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Gold loves chaos and should be hitting new highs, especially with inflation coming down and with it, two rate cuts likely before year’s end.
Concerns are mounting over draft legislation being considered by Mongolia’s parliament that would place severe restrictions on foreign ownership and greatly increase state control over mining and exploration companies.
The Asian country has enjoyed a resource investment led boom turning it into one of the fastest growing global economies. The sparsely populated country with some 3 million inhabitants grew at a 17% clip last year from 30% the year before.
But ardour for new mining projects in the country is already cooling and growth could return to the single digits.
The Business Council of Mongolia, a five-year old business advocacy group, sent a letter to Mongolian President Tsakhia Elbegdorj the architect of the bill earlier in January expressing grave concerns about the bill which in its current form is much more far-reaching than anticipated.
In the letter obtained by the Financial Times the council, which counts Rio Tinto, Peabody Energy, Siemens, Mitsubishi and other multinationals among its members, states:
“The impact of the draft law on the minerals industry will be to halt current minerals exploration and development in Mongolia and greatly discourage any future investment. … Collateral damage is likely to include all other sectors of supply, including but not limited to the construction and real estate sectors, imposing a significant chain-reaction burden on the banking and financial institutions which they may not be able to withstand and leading to a deepening crisis.”
Jim Dwyer, the executive director of the business group, told Bloomberg the proposed legislation may allow for the creation of “a few Mongolian oligarchs.”
Among the more deleterious provisions called for by the bill include:
At stake are two of the richest prizes in mining – copper and gold mine Oyu Tolgoi already in start-up and a portion of the Tavan Tolgoi met coal deposit.
A group of influential parliamentary backbenchers in a petition in September called for the enforcement of a parliamentary resolution that gives the Mongolian government majority ownership of Oyu Tolgoi from the current 34%.
Turquoise Hill Resources, controlled by Rio Tinto, holds the rest of the $10 billion plus project.
It was not the first time Mongolian politicians had tried to rework the 2009 deal that only allows a bigger stake for the state 30 years after the project goes into operation (Oyu Tolgoi – turquoise hill in the local language – has an estimated life of mine of almost twice that).
In 2011 shares in Turquoise Hill, then Ivanhoe Mines, plunged on news that the Mongolian government wanted to rework the deal to gain a 51% stake.
At the time Rio and Ivanhoe took a tough stance however and after some desperate negotiations Mongolia backed off.
Turquoise Hill also holds 58% interest in Mongolian coal miner SouthGobi Resources (TSX:SGQ). The Mongolian government last year blocked a takeover deal by China’s Chalco for SouthGobi decreeing a ban on majority ownership of Mongolian assets by state-owned companies.
Calls for much more forceful resource nationalism is also bad news for investors from Asia and the US that are lining up to develop Tavan Tolgoi in the South Gobi desert, the world’s largest high-quality coking coal deposit used in steelmaking.
Last year Mongolia stopped all talks with international miners on developing the western Tsankhi block of Tavan Tolgoi which on its own holds 1.2 billion tonnes after a shambolic bidding process that stretches back as far as 2007.
Mongolia is walking a diplomatic tightrope with Tavan Tolgoi. Aside from from closer ties with China it wants to use the project to strengthen its longtime political and cultural links with Russia and at the same time make room for the US as a geopolitical balancer in Asia.
Mongolia’s National Security Council rejected a development deal struck with US giant Peabody Energy, Shenhua and a Russian-Mongolian consortium mid-September 2011, just two months after they were announced as winners. At the time losing bidders from Brazil, India and South Korea raised serious concerns and Japan went so far as to call the bidding process ‘extremely regrettable’.
Mongolia also still hopes to privatize its Erdenes Tavan Tolgoi coal-mining company which controls the remainder of the 6 billion tonne resource.
