Mongolia
was to be the “ultimate resource play”. But playtime can quickly turn
ugly. Chalco, China”s biggest aluminium producer, has abandoned its attempt to
take a controlling stake in SouthGobi
Resources,
the owner of Mongolia”s Ovoot Tolgoi coking coal mine. Since Mongolia rushed to
pass a new law on foreign investment after the deal was announced in April that
would have capped foreign ownership at less than 50 per cent, Chalco did not
really stand a chance. Its retreat is a Pyrrhic victory for Mongolia.

The
problem for Mongolia is its existential angst about its giant neighbour. The
landlocked republic is home to a 10th of global coal reserves, and the world”s
largest under-developed copper mine. With a budget deficit after heavy spending
in the run-up to June elections, Ulan Bator could do with the foreign
investment to develop those reserves. China is clearly willing, yet it also
buys more than 80 per cent of them. For Mongolia, the idea of ceding control of
its resources to its biggest customer is unpalatable.

That
leaves mining companies operating in Mongolia in a bit of a bind. The collapse
of resource prices as a result of the fall in global demand is hurting all
miners. Shares in resource giants such as BHP Billiton and Rio Tinto have lost
between 3 and 13 per cent this year. But the uncertainty about investments in
Mongolia, meanwhile, has also undermined the share prices of mining companies
operating there. Shares in SouthGobi have lost 60 per cent, as have those in
Winsway, also a target of Chalco. Aspire Mining, the Australian group
developing the Ovoot coal project in Mongolia, has lost three quarters.

Granted,
China”s slowdown in steel demand is hurting the coking coal industry. But it
remains a net importer of coking coal, and mining remains a multi-decade
investment. Mongolia should not forget that.