Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
Mongolian elections are less than two months away.
Mongolians, some of the poorest people in the world, are enjoying the world’s fastest-growing economy.
Last year gross domestic product in the nation of fewer than 3 million people expanded by 17.3%.
This year it should easily top 20% thanks to billions of dollars of foreign investment in the country’s coal, copper and gold mining industry.
That was the thinking until today.
Draft legislation, a copy of which was seen by the Financial Times on Wednesday, gave “the clearest sign yet that Mongolia is uncomfortable with the large foreign investments that have so far been a mainstay of economic growth.”
Changes to investment rules in Mongolia have long been mooted, but this draft for the first time puts forward regulation to cap foreign ownership of domestic companies at 49%, rules similar to Zimbabwe’s indigenization policy.
Mongolian politicians – keen to fly their patriotic colours – have made ownership of mining ventures a central campaign issue.
The latest backlash against foreign involvement in the resource industry seems to have been sparked by a takeover bid by Chalco, China’s largest aluminum firm, of SouthGobi Resources, a coking coal producer.
That $925 million deal is now on ice pending a government review and the suspension of some of SouthGobi’s licences. SouthGobi is majority owned by Canada’s Ivanhoe Mines.
The SouthGobi fiasco is not the first time Mongolian politicians have interfered in the mining industry.
After a shambolic bidding process that stretched as far back as 2007, Mongolia struck a deal with US giant Peabody Energy, China’s Shenhua and a Russian-Mongolian consortium in July last year to develop the western block of Tavan Tolgoi, the world’s largest coking coal deposit.
Barely two months later the country’s National Security Council threw out the agreement after losing bidders complained and in March stopped talks with foreign miners altogether.
West Tsankhi alone holds 1.2 billion tonnes of high-quality coal used for steelmaking and Shenhua, the world’s largest coal miner with 53 operating mines, said in March it is still confident of signing a deal post elections.
Given the reaction to Chalco and calls by some politicians that Mongolia develop West Tsankhi itself, that optimism may be misplaced.
Mongolia also still hopes to privatize its Erdenes-TT mining company which controls the remainder of the 6 billion tonne Tavan Tolgoi resource.
The government was hoping to raise as much as $3 billion through a listing in London, Ulan Bator and Hong Kong, but that process has also been thrown into disarray by the upcoming elections.
Just how tempting these massive mining investments are for politicians look no further than Mongolia’s current prime minister Sukhbaatar Batbold.
During the last election that put him in power his Mongolian People’s Party promised $750 (a cool million in the local currency, the tugrik) in cash to all of Mongolia’s adult citizens following the Erdenes-TT sale.
Tavan Tolgoi is not even the largest mining investment in Mongolia. That honour goes to Oyu Tolgoi, a $13 billion copper-gold-silver-project.
In October Ivanhoe and partner Rio Tinto dodged a bullet when the Mongolian government said it was rethinking a 2009 deal that gave Ivanhoe and Rio Tinto a 66% stake in Oyu Tolgoi and that it wanted half of the mine, already three-quarters built.
Oyu Tolgoi is forecast to contribute a third of the country’s GDP when it goes into full operation and increase the average earnings of Mongolians by 60%. Even that may not be enough for power-hungry politicians.
Image is the Genghis Khan statue outside the capital which at 40 metres is the tallest in the world.
18 Comments
Frankie J Holden
I am in favour of protecting national assets from foreign ownership, anywhere in the world. I have these strange things called morals and values, apparently they used to be quite prevalent in the world.
Oakley Sunnies
For me, Mongolia is a mysterious country. They are rich in spirit.
Frankie J Holden
The concept of royalties does nothing more than include a middle-man and dilutes the real benefits that can be attained. Why do the resources need to be exploited in the short term, what a greedy concept.
Davaa
Perhaps one of the major point we are missing here is the fact that this legislation is draft proposal only, at least for now. With the parliamentary election nearing, politicians are trying to capitalize on populist ideas (just like politician everywhere), so that they may be elected. It is far from “kicking out” investors of our country as depicted in this article.
