Encouraging mining FDI in Mongolia

By Paulius Kuncinas
Regional Editor, Oxford Business Group

Changes to Mongolia’s mining legislation will open up vast new tracts of land for exploration and pave the way for new license issuances. This should help restore the confidence of foreign investors made wary by government intervention in the sector.

On July 1, the Mongolian parliament voted to approve amendments to legislation governing mining activity, ratifying changes to the Mineral Laws of 2006, aimed at regenerating foreign interest in the sector.
Among the key changes to the legislation will be the expansion of Mongolia’s landmass open for exploration and subsequent mining activity, with 20 percent of the country set to be rated as available for development, rather than the eight percent available prior to the change.
The amendments will also see an end to the moratorium on new mineral exploration licenses, imposed in 2010 as a means of cooling the rush into the sector at the time. Lifting the ban is intended to encourage a return to Mongolia by mining firms, as is the provision extending the term of exploration on a lease from nine years to 12.

The amended legislation also establishes a policy body that will be tasked with addressing issues faced by the industry and working with sector players to overcome challenges.

Re-tender 106 permits

In another step forward for the mining sector, the government approved plans on July 6 to re-tender 106 exploration permits. This reverses a decision taken in 2013 to cancel the mining licenses, according to a cabinet meeting memo cited in local media. The licenses in question were revoked late last year as a result of a court case involving senior officials of the Mineral Resource Authority of Mongolia.
Though the companies affected by the cancellation were not directly involved in the investigation, the allegations of corruption against the officials were seen to have tainted many of the activities in the sector.
The memo did not elaborate on a timetable for details of the procedures but by marking a path of reconciliation, the government will go a long way towards restoring confidence among foreign and domestic miners.
Mongolia’s leaders hope the liberalized minerals law will encourage a fast turnaround in interest in the country’s resources. O. Erdenebulgan, the deputy minister for mining, told Bloomberg in May that amendments in the legislative pipeline could attract 1 billion USD in new investments into the sector, this year alone. This could help reverse the sharp decline in the flow of foreign direct investment (FDI), which halved last year and is down 64 percent for the first five months of 2014.
According to Independent Mongolian Metals & Mining Research analyst Dale Choi, the amendments should help in resolving the uncertainty that has been hanging over the mining and exploration industry in recent years.
“Lifting of the moratorium on issuance of new exploration licenses is of particular importance for the viability of the exploration sector,” Choi said in a statement issued on July 2.
Implementing and delivering long-term stability and sustainability, he said, would help Mongolia rebuild investor confidence as well as attract global top tier mining investment, adding that the amendments represented a significant message to investors around the world.

Concerns linger

While the government is looking for a surge in investment, it may take some time before the tide turns. With commodity prices well down and prospects for a rebound in the short-term unlikely, leading mining firms are looking to consolidate their present holdings rather than take on new, potentially expensive projects. With growth prospects for the Chinese economy uncertain, and a general oversupply of coal and other minerals on the international market, investors may hold back to see both how demand trends develop over the next year or two, as well as to determine the full impact of the legislative amendments.
The outlook for Mongolian coal may also be affected by a rise in production in some segments of the Chinese mining sector; for example, the output of washed coking coal in the northern province of Shanxi rose as capacity expanded last year. Production from the province’s mines has continued to increase this year, rising by 1.44 percent over the first five months of 2014, but jumping more than 12 percent month-on-month in May, taking production since the beginning of the year to 387 million tons.
Potential new entrants to the Mongolian market may also want to see the outcome of a series of disputes between the government and one of the highest-profile foreign operators in the sector, Turquoise Hill Resources, which is majority-owned by mining giant Rio Tinto. Operator of the 6.6 billion USD Oyu Tolgoi copper and gold mine, Turquoise Hill is in dispute with the government over claims of unpaid taxes and penalties; the firm is also in disagreement over fees it is owed.
On June 26, the company announced it had filed a dispute notice with the government over a state audit report. It has been claimed that Turquoise Hill owes up to 130 million USD in taxes, an allegation the company has rejected.
If the disputes can be resolved to the satisfaction of all, this will boost confidence in the whole mining sector and in the potential for future investment in the industry. With the opening up of new exploration opportunities, more adventurous companies may look to buck the trend of consolidation and caution currently marking the industry around the world. Some may seek to get in on the early stages of what could be the next big minerals rush in Mongolia – one that could be better managed and more transparent than the first.

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Posted by on Jul 20 2014. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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