Wednesday, November 07, 2012

The Role of Foreign Investment in Mongolia’s Mining Industry

Aspire Mining: Update on Mongolia Foreign Investment Law
FT: Chalco—Mongolia’s Angst Attack
FT: Mongolia Open to Talks on Investment Law
MarketWatch: Mongolia Tavan Tolgoi IPO likely in 2013: Banker
NPR: Mineral-Rich Mongolia Rapidly Becoming ‘Mine-golia’
NYT: In Mongolia, a New, Penned-In Wealth
Reuters: Mongolia Passes Watered-Down Foreign Investment Law
WB: Mongolia Quarterly Economic Update – February 2012
WB: Poverty Level Estimated at 29.8 Percent in Mongolia
WSJ: Chalco Bid for SouthGobi in Peril
WSJ: Geography Rules: Why Mongolia’s China Mining Strategy is a Mistake
WSJ: Mongolia Sets Plan to Cap Investments
WSJ: Rio’s Timely Antidote to Poison Pill

Mongolia has a vast amount of underdeveloped natural resources, including coal, copper and gold. Although these resources will likely be the driving force behind Mongolia’s economic growth for the foreseeable future, foreign investment is necessary to take advantage of this natural wealth. Nevertheless, Mongolians worry about the possibility of foreign exploitation, which led the government to pass a new foreign investment law limiting the ownership equity that foreign investors can hold in Mongolian companies within strategic industries. However, investors have become uncertain about the state of Mongolia’s business environment because of the foreign investment law, which is exemplified by the Aluminum Corporation of China’s (Chalco) decision not to proceed with its planned acquisition of SouthGobi resources, a coal mining company based in Mongolia.

Mongolia’s untapped natural resources could make the country’s citizenry economically better off if they were able to share in the profits of the mining industry. Mongolia is home to 10% of the world’s coal reserves, as well as the largest underdeveloped copper mine in the world. Analysts estimate that Mongolia’s resources are worth more than $2.75 trillion, while Mongolia’s population is only about 2.8 million. Moreover, the construction and exports from mining projects thus far have caused Mongolia’s gross domestic product (GDP) to grow 17.3% in 2011, a drastic increase from only 6.4% GDP in 2010.

As of yet, however, the average Mongolian citizen has seen very little benefit from the development of the country’s natural resources. About 29.8% of the population still lives in poverty, and stories abound of mining projects that leave behind ruined pastures or lead farmers to abandon their livestock to work in the mines. Many Mongolians are upset that foreign investors receive the majority of the financial benefits from projects such as Oyu Tolgoi, one of the largest copper and gold deposits in the world. Ivanhoe Mines of Canada owns a 66% stake in Oyu Tolgoi, while the Mongolian government owns the remaining 34%. Thus, Mongolia will receive less than 50% of the profits from mining its own natural resources when the mine is operational next year. On the other hand, Mongolia would likely not have had the $4 billion necessary to invest in the mine because the country’s GDP last year was only $8 billion.

To correct the wealth distribution problem, the Mongolian government has promised to give every Mongolian a share in the multi-billion dollar initial public offering of a state owned enterprise that runs part of the Tavan Tolgoi coal deposit. The government has also passed a law that limits foreign investment in “strategic” industries such as mining, finance, media, and telecommunications. Pursuant to this law, foreign investors must now register with the Foreign Investment Agency of Mongolia (FIA) after they acquire more than 5% of an enterprise that operates in a strategic industry. Foreign investors must also obtain government approval to acquire more than 33% and parliamentary approval for acquiring more than 49% of enterprises in these key sectors. However, foreign investments only trigger the approval process if they are worth at least $75 million or if a foreign state-owned enterprise is involved.

The foreign investment law may have negative consequences for future foreign investment in Mongolia. For example, Chalco announced on September 4, 2012 that it had abandoned its plans to purchase a controlling interest in SouthGobi Resources, an investment that was worth about $920 million. Chalco announced the initial deal in April of this year, just one month before the government passed the foreign investment law. Many analysts believe that the government passed the law because of concerns about further Chinese involvement in Mongolia’s economy. Mongolia is dependent upon China both for export transit and as a market for these exports. China currently purchases 80% of all coal produced by Mongolia for 30% less than global prices. Thus, the investment law and its timing may create an uncertain business environment that discourages foreign investment and hinders Mongolia’s potential economic growth and development. The key for foreign investors going forward is to create ownership structures for projects in strategic sectors that are acceptable to the government.

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