The Mongolian government is set to soften a proposed foreign
investment law, which seeks to impose a 49 percent cap on foreign ownership
in “strategic” assets including the country”s booming mining sector,
industry executives told CNBC.

“Cooler heads prevailed this week,” said Jim
Dwyer, Executive Director of the Business Council of Mongolia (BCM) in a
telephone interview from the capital Ulan Bator on Wednesday.

A working group headed by the
Deputy Speaker of Parliament informed the BCM earlier this week that it had
revised the initial draft of the law to remove the most controversial aspect of
the proposal, a requirement of 51 percent Mongolian government ownership.

“It”s out,” said Dwyer,
a former global head of M&A for UBS, referring to the ownership limits.
“We were thrilled when we heard what the Working Group came up with. The
initial draft was draconian but it”s been reworked very nicely.”

The draft legislation is expected
to be considered by the country”s Parliament this Friday during its first
reading and it could be passed “within two weeks,” Dwyer said.

Investors have been questioning
governance, transparency, contractual certainty and legal structures amid
claims that the government is playing the national interest card by making it
tougher for foreign companies to do business in the country.

Mining industry executives warned
the legislation still needs to be ratified by Parliament in what has been a
tense run-up to legislative elections on June 28 with pre-poll rhetoric taking
on an anti-Chinese tone.

“This is just the first
reading,” said one Singapore-based executive with deal-making experience
in Mongolia, adding that another big risk is if the post-election political
landscape changes, leading to the “pro-business bureaucracy getting kicked
out.”

Anti-China Rhetoric

Nationalist rhetoric is taking on
a heightened anti-China tone in the run-up to the polls, presenting an
additional risk for the investment outlook, political analysts said.

The draft foreign investment law
“would subject all foreign investors to a new layer of scrutiny, even as
Chinese investments are likely to be disproportionately targeted,” wrote
Damien Ma, analyst at Eurasia Group on May 4. “Given China’s outsized
importance to the country”s economic prospects, however, Mongolia is not
turning away from China. But it clearly wants to counter the perception that
the future of the country”s mining resources is being decided in Beijing rather
than in Ulaanbaatar.”

Emerging markets veteran Mark Mobius
highlighted the opportunities of investing in Mongolia and the pitfalls —
including a distrust of foreign investors” motives — in a blogpost after he
visited the country in 2009 when mining was taking place “on a limited
scale.”

The Mongolian government “seems
to be grappling with a post-Soviet nostalgia combined with a fear that they
will be ripped off by foreigners,” wrote Mobius, executive chairman of
Templeton Emerging Marketing Group who has more than 30 years in global
emerging markets. “In addition, there is a fear that China will take over,
or if the Chinese don”t take over, then the Russians will.”

The debate surrounding Mongolia”s
proposed foreign investment law highlights the challenges faced by any
mineral-rich country – ensuring the revenue from resources exports benefits the
country as a whole while keeping the doors of business open to foreign
investors.

“One of the issues the
Mongolian government has is trying to create an industry for the Mongolian
people and they”re actually very passionate about that but they are reluctant
to be beholden to one market like China,” said UBS commodities analyst Tom
Price in Sydney.

Still, miners active in Mongolia are
optimistic. “I imagine the law may change and there”s a chance that clause
is removed before it becomes actual law,” said a source close to
Ivanhoe Mines, one of