Mongolia”s parliament approved a new investment law Thursday that caps
future foreign participation in certain strategic industries, reflecting a
growing public push to keep profits from the mineral-rich nation”s industries
inside the country.

When it goes into effect, the law will require
foreign investors to obtain government review and parliamentary approval for
investments at 49% and above into industries such as resources, finance,
telecommunications and media, according to analysts in Ulan Bator. The cap is
specific to deals valued above about $75 million.

Investors owned by governments, such as
state-backed Chinese companies, will also need special permission to buy into
the sectors.

Foreign investment is critical to Mongolia”s
future as a commodity powerhouse. But the law reflects anxiety among ordinary
Mongolians that foreigners would enjoy the spoils of the country”s hoard of
coal, copper, gold and other natural resources. Its passage comes weeks before
a parliamentary election, the first in four years, for which politicians are
expected to campaign on populist promises of ensuring profits are retained in
Mongolia.

Dale Choi, chief investment strategist at
Frontier Securities in the Mongolian capital, said in a research note Thursday
that the legislation would take effect 10 days after its publication unless
vetoed by the president.

Full details of the legislation weren”t
available Thursday night, but his note said key provisions hadn”t changed since
they were published earlier in the week.

The impetus to tighten foreign investment
regulations now was spurred by a deal announced in April that would give
investors backed by the Chinese government more sway over Mongolian coal
reserves.

Still, the final version of the law carries
less sting than foreigner investors had initially feared, in part because it
wouldn”t be retroactive.

“Foreign investment should continue to be
the lifeblood of Mongolia”s strong mining-sector ramp-up,” Jim Dwyer,
executive director of the 220-member Business Council of Mongolia, said by
email.

Ahead of Thursday”s vote, analysts also
predicted revisions are possible once a new parliament is sitting.

Previously, Mongolia set few hard limits on
foreign investments. In the all-important mining sector, the government had
previously wanted about 34% of strategic mineral deposits that were developed
privately, and retained stakes of up to 51% on others, including uranium mines,
according to the business council.

Historically known for nomadic ranchers who
produced cashmere, Mongolia is increasingly known for its coal.

Driving the economy is major mining under way
near the border with China, the expected buyer for the mineral output.

But in the landlocked country, which broke from
Soviet influence just over two decades ago and formed a democracy, China also
makes some Mongolians nervous for its size and influence.

Mongolia”s key mine projects remain in their
infancy. The projects are already drawing foreign investment, which has pushed
gross domestic product growth rates above 16% in recent quarters. But the
nation”s increasingly urban and still-poor population so far sees limited
trickle down, making it a key issue going into elections.

Specifically spurring momentum for a foreign
investment law, according to analysts, was an April 1 deal by Rio Tinto
Ltd.-controlled Ivanhoe Mines Ltd. to sell a large stake in a coal company to a
state-owned Chinese investor. Under that plan, Aluminum
Corp. of China, or Chalco, would pay over $920 million to buy up to 60%
in coal producer SouthGobi
Resources Ltd., already about 14%-owned by the sovereign-wealth fund of
China, China Investment Corp.

SouthGobi, which sits on roughly 800 million
metric tons of coal, said some of its mine licenses were suspended by local
authorities after the China deal was proposed. Chalco took another step into
Mongolia days later, buying control of Winsway
Coking Coal Holdings Ltd., another coal miner.

Two other mine projects are worth hundreds of billions of dollars and don”t
appear immediately impacted by the new legislation, namely a copper and gold
project called Oyu Tolgoi, controlled by Rio Tinto and Tavan Tolgoi, which is
being privatized with a structure in line with the new legislation.

By James T. Areddy

Source: http://online.wsj.com