Gold miners’ Q3 2024 fundamentals
Thanks to record gold prices, major miners achieved record revenues, record bottom-line earnings, and record operating cash flows.
On November 3 Mongolia’s new, friendlier foreign investment law came into force.
Probably not a day too soon.
The Asian nation of three million citizens, dependent on the mining sector to fuel growth, is desperate to turn around the slump in its economy and the steep fall-off in foreign investment.
Foreign direct investment in the country dropped 49% to September 2013 compared to last year which already marked a 17% year-on-year decline, the value of the currency, the tugrik, is down 20% this year, inflation has returned to double digits and the Mongolian central bank’s off-balance sheet spending is burning through foreign reserves as foreign debts balloon to 55% of GDP.
The path to prosperity for Mongolia, ranked 155th in the world according to GDP per capita, has always been a rocky one. The country has been bailed out by the IMF no fewer than five times and it suffers a domestic bank failure on average every 18 months.
While the changes to the 2012 Strategic Entities Foreign Investment Law (SEFIL) including greater certainty surrounding mining taxes and royalties and the scrapping of the distinction between private foreign and domestic investors are being universally welcomed as a positive step, a number of issues remain unresolved.
Mongolia is currently being sued in international courts by South Africa’s Standard Bank after a $120 million loan to a leading Mongolian banker and industrialist backed by the state-owned copper miner Erdenet went sour.
The debacle has prompted Standard Bank, 20%-owned by top Chinese bank ICBC, to exit the country entirely, selling its $350 million Mongolian portfolio to a French bank.
It marks something of a retreat for Standard Bank which in 2009 was the sole lead arranger for the country’s inaugural sovereign bond issue.
Canadian uranium explorer Khan Resources, is currently seeking $326 million in damages from the government of Mongolia due to the illegal expropriation of its permits with a trial by the International Arbitration Tribunal in Paris scheduled to start Monday.
Legal action is also likely to follow from the revocation at the end of October of 106 exploration licenses – covering a landmass approximately six times larger in surface area than active mining licenses in Mongolia – held by companies caught up in a corruption case relating to former senior government employees in the Mineral Resource Authority of Mongolia.
The mining sector accounts for more than 20% of GDP today, but has the potential to contribute a much greater proportion to the economy where 30% still live in poverty.
The Chairman of Oyu Tolgoi and Mongolia’s Trade and Foreign Affairs Ambassador at Large Batsukh Galsan recently had this to stay about the prospects for mining inside the country:
“I have seen excitement about Mongolia reach fever pitch and drop off a cliff multiple times. Examples include the passage of the 2006 minerals law, adoption and repeal of the windfall profits tax, and recently of course the delay in developing the underground mine at Oyu Tolgoi,” he said.
“In spite of the ups and downs, the trend has been a steady march forward as more and more investors discover the long term prospects of the country and the potential rewards for patience and commitment,” he added.
Oyu Tolgoi is seen as the number one issue that needs to be resolved to restore investor confidence in Mongolia. The copper-gold mine which could have final bill of as much as $14 billion is 34% owned by the Mongolian government with Rio Tinto-controlled Turquoise Hill (TSE:TRQ) owning the rest.
Talks over Oyu Tolgoi’s expansion and the reworking of the initial 2009 deal which first unleashed the Mongolian investment boom, have dragged on for the better part of a year. Both sides provided fresh faces for the Oyu Tolgoi board in September to break the impasse.
The disputes are centred on costs with Rio’s management fees and the Mongolian government’s share of funding proving particular sticking points.
Wrangling over Oyu Tolgoi has also snagged another Vancouver-based company besides Turquoise Hill. Mongolia in February suspended Entrée Gold (TSX:ETG)’s mining permits in an area adjacent to the project and the explorer may have to cede a portion of its property to the government as part of an overarching deal.
Time for an agreement – neither side have commented on the negotiations much beyond boilerplate statements of “progress” – is running out.
The deadline to finalize a World Bank-led $4.5 billion project finance package – the largest in the history of mining – is December.
Incentives to resolve the dispute are definitely not in short supply.
The mine, which shipped its first copper in July, is set to contribute as much as a third of the nation’s economy if the underground expansion where 80% of the project’s value lies were to go ahead.
A positive outcome on Oyu Tolgoi, where some 2,000 workers have been let go due to the delays, would do much to restore the confidence of investors, many of whom have burned fingers in the country before.
Independent Mongolian Metals & Mining Research, an Ulaanbaatar-based research company headed by Dale Choi, is a bit more pessimistic although a positive outcome on Oyu Tolgoi has the potential to be a strong catalyst:
“While well- overdue legislative change, such as the new Investment Law, is a potential positive development, without flagship transactions and resolution of key security of tenure uncertainties we do not believe the foundation for a return towards private sector growth will be provided.”
