Mongolia mines its future

In August 2009 Mongolia’s newly-elected president, Tsakhiagiin Elbegdorj, replaced a 68 percent Windfall Profits Tax on copper and gold, imposed three years earlier by the country’s previous communist-leaning government, with a system of graduated royalty rates, up to a maximum charge of 10 percent. The move, due to take effect in April 2011, has significant implications for a country known by some investors as ‘the Kuwait of Central Asia’.

To address Mongolia’s wide income disparity and grim Soviet-style infrastructure, Elbegdorj had come to power promising to fight corruption and spread income from the country’s largely unexploited mineral wealth more broadly among its 2.7 million citizens.

The controlling pro-business Democratic Party hopes a mining boom will help triple Mongolia’s GDP by 2020 and it has set about determinedly wooing foreign investors.

However, it was under the pragmatic centre-left Mongolian People’s Revolutionary Party (MPRP) – a descendent of the party that ruled the country in the Soviet era –  that the Mongolian government signed a joint venture with Canadian-listed Ivanhoe Mines (of which Rio Tinto currently owns a 48 percent share) in October 2009 to develop the Oyu Tolgoi copper and gold reserve. The Mongolian government owns a 34-percent share in the joint venture.

The MPRP also presided over privatisation of the banking sector and of land ownership.

Mongolia has significant coal, copper, tin, molybdenum, tungsten, gold and uranium deposits, but political instability and corruption have until now hampered efforts to harness the struggling country’s economic potential. Indeed, many Mongolians have characterised themselves as “beggars sitting on a huge pile of gold”, according to the Economist.

The scale of the Oyu Tolgoi reserve gives an indication of the potentially transformative power of Mongolia’s mining sector. With an estimated development cost of US$5 billion and a further US$4 billion in infrastructure support, Oyu Tolgoi is likely to become the world’s largest copper mine.It is thus forecast to lift Mongolia from the world’s 18th-largest producer of copper to fourth-largest and to double the country’s GDP when production peaks in 2019. By some estimates, there are up to 15 more Oyu Tolgoi-sized strategic metal deposits and coal reserves in the 1.56 million sq km country, including Tavan Tolgoi - another large mining investment and the world's second largest coal reserve.

“Mongolia also has one of the region’s largest reserves of uranium,” says Peter Allport, the Honorary Consul for Mongolia in New Zealand. “Practically anywhere you dig up there you will find something.”

In December 2009, the Moscow-based emerging markets investment bank Renaissance Capital, co-founded by New Zealander Stephen Jennings, issued an upbeat report on the country’s prospects.

Titled Mongolia: Blue-Sky Opportunity, the report concluded: “Over the next decade, Mongolia is likely to prove a case study on the impact of a natural resources windfall on a small economy. Its proven reserves and proximity to China have long made the country a target for investment. The agreement reached over revenue-sharing between the government and the private sector leading up to the signing of the Oyu Tolgoi joint venture is the precedent that means the transformation of the economy has likely begun.”

Renaissance Capital identified several short-term risks, including the possibility of Mongolia’s banking system and budget being overwhelmed as massive investment flows in to the US$4 billion economy. The longer-term risk was political and centred on the “judicious” management of the country’s large, ambitious neighbours — China and Russia.

Nevertheless, it was the investment bank’s view that, with luck and good judgement, Mongolia could position itself as “the next Asian Tiger... rather than the latest Central Asian resource supplier.”

The implications of mining exploitation on such a scale are vast and wide-ranging. Ensuring best practices in mining and balancing strategic resources extraction with environmental sustainability will be crucial for a country like Mongolia where water is scarce and a large proportion of the population relies on traditional nomadic pastures for their livelihood.

In a December 2010 conference report, Hong Kong-based pan-regional investment bank Eurasia Capital forecast Mongolia’s GDP to grow by 20 per cent annually through to 2025 by which time it would stand at US$60 billion. In that time frame, GDP per capita was expected to rise tenfold – from about US$2000 to US$20,000.

Eurasia Capital puts the worth of the country’s 10 largest deposits, which include Oyu Tolgoi and the coal fields of Tavan Tolgoi and Shivee Ovoo, at US$1.3 trillion.

The newish Mongolian Stock Exchange (MSE), whose founder claims direct descent from Chinggis Khan, was the best performing market worldwide in 2010, with the MSE Top-20 companies growing by 125 per cent, while the country’s currency was the second-best performing globally for the year.

Peter Allport, who has been a frequent traveller to Mongolia for almost 20 years, and who in 1992 advised its government on the privatisation of state assets in the post-socialist era, says the country has made enormous progress, politically and socially since his first visit.

“In 1992 it was a basket-case. Its economy basically involved feeding the Soviet troops stationed in the country and when they pulled out and the trade with the Comecon [Council for Mutual Economic Assistance] countries dried up after the collapse of Communism in Eastern Europe in 1991 its economy was hit hard.

“Pockets of extreme socialism remain,” says Allport, “but that generation is passing.”

A new breed of very successful and well-educated business people, epitomised by the current prime minister, Sukhbaataryn Batbold, is guiding the transition from communism to a market economy, he says.

“People are aware of what is happening in China, but I know where I would rather be doing business.”

A country of extremes

• Mongolia is the size of Western Europe but has just 1,500 km of sealed roads – less than tiny Luxembourg.

• Its population density is about half that of Australia. About 30 Australian mining companies are operating in Mongolia.

• With a total population about twice that of Auckland, Mongolia is bordered by three Chinese regions having a combined population of 74 million.

• Mongolia’s total exports (US$1.9 billion) are approximately equivalent to the total exports of China’s smallest province, Hainan (US$ 1.8 billion. Source – The Economist).

• The Chinese province of Inner Mongolia, which is 80 per cent Han Chinese, has a larger Mongol population than Mongolia does.

• Almost half of Mongolia’s population lives in the capital, Ulaanbaatar (pictured).

• Some 40 percent of the workforce herd livestock on the country’s vast pasturelands.

• Over the next five years, the country’s production of coal is expected to double, gold to treble and copper to increase four-fold.

• Despite its rich natural resources, Mongolia depends largely on Russian grids for much of its electricity and for almost all of its petroleum.

• Mongolia lacks convenient sources of water, which limits local food production and forces a reliance on imports for many basic commodities.

• The most important link to the outside world remains the Trans-Siberian Railway, completed in 1955.

• 550 km from the border Beijing, founded by a Mongol (Kubilai Khan), has a “standalone” GDP some 30 times greater than Mongolia.

• The World Bank ranks Mongolia higher than any of the BRIC countries for ease of doing business.

• Mongolia’s longest border is shared with the world’s most populous country, China, which has a large appetite for its minerals. It also has strong historical ties with Russia and tries to balance these competing relationships by cultivating links with its “third neighbour” – everyone else.

- by Vaughan Yarwood. Images of Oyu Tolgoi mine and Ulaanbaatar sourced from Wikimedia Commons.