a Russian study, total reserves are between
120,000 and 150,000 tonnes. The country also has estimated gold reserves of
some 3,000 tonnes. Its known copper reserves are around 45m tonnes, but
could be more than twice that. Indeed, it is expected to overtake Chile as
the second-largest copper producer once more mines come into operation and
production starts to tail off in some of the older Chilean mines.
Laws of the land
Until now, Mongolia's relative
obscurity and the lack of clear rules of operation in the mining sector
have deterred investment to an extent, though opportunities are so large
there has still been some interest. "There has not been tremendous
stability in the mining laws because it's a young country that is trying to
understand its mining industry and how to regulate it," says Lee
Cashell, managing partner of Asia Pacific Investment Partners and Altan San
Securities. "Once this is finalized, it will give increased clarity
for the future." Even so, Cashell points out that during the six years
he's been investing in Mongolia, "every year we have seen a 20-30%
increase in foreign investment."
Its location between the markets of
Russia and China is an attraction. "Both Russia and China are growing
fast, and Mongolia has finally managed to position itself in people's minds
as a strategic position between them," says Ganhuyag Hutagt, CEO of
XacBank.
Investments have come from Europe and
the US, from the mining giants of Australia and Canada, and from countries
closer to home such as Kazakhstan and Uzbekistan. The greatest interest,
however, has been from Russia and China. Sandwiched between these two giant
powers, this is perhaps inevitable. China in particular is desperate to
secure new sources of raw materials. "Major Russian companies setting
up there, but China will ultimately be the consumer of Mongolia's
resources," forecasts Djumanov. "The long-term story is very positive
and bullish."
However, after a decade during which
Moscow all but ignored Mongolia, Russia has been aggressively moving in on
its neighbour. In April, then president Vladimir Putin and his PM, Viktor
Zubkov, visited Mongolia, accompanied by business leaders including Rosatom
head Sergei Kiriyenko. The trip resulted in a raft of commercial agreements
being signed between the two countries.
During the visit, Putin called for an
increase in economic cooperation between Russia and Mongolia, saying he was
sure that trade turnover between the two countries would soon reach $1bn,
Last year, turnover was $790m, an increase of 30% on 2006, though it still
lags behind the level when Mongolia was the de facto "16th state"
of the Soviet Union.
Deals signed while the Russian
delegation was in Ulaanbaatar include an accord on joint uranium
exploration, production and processing, a cooperation agreement between
Aeroflot and Mongolian Airlines, and the sale of a majority stake in the
Ulaanbaatar Railway, a joint venture between Russia and Mongolia, to
Russian Railways. At present, Ulaanbaatar Railway and two other
Russian-Mongolian joint ventures - mining companies Erdenet Mining
Corporation and Mongolros-Tsvetmet - account for 20% of Mongolia's GDP.
Mongolia's other neighbour, China, is
even more voracious for its raw materials. "China accounts for between
25 and 30% of global demands for basic raw materials including copper and
aluminium," Ivanhoe Chairman Robert Friedland said during the recent
Central Asian Mining Congress in Almaty, "The dragon has a fire in its
stomach and it's hungry for copper." Once new railways were built,
trucks carrying copper from Oyu Tolgoi will just "roll down the hill
to China" he predicted; the mine is less than 80 kilometres from the Chinese
border.
China is also desperate for fuel,
another resource Mongolia can supply. "Coal prices have gone through
the roof. The shortage of metallurgical coal in China has caused cutbacks
in steel production for the first time," Friedland added.
China has become the largest investor
in Mongolia. However, while China and Russia are the most obvious partners
given Mongolia's location, Ulan Bator has been careful to promote the
country among potential investors from other parts of the world. According to
the Foreign Investment and Foreign Trade Agency of Mongolia (FIFTA), the
government agency responsible for encouraging inward investment, other
major sources of FDI are Canada, the US, South Korea and Japan.
The government of Kazakhstan and
Mongolia have also been pushing for stronger trade ties between their
countries. In June, Kazyna Capital Management and FIFTA agreed to set up
the Kazakh-Mongolian Direct Investments Fund to invest in projects in both
countries.
While mining is the obvious reason to
invest in Mongolia, money from this sector is starting to trickle down
through the economy, stimulating sectors such as real estate, and consumer
and business services. "There is a great deal of activity in mining
and the related supply chain, which will lead to a broader range of
investments. However, there isn't a manufacturing base and there isn't
likely to be one with China so close," says Peter Morrow, CEO of Khan
Bank.
Indeed, Mongolia is becoming visibly
richer, and increased spending power is already helping markets to develop
outside the mining sector and the traditional animal-based economy, which
still produces meat, hides and cashmere. "The cars are getting bigger
every year. Every week new restaurants, bars and shopping centres open,
each one more luxurious than the last," says de Gruben. "People
are getting very rich, very quickly."
The Mongolian Stock Exchange is doing
well. After several years as the world's smallest exchange by market
capitalisation, within the last year it has gone up by 600%. New companies
are listing, liquidity is improving, and there are no restrictions on
foreign investment or repatriation of income.
The real estate market is also
developing. "The investment scene has changed a lot over the last
couple of years, from small buyers of a $60,000 apartment to hedge funds
and other institutional investors doing million-dollar deals," says de
Gruben.
Tracking growth in this sector is
difficult, because, as de Gruben points out, it is extremely cyclical due
to Mongolia's temperature range from -40� Celsius in winter to +40� Celsius
in summer. "People make their money in summer, buy a property in
September, then hibernate for the winter before selling it in April to free
up capital for the summer months. They then buy a bigger property the
following September," he explains. High inflation and a freeze on
mortgages have shaken the market recently, but September saw a 25%
year-on-year increase.
In general, Mongolia's business
climate is friendlier and more open to foreign investment than that found
in the rest of the CIS. However, it still "suffers from some of the
frustrations of this part of the world," notes Morrow. On the World
Bank's Doing Business index for 2008, it is ranked 52nd, higher than every
CIS country except Armenia and Georgia. "Mongolia has huge untapped
resources, GDP growth of over 10% for the foreseeable future, and - what a
lot of people have never realized - it's a low tax, free and open economy
run by a democratically elected government," says Cashell.
Hutagt agrees that, "Mongolia is
a good place to do business; it's easy to be a foreigner here - to own
assets and repatriate earnings."
And as a result, investors are coming
to look at Mongolia from all corners of the globe. This is unlikely to be
upset by the current unrest, people on the ground forecast. As Hutagt
points out, "Not a single working day goes by without some people
coming to talk to me, looking for opportunities."
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