Mining News

Mongolia Considers Selling Stake in Tavan Tolgoi

Posted by Cheryl Rutledge on 7/24/2015 11:04:08 AM

By Alexander Collen, Taylor Jackson and Kenneth P. Green

Mongolia is considering selling its stake in 10 state-owned companies during this year and the next, including its share in the US$4 billion coal operation Tavan Tolgoi, the largest coal operation in the country. According to Bloomberg, the decision comes as part of the government’s plan to divest its holdings in power plants and other businesses, in an attempt to draw foreign investment into their weakening economy.

Foreign investors have faced adversity in the past due to government intervention, the most recent example involving Tavan Tolgio. According to Mining Global, the Mongolian parliament in April cancelled a deal with a consortium of foreign firms, who intended to develop the deposit. The mine is located in the South Gobi Desert and is the world’s largest high quality coking coal deposit, with estimated reserves of 7.4 billion tonnes. Events of this sort are not new to Mongolia, with Rio Tinto’s US$5 billion copper operation at Oyu Tolgoi only being given clearance after two years of delays.

On the broader scale, economic growth in Mongolia has slowed to 7.8 percent, the first time it has dropped below 10 percent since 2010. Falling commodity prices and high profile clashes with foreign investors were identified as the causes for the slowdown, hence the push to attract more foreign capital.

Erdenes Mongol LLC, who control the deposit, said that plans were underway to develop the site within the next two months. Approximately 20 to 30 percent of the mine may be offered to investors in London or Hong Kong in the next two or three years.

The government’s divestment plan seems to be a positive sign for investors, with the MSE Top 20 Index surging 18 percent in June. Although this turn of events is positive, it highlights the uncertainty of government policy in Mongolia. To add to this uncertainty, Mongolia’s parliamentary election in 2016 may lead to a change in rhetoric that voids the planned policy changes.

The Fraser Institute’s 2014 Survey of Mining Companies ranked Mongolia’s investment attractiveness 51st of 122 jurisdictions assuming that “best practice” policies were in place. However, respondents ranked Mongolia 110th of 122 jurisdictions in its Policy Perception Index (a measure of how attractive investment is based on government policy).

The survey found that 37 percent of respondents were strongly deterred to invest by uncertainty regarding the administration, interpretation and enforcement of existing regulations in the region, while an additional 37 percent would not invest in Mongolia for this reason. Regulatory duplication and inconsistencies strongly deterred 42 percent of respondents from investing while 26 percent said that they would not invest in the region at all on this basis.

The uncertainty with regards to policy in Mongolia is potentially compounded by their lack of infrastructure. The Fraser Institute’s 2014 Survey of Mining Companies shows that 47 percent of investors were strongly deterred by Mongolia’s lack of quality infrastructure and 16 percent said they would not invest in Mongolia for this reason. In order to improve infrastructure, it may be in the government (and people)’s best interests to encourage foreign investment. The consortium that wished to invest in Tavan Tolgoi had intended to develop the infrastructure required to access the deposit.

If foreign investment is deterred, the region may have less access to funds that develop the infrastructure necessary to make their deposits economically feasible. As it stands, the mine is located in an area without the roads and railways needed to economically deliver coal to the markets. It also lacks the power and water supplies to support big mining camps.

Investor confidence in Mongolia may be increasing in light of the recently announced divestment plans. However, uncertainty regarding the Mongolian government’s policies still seems to be an issue deterring potential investors. Reducing this uncertainty could potentially boost foreign investment, and with it create the jobs and economic prosperity that will help ensure future growth for Mongolia.




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