MAC: Mines and Communities

Mongolia's mineral extraction dilemma intensifies

Published by MAC on 2010-06-26
Source: Reuters

A year ago, this website identified China as the key prospective customer for Mongolia's mineral wealth - which, judged by its sparse population of around 3 million, theoretically could make Mongolian citizens the richest in the world. See:

The government's policy in regard to "sovereignty" over its massive deposits of copper, coal and gold, has shifted back and forth over the past decade. Meanwhile, civil opposition to rushed permitting of the biggest putative mine, Oyu Tolgoi, has been growing. See:

Now the focus is beginning to move to the Tavan Tolgoi coal fields. Once again, however, the government seems in two minds over how to reap domestic benefits from extraction without deterring the foreign capital investment viewed as essential for the project to proceed.

According to one consultancy, China's biggest coal user, Shenhua, may be first in line to exploit this massive deposit. But South Korean, Japanese, Indian and Taiwanese customers won't be far behind.

Mongolia's resource riches bring with it concerns of Chinese dominance

Joseph Chaney, Asia Resources Correspondent


18 June 2010

ULAN BATOR - Mongolia's bid to exploit untapped mineral wealth, build huge infrastructure projects and list its homegrown firms abroad, is hampered by an unresolved dilemma facing the young Asian democracy: the rise of resource hungry China and its influence as Mongolia's major customer.

Consultants, bankers and analysts are flocking to Mongolia, hoping the government values economic priorities more than politics as it tries to pull the bulk of its 3 million citizens out of poverty.

Many are eager to remind Mongolia that China will remain its dominant resources buyer and investment partner due to geographic location and insatiable resources demand in the world's fastest growing major economy.

"China is the principal market for the majority of what Mongolia will be producing and, as a result, we expect Chinese investment interest will be strong in Mongolia because clearly the Chinese companies have the market linkages inside China," Graeme Hancock, senior mining specialist at the World Bank, said at the Frontier Securities' Mongolia Capital Raising Conference in Ulan Bator.

"However, I do recognize and have observed during my time in Mongolia some concern about Mongolia being dominated by Chinese investment," Hancock added.

"So, while there will be a lot of investment from China, there will be limits to that investment. There will need to be a lot of partnership arrangements with Mongolian companies to facilitate Chinese investment."

China, for its part, has been clear about its economic ambitions in the northern land of windswept grassland.

More than 70 percent of Mongolia's exports went to its southern neighbour last year. China's coal giant Shenhua is pitching for a slice of Tavan Tolgoi, one of the world's largest untapped coal deposits, and CIC, China's $300 billion sovereign wealth fund, has backed Mongolia-focused miners such as SouthGobi Energy Resources Ltd.

What's more, the bulk of Mongolia's oil is being produced by Chinese firms and most of the big projects now being developed -- including Ivanhoe Mines' $5 billion copper-gold project at Oyu Tolgoi -- are also counting on surging Chinese demand.

Alarm Bells

These developments continue to sound alarm bells among Mongolia's political elite as the government formulates investment agreements on strategic assets such as Tavan Tolgoi, and massive rail and infrastructure projects.

Feeding into the debate is Mongolia's determination to forge its own path and shed its historical vulnerability as a landlocked country sandwiched between Russia and China.

"Mongolia has been quite careful about its sovereignty -- we don't want to be too dependent on one country," said Oyun Sanjaasuren, a lawmaker and former foreign affairs minister.

"Theoretically, we want to have a one-third, one-third, and one-third balance," Oyun added, referring to China, Russia and a third country such as Japan or the United States.

Mongolia originally planned to sell as much as 49 percent of Tavan Tolgoi to a foreign bidder, but cancelled the sale early this year in favour of 100 percent state ownership, with plans to sign a development contract without giving any equity away.

Now, it plans to divide the deposit in two parts, one for Mongolia, the other for foreign development, although a final, detailed plan about foreign involvement - including Shenhua's -- has yet to emerge.

Industrial Park, Railway

Tavan Tolgoi's development plan isn't the only issue simmering inside the halls of the State Great Hural.

Just how to shift the country's resources out of its vast interior is also crucial to making its mining operations economically feasible over the long term, analysts say.

Mongolia aims to build a massive industrial park in Sainshand, capital of Dornogovi Province, to help transport metals and coal to customers around the world.

The government is receiving proposals from engineering companies and hopes to move forward with a plan this year. The facility will include copper smelting and coal processing plants, as well as railroads to and from the park.

In April, Prime Minister S.Batbold threw his support behind a controversial east-west railway plan, which will connect Tavan Tolgoi to the eastern city of Choibalsan via Sainshand.

"The Boston Consulting group has identified there are other market opportunities besides China, such as Korea, Japan, India, and Taiwan for both coal and copper," said Ganbat Chuluunkhuu, adviser to the minister for road, transport, construction and urban development.

"The idea is to have multiple export opportunities and, number two, to not be dependent on one trading partner," Ganbat added, referring to China.

"In addition to Chinese export hubs via Chinese seaports, we would have export opportunities via Russian seaports to reach markets in Japan, Korea, and elsewhere. (Editing by Ian Geoghegan)

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