Mongolia’s latest general election was a victory for democracy, but
what it will mean for foreign companies heavily invested in the country is
still up in the air. With strong public support for resource nationalism, there
is growing concern from major mining groups with developing projects that they
will not see the returns they are expecting. Yet it is clear that given
Mongolia’s copper wealth, junior miners cannot afford to stay away.

“Bad governance and mining wealth have rarely been a good mix for the
fortunes of a developing resource-rich country,” cautioned Nyamosor Tuya, a visiting
fellow at the Center for Northeast Asian Policy Studies at the Brookings Institution. “In the coming years, the challenge
for Mongolia’s newly elected leaders and the country as a whole will be to rise
to the occasion and not squander the opportunity presented to bring prosperity
to its citizens, strengthen the economic underpinning for a sustainable
democracy, and consolidate its international status.”

Before the elections in late June, the Mongolian parliament passed a law
limiting foreign ownership in major industries including mining and capping
foreign ownership in strategic sector companies valued at over $75 million to
49 percent. The former Soviet-controlled nation elected 31 members of the
opposition Democratic Party to the 76-member parliament, nine of
which are widely believed to be strong proponents of greater distribution
of the mining wealth to citizens as well as free distribution of land. Party
leader Nambar Enkhbayar has called for privately-owned mines to be nationalized
after 20 years. The Democratic Party is expected to form a government together
with the Justice Coalition, which advocates increased national control of the
mines as a means to address the poverty faced by over 30 percent of its
population.

Mongolia has over 6,000 deposits of 80 different minerals and is home to one
of the biggest copper projects in the world. The country’s allure has surged
since development of the Oyu Tolgoi copper mine, which promises over 81 billion
pounds of copper as well as 46 million ounces of gold. Still, if Enkhbayar’s proposal
becomes law, the mine site that was discovered in 2001, would be handed over to
the Mongolian government after eight years of commercial production, which is
slated for the first half of 2013. That would certainly not be enough time for
either Ivanhoe Mines (TSX:IVN), which owns the mine,
nor for Rio Tinto (NYSE:RIO),
which holds a 51 percent stake in Ivanhoe, to recoup their investment in Oyu
Tolgoi currently estimated at $13 billion.

Still, many analysts are hopeful that the incoming government’s rhetoric
will be toned down as politicians focus less on attracting voters and
concentrate more on ensuring sustainable growth. Certainly, it is in the best
interest of policymakers to ensure that Oyu Tolgoi succeeds as it is expected
to account for over 30 percent of GDP once completed. Its success will be
critical in maintaining existing and attracting new private capital.

“The paramount importance of attracting and retaining foreign investment in
developing Mongolia’s economy has been recognized,” stated Resource Investment
Capital. “Leveraging on its strategic location with close proximity to
emerging market economies combined with a very attractive landscape of existing
mining projects and largely explored mining opportunities, Mongolia’s natural
resources sector is set to be redefined as it experiences substantial growth
over the coming years.”

In a Center for Strategic and International Studies briefing, Stephen Noerper,
a former visiting professor to the National University of Mongolia’s School of
Foreign Service, echoed that sentiment.

“With foreign support, (Mongolia) has the extractive capacities (to mine
copper and other commodities) and is building the needed transportation lines.
Managing this new wealth is a challenge for Mongolia’s leadership, and it has
looked to nations like Chile and Norway for examples of effective management of
the commons and sovereign trusts,” Noerper said in a recent report.

Foreign investors are remaining committed to profiting from Mongolia’s
resources, and the number of junior mining companies in Mongolia has blossomed
as Oyu Tolgoi nears completion. Halifax-based Erdene Resource Development (TSX:ERD), for instance,
separated into two pubic companies last month to divide its North American and
Mongolian development efforts. The move will allow Erdene to have a “dedicated
Mongolia management team with greater flexibility to access capital for future
programs” as it looks to develop its Zuun Mod copper and molybdenum project as
well as its Altan Nar gold discovery, the company said.

Kincora Copper (TSXV:KCC)
also has a significant stake in Mongolia’s copper prospects as it holds Ivanhoe
Mines’ two former high priority targets in the country, namely its Bronze Fox
and Tourmaline Hills projects, located near Oyu Tolgoi.

Australia’s Voyager Resources (ASX:VOR), meanwhile, fully
acquired the Khongor copper and gold project in 2010, which is in the South
Gobi Arc terrain where the Oyu Tolgoi mine is located. Voyager said that it
“fully supports the right of the Mongolian government to implement (the latest)
foreign investment regulation and the company notes that, provided this new
legislation is applied sensibly, the effect of this new legislation will be not
dissimilar to the foreign investment review procedures that exist in many other
jurisdictions, including Australia.”

One dispute that will be closely monitored to gauge the new Mongolian
government’s stance regarding foreign investment is the Aluminum Corporation of
China’s (Chalco) bid for coal mining group  SouthGobi Resources (TSX:SGQ), in
which Ivanhoe Mines has a majority share. Chalco’s $926 million bid in April
for SouthGobi has been supported by Ivanhoe, but the Mongolian government has
challenged the legitimacy of the move under the new foreign investment law.

In last week’s meeting in Ulaanbaatar, US Secretary of State
Hillary Clinton praised the country’s efforts to ensure greater transparency as
it embraces democracy, while current Mongolian President Tsakhia Elbegdorj said that “intensive economic growth
gives many opportunities.” Regardless of political shifts, Mongolia’s economic
growth depends not just on its mineral wealth, but also on partnering with
junior miners and major mining groups alike for the long haul.

ByShihoko Goto

http://copperinvestingnews.com