On that note, as a lawyer working in the mining industry, I can say, with full confidence, that Mongolia government fully honors its deals and supports its mining industry by policy. I respectively disagree with the speculation that Mongolia is on the road to become Zimbabwe. In actuality it is far from it, and never will be.
Aliowhk
sure Mongolian ruling elites are more like R. Mugabe….now
Jeffreymadzingira
MUGABE IS A GOOD RULER FROM GOD !!!!!!!!!!!!!!!!!!!!!!
Fkunaka
Control of resources by government for the benefit of the indigenous population can be done successfully through levying a royalty tax on the mines rather than taking up equity. The royalties can then be channeled into a fund which will ultimately be utilised to acquire equity in the targeted mines for the benefit of the so called “poor”. Why should people be poor when the country is endowed with resources?
Enkhii
do not agree. Mongolia is firmly aiming to reduce state control over domestic businesses. But same time it has to protect its industries from foreign state influences. Chalco is Chinese state owned company and one of the key players to establish Chinese dominance over supply of mineral resources. So would not it be complete stupidness for Mongolians to yield its mineral recourses to foreign governments?
Tugsbilegt_b
Mongolians are not poorest in the world, contrary they are the richest people in the world. You can see that is true when you go to Mongolian country.
Prairie_eagle
This could be the No.1 joke of 2012.
Yogi bear
Sure there are better ways to do things and spread the wealth and benifit more evenly. but it will never happen in places like Mong and Zim they may have the mineral wealth but they do not have the technical or financial wealth. every country in the world needs other countries to invest to strengthen their economies but it is as plain as day where this wealth will go I suppose the senior people in the governments are all rubbing their hands together and have already ordered their new Roll Royce’s the poor will see nothing ask the people of zim.
Open your eyes.
Naive 666
precisely, Mongolians are discriminated against the China in particular, for
fear they’ll be swallow up……
Pahint
Mongolia was, is and will be pain in the rear end to any resource company. The government is extremely populist and saturated with socialist ideas. Power, money and greed as everywhere in the world but its own way.
Den_mn
Leave Mongolia for Mongols. Mongolia’s national companies are grown big enough to invest in its home country. We are not very rich but not the poorest ones. So we can take care of our own.
Terrtogii
This is just wrong. Mongolia can’t afford to develop its mines–that means money, manpower, or know how. All of the development in Ulaanbaatar is thanks to projects like Oyu Tolgoi. Now it’s up to Mongolia to barter fair deals that it can benefit from but are still attractive to foreign investors.
Oyu Tolgoi is an example of this. It retains a 34 percent stake in Oyu Tolgoi LLC with 0 percent risk and 0 percent investment thus far. On top of earnings form the company it will take revenue from royalties and taxes. It’s a good deal and a lot of mining companies might not have even given 34 percent.
That said, Mongolia is far from perfect, but it’s done pretty well keeping business interests. It rattles investors every now and then but thus far has stopped short of doing anything to really kick them out the door (e.g. Venezuela.). Actually it’s good investment to buy stocks every time there is a scare like this–makes those stocks cheaper to buy up 🙂
Lama
There is a good old saying in Mongolia: Better to be eaten by my own dog rather then my neighbor’s
Bordukh
The mining industry is the most profitable sector anyway and Western companies and their home countries are already getting more than enough. Why are you, westerners so greedy!
Natural resources are non-renewable and in that sense the people who owns it should have a realistic share.
I don’t like the editor comparing Mongolian politicians with Zimbabweans. There are also developed countries that are trying to control their economy. Australia, for example put heavy tax burden on mining companies.
drookboy
Being in Oyu Togoi at the moment. it is apparent that this developing economy is in need of outside resources to expand their skilled labor and technology, assuming that they desire such things. The complication lies at which pace of acceleration the gov’t is willing to accept. Change is inevitable and the pre-existing rigid system that exists here from Soviet structures will need to soften to allow for the technologies and the developing young skilled labor force to flourish.