It is five years since John Johnson, CRU’s China Country Manager, first visited Mongolia and he has closely followed the many twists and turns in prospects for Mongolian mining since that first visit. As a result of a recent visit to Ulaanbaatar during September 2014, and discussions with key players there, in this article he suggests there is good reason to feel more optimistic about the country’s mining prospects, although there still remain some challenges to overcome.
The minerals that are most relevant to Mongolia include coal, copper, iron ore, gold, molybdenum, zinc, tin, titanium, tungsten, rare earths, uranium, limestone and fluorspar. Currently, minerals are estimated to account for 22% of Mongolia’s GDP, 61% of its value-added and 94% of Mongolia’s exports, of which 88% are exported to China. Mongolia also has ambitions to add value to some of these minerals, including the Sainshand industrial complex, with plans to include downstream steel, coke and copper as anchor industries.
The Mongolian government admits that it has made mistakes, notably with its seemingly capricious attitude towards overseas mining companies investment and various pieces of legislation that have been enacted in recent years. Some past examples of this behaviour include the following:
The above bullet points exclude several mining royalty increases during this period. In fact, it appears that Mongolia has succeeded in annoying virtually all the world’s major mining companies, not to mention creating a difficult operating environment for junior miners and many domestic mining companies too. In addition to the above, one might add the never ending infrastructure delays and, in particular, the indecision over building a rail link connecting Mongolian mines to the Chinese border.
Given the above factors it is surprising that Mongolian mines have produced as much as they have in recent years, which is a testament to Mongolia’s potential. However, it is not that surprising that more recently FDI in the mining industry has fallen and the economy has shown worrying trends. In addition, Mongolia has also had to contend with global commodity price falls and China’s slowdown. It seems it is these factors that have forced the government to rethink its strategy towards inward investment.
More recently there has been more positive news for mining companies in Mongolia. The new government is eager to restore investor confidence within the existing breathing space before the next election in 2016.
Some positive examples of tangible changes include the following:
The above demonstrates the clear advances that have been made in government attitudes toward mining investments. However, CRU believes that the biggest challenge that Mongolia needs to overcome is that of developing the rail infrastructure to export bulk commodities competitively. CRU Consulting has examined the delivered costs of various bulk commodities into the Chinese market versus local Chinese prices, and concluded that logistical issues are of paramount importance. Sitting on great mineral assets is all very well, but these have to be delivered to the market competitively. When Mongolian mines are linked to the Chinese rail network freight costs for bulk commodities should be halved. Therefore, the development of the railways is likely to hold the key for Mongolia’s successful development.
Mongolian Rail (MTZ) has plans for two phases of rail investment which will run to 1800km, but the key section is the line from coal mines at Ukhaa Khudag (near Tavan Tolgoi) to the Chinese border at Gashuun Sukhait, which will connect to the Chinese rail network. Once completed, the capacity of this line south to the border is expected to be around 30 Mtpy. The slow progress on this 230km of line appears due to problems in raising finance. Almost half of the earthwork has been completed, but the gauge has still not been decided, and this project is understood to need more finance to continue.
This rail project was due to begin operations from 2015, but is now behind schedule, so 2016 appears to be the earliest possible start date at present and this may be optimistic. A strategic investor is being sought and a sovereignty guarantee is needed to cover sovereignty risk for Mongolia. This issue is complicated, but one problem appears that the government wants majority ownership. In fact, this tension between government control and the desire for private sector investment is an ongoing issue in Mongolia across the whole mining sector.
In conclusion, the Mongolian government now appears to be moving in the right direction. However, there are still many challenges and bottlenecks to overcome. Major challenges include improving the legislative regime, reducing harmful government interference, completing vital infrastructure and possibly most vital of all, being able to raise adequate finance. Nonetheless, CRU believes Mongolia is still in its early stages of development, presenting opportunities to many mining companies that do good due-diligence. To assist in further understanding the competitiveness of Mongolian projects CRU’s Beijing office is very well placed to provide such analysis and advice and to help understand Mongolia’s largest market south of its border.SOURCE: CRU