Coal, the bedrock of the Mongolian resource economy, is in deep trouble too.
Mongolian coal exports to China, which buys 9 out of every 10 tonnes, have plummeted to $542 million compared to $1 billion worth during the first half of 2012, as the the land-locked country is muscled out by Australian exports.
On top of plummeting volumes, exports channeled through state-owned Erdenes Tavan Tolgoi are sold for $40 a tonne compared to a ruling price for high-quality metallurgical coal of $120 – $150 a tonne.
The price is the result of an off-take agreement with Aluminum Corporation of China (Chalco) that sees Mongolia repay $350 million of debt in coal exports by the end of the year, something that authorities now say it will not be able to honour.
Talks with international miners on developing the western block of the Tavan Tolgoi deposit in the South Gobi desert, the world’s largest deposit of high-quality coking coal, is ongoing, but the project’s history does not bode well.
Erdenes TT controls the main block of the 6.4 billion tonnes deposit that has been mined since the 1960s, but the Tsankhi section which is being offered to foreigners on its own holds some 1.2 billion tonnes.
Mongolia struck a deal with US giant Peabody Energy, China’s Shenhua and a Russian-Mongolian consortium in July 2011, only to cancel the whole process two months later.
The much-vaunted multi-billion dollar IPO of Tavan Tolgoi in Hong Kong and London, first mooted more than five years ago, also remains on ice.
Following its so-called Article IV mission to Mongolia the IMF issued a stern warning about Mongolia’s prospects given the country’s deteriorating macro-economic picture, reduced investment from developed economies and the economic slowdown in China:
“Spillover risks will particularly affect the more vulnerable emerging market economies. In light of this, Mongolia needs to change course to avoid becoming highly exposed to these external shocks and risks of crisis.”
Image of traditional Mongolian wrestlers by Kyle Thomas | Construction workers in Ulan Bator by Al-Jazeera
5 Comments
babennett
Unfortunatley it looks like it will be getting worse before it gets better. Expats are leaving the country in increasing numbers because the work is drying up. Jobs that are being advertised by small local companies are offering minscule wages for work that 6 months ago was bringing in above average salaries for the loacal nationals. The people themselves are complaining that the Government is putting them behind their own personel needs. The corruption that is being exposed could prove to be the tip of the iceberg if the Billions of Dollars the Government receives is all accounted for. Mongolia as a Country and Mongolians as a people deserve better than what they are receiving at the moment.
Mike Failla
It seems that people always come second to bureaucracy.
Honheree
Count how many millionaires, multi-millionaires and billionaires in the Mongolian parliament, and the 40-50 families controlling the economic demise of Mongolia with their greed, most of whom do not care, but for what they themselves can control, it is no wonder Mongolia is where it is. Transparency is non-existant. Unlike other parliaments in the world where the press and the public can watch and listen to the proceedings in person or on TV, in Mongolia it is behind closed doors.
Corruption is still rife from top to bottom, and the Mineral Policy promised by the President to be completed by September, 2013 has not appeared. The follow-up new Minerals Law, whose original draft, with suicidal clauses for investors, canned earlier in 2013, has therefore not even been discussed. The Forests and Water Law restricting exploration and development is sitting in a vacuum. No new exploration licences have been issued since April, 2010 in what was supposed to be a 6 month halt to deal with corruption. Licences that have been canceled MAY go to tender, when it suites the government, in a hidden process, which requires the bidders to expose all their ideas. Fertile ground for more corruption. Ninja mining has not even been attempted to be controlled, creating environmental issues that have turned many Mongolians against mining. Mining and exploration investors will not return until all these are resolved in a fair and transparent way..
The Mongolian language media is controlled and censored. The biggest problem is that what is written here, or spoken about by critics like Dale Choi, NEVER will be read, or heard on the radio or TV by the majority of Mongolians. What is reported are the dumbed down statements like the closing comments of Batsukh Galsan, that everything is fine, despite the herd heading for a clif of economic disaster with no one making efforts to stop it. Disappearance of millions of dollars of government revenue is, maybe, reported once, then brushed under the carpet, where in developed countries it would be a major scandal with immdediate investigation and reporting of what happened.
Finally, the majority of Mongolians are scared to say anything, for fear of retribution from above, as are most foreigners. Just look at the recent arrests and departure of foreigners for speaking out and the past arrest of the anti-corruption agency chief for speaking out against corruption of certain parliamentarians. That is the real situation in Mongolia.
Cato
You say that Mongolia is being sued in “international courts” by Standard Bank? Which international court are you referring to? Is it an international arbitration?
guest
Mongolia is still learning by doing. Unfortunately sometimes learning process is painful. Indeed politicians in this country are spoiled by economics growth fueled by mining boom. There is so-called resources nationalism in place. But I remain still very much optimistic about the future of Mongolia.