Special report: Mongolia: Foreign investors ponder potential

David Wigan
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Mongolia’s rich mineral resources have attracted considerable foreign capital but the government also now hopes to attract investment in its efforts to diversify the economy. The long-running dispute over the Oyu Tolgoi mining project may be dampening interest, however

 Oyu Tolgoi mine
Resource-rich Mongolia has been attracting long-term foreign investment on an ever-increasing scale since the 1990 transition. But net inflows exploded following the financial crisis, reaching $4.45 billion in 2012 up from just $372.8 million in 2007, World Bank figures show.

FDI dipped to $2.3 billion in 2013, largely due to the falling price of commodities and completion of phase one of Rio Tinto’s $6 billion Oyu Tolgoi gold and copper mining project in the Gobi desert. The joint venture with the Mongolian government was investing around $180 million a month throughout 2011 and 2012 on everything from a copper concentrator plant and power and water supplies to roads and an airport complete with terminal, as it raced to bring production on line. Work on the deep-mine phase two has been halted by disagreement over financing arrangements which the government says can only be approved by parliament.

State Bank says sweeping legislation restricting foreign investment in sectors of strategic national importance deterred overseas investors and delayed projects. "Our economic analysis reveals that FDI has declined dramatically. By the first quarter of this year, FDI inflows were down by almost 60% year on year," says State Bank’s director of investment banking, Gombosuren Khandtsooj.

"This was due not only to the completion of Oyu Tolgoi but to stagnation in the mining sector, especially the coal industry. The passage of the Strategic Entities Foreign Investment Law (Sefil) in May 2012 also pushed FDI out. Parliament responded by updating the legislation and approving the new Investment Law."

Government figures show coal exports slumped by more than 40% to $1.12 billion last year as a slowdown in growth in China, the destination for almost 90% of coal shipments, and disputes with foreign mining investors, took their toll.

Negotiations with international mining firms over rights to develop the West Tsankhi section of the 6 billion ton Tavan Tolgoi coal deposit have been stalled for two years. A $3 billion Hong Kong-Ulaanbaatar-London listing planned for late 2012 of Erdenes Tavan Tolgoi, which is managing development of East Tsankhi, has yet to materialize.

Untapped riches

Even so 2013 FDI, at more than 22% of GDP – the equivalent of around $800 per head of population – remains one of highest proportions of any country. The country sits atop some of the largest untapped deposits of coal, copper, gold and other minerals in the world, worth as much as $2 trillion, that have barely begun to be exploited. Oyu Tolgoi alone is forecast to boost annual gold and copper production from 8 tons and 644,000 tons respectively in 2013 to around 1.2 million tons and 32 tons when its $6.3 billion underground phase two comes fully on stream.

Mongolia is also an oil exporter and has commercially exploitable deposits of a further 80 of the 111 elements on the periodic table, from molybdenum and platinum to tungsten and fluorspar as well as 25 of the 40 heavy elements.

But, unlike in many of its counterparts, Mongolia’s natural bounty is not a source of conflict and division. Mongolia’s robust free-market democracy means its policy of developing its mineral wealth by the most transparent but commercially efficient means, while hotly debated, is in the end consensual. Tapping the resources and expertise of global mining companies has proved beneficial not only to foreign investors, but also in helping fast-track economic and social development.

Mongolia ranks 42nd out of 132 countries for opportunity in Social Progress Imperative’s 2014 Social Progress Index, far ahead of China and most other developing countries in the region. Mongolia scored even more highly for private property rights, freedom of movement, assembly/association and political rights, which are enshrined in law. SPI says Mongolia’s democracy is exemplary, pointing to six free and fair parliamentary and presidential elections since the 1990 transition from one-party state socialism. Mongolia also bested China on meeting basic human needs and the fundamentals of well-being.

Opportunities ahead

Mongolia’s development is still in its early stages and robust economic growth for the foreseeable future means opportunities for overseas investors in almost every area from transport infrastructure and housing to water security and air pollution. Surveys and technical assessments are already under way ahead of the start in 2016 of construction work on a $1.5 billion mass transit railway system serving the capital, Ulaanbaatar. The 16.6km line, of which the central 6.6km will run underground, is scheduled to be completed in 2020. Five transit corridors are also being developed to link landlocked Mongolia to its export markets including a new railway network and a new highway connecting the northern border to the south. There are also plans for both a gas pipeline and an oil pipeline and a longer-term aspiration to form a bridge connecting Europe with APEC nations.