Mongolia, the commodity-rich nation that posted the world’s fastest economic
growth in 2011, is on course to pass a law by June that will bar foreign
state-owned companies from controlling its key assets.

The draft law, submitted to parliament two years ago, was accelerated after
a public outcry following state-run Aluminum Corp. of China Ltd.’s move last
month to take control of South Gobi resources Ltd., Vice Finance Minister
Ganhuyag Chuluun Hutagt said in an interview. The law isn’t likely to apply to
any existing operations, he said. Rio Tinto Group is developing the $6 billion
Oyu Tolgoi copper mine in the nation.

Tightening the legislation would mean Mongolia joins Indonesia and Argentina
in seeking to control ownership of resource assets to secure their economic
future. The draft law, due to be passed before parliamentary elections next
month, will be applied to the bid by Chalco, as Aluminum Corp. is known, and is
aimed at ensuring no one country or product dominates the economy, according to
Ganhuyag.

“Investors don’t like it when the rules of the game are changed after the
game has started, and changed often at that,” Dale Choi, chief investment
strategist at Frontier Securities in Ulaanbaatar, said by phone. “It would be
in the interests of Mongolian people to make a decision based on commercial
factors, rather than geopolitical factors.”

Controlling Assets

Mongolia, a nation of 2.8 million people that broke off from Communist rule
and dependence on the then-Soviet Union in 1990, wants foreign investment in
key assets to be made by entities that represent several nations, Ganhuyag
said. The country currently exports most of its coal and copper to China.

“We don’t want to be faced with one sovereign,” he said by phone from Ulan
Bator. “Our struggle to get political freedom was a long one and we cherish
that. We will not let foreign government-owned entities control strategic
assets in Mongolia.”

The land-locked country is squeezed between China and Russia, two of the
world’s ten largest economies and the No. 1 and No. 3 countries by land mass.
China accounts for over 80 percent of its neighbor’s import and export trade,
according to the World Bank.

Resource nationalism, or state demands for higher taxes, royalties or
stakes, was cited as a growing concern by Rio Tinto and Freeport MvMoRan Copper
and Gold Inc. at their most recent earnings. The issue was the number-one
concern among mining executives in 2011, replacing capital allocation, Ernst
& Young said in its annual risk survey published in August.

Government Review

Chalco said April 2 that it agreed to buy Toronto-listed Ivanhoe Mines Ltd.’s
58 percent stake in SouthGobi in a deal worth as much as C$925 million ($914
million). Mongolia’s Mineral Resources Authority said it would ask SouthGobi to
suspend exploration activity and mining on certain licenses while it reviews
the deal. Some customers have cut orders because of the request, SouthGobi said
May 14.

Chalco won’t proceed with the deal unless it gets approval from Mongolia, it
said on April 25. Yuan Li, a spokesman for Aluminum Corp. of China, Chalco’s
parent, declined to comment, saying he can’t provide more information.

“There’s a big issue of discrimination and foreign investors should be just
foreign investors,” Frontier’s Choi said. “You can’t create separate rules for
Chinese state-owned companies or Canadian companies. Chalco’s accord is market-
based, it represents the way the market wants to go.”

Coal Deposit

Plans to develop Mongolia’s Tavan Tolgoi coal deposit, one of the world’s
largest, have also stalled ahead of the June elections. Progress on talks with
companies including Peabody Energy Corp., OAO Russian Railways, and China’s
Shenhua Group to develop the West Tsankhi part of Tavan Tolgoi have “stopped,”
Prime Minister Sukhbaatar Batbold said in March.

Mongolia first announced and then said it would review an accord in July
that planned to give Shenhua Group a 40 percent stake in West Tsankhi, with
Peabody taking 24 percent and a Russia-Mongolian group the rest. The government
didn’t clarify who the Russia-Mongolia group included.

Uncertainty about the fate of the foreign tender has meant that the $3 billion
initial public offering of state-run Erdenes Tavan Tolgoi, which is developing
the East Tsankhi part of the 6-billion-metric-ton field, was delayed in March
as some politicians call for Mongolia to develop West Tsankhi itself.

Chalco’s Move

Chalco’s move on SouthGobi was announced in the same month that it revealed
plans to become the top shareholder in Winsway Coking Coal Holdings Ltd, a Hong
Kong-based trader that ranks among the top exporters of the commodity from
Mongolia. London- based Rio Tinto, the world’s third-largest mining company,
counts Chalco’s parent as its largest shareholder.

Rio spokesman Illtud Harri declined to comment.

The new law will make sure that any purchase of stakes in so-called
strategic assets by a state-owned entity are registered and receive government
approval, Ganhuyag said. The list of strategic assets and industries will be
made later and will likely include uranium and rare earths among other
minerals, he said.

State-owned entities won’t necessarily be barred from owning any assets in
Mongolia, Ganhuyag said. “We’ll review all applications on a case by case
basis.”

Private companies investing in the country’s key assets will also be
scrutinized on their source of income, local hiring intentions and investment
timespan to avoid so-called hot money inflows, Ganhuyag said. Mongolia will
also seek to make sure investors do not use jurisdictions that allow tax
minimization, he said.

Export Partners

The country needs new investment laws to support more of its products being
exported to countries other than China, Ganhuyag said. A project that would
include several foreign entities, such as West Tsankhi where companies from
five countries may form a consortium, is the model Mongolia wants, he said.

“We want China to be our good neighbor and economic partner,” Ganhuyag said.
Mongolia’s “Third Neighbor” policy, a move to broaden ties with nations outside
China and Russia, aims to have no country or product account for more than a
third of total sales, he said.

Coal sales amounted to $2.2 billion in 2011 and made up almost half of
Mongolia’s exports, the World Bank said in a February report. Mineral resources
accounted for 89 percent of Mongolia’s total exports in April, according to the
latest data from the country’s Customs General Administration. Exports to
northeast Asian countries were $389 million of a total $409 million, the data show.

Strategic Industries

To protect its strategic industries, which in the current version of the
draft law include mining, media, communications, weaponry and air traffic,
Mongolia may retain a majority stake in key assets or a so-called golden share
that would allow the government to veto decisions, Ganhuyag said.

Chalco’s intention to purchase SouthGobi will be reviewed once the new
strategic investment law is passed, Ganhuyag said. The fact that the company is
state-owned and that Mongolia is China’s biggest coking coal supplier will be a
factor in the decision, he said.

“We don’t think it’s a good idea to give up control over the whole supply
chain,” Ganhuyag said. “We trust the Chinese government will understand our
needs and our concerns.”

Chalco was allowed last year to buy all of the coal from the East Tsankhi
area of Tavan Tolgoi, Mongolia’s biggest coal field, after it agreed to resell
30 percent of the total volume to Mitsui&Co, Itochu Corp and Korea
Resources Corp.

The difference between SouthGobi and East Tsankhi is that Mongolia controls
the mine, how much it produces and how it exports, Ganhuyag said.

“We would like to retain that freedom,” he said.

Source: www.bloomberg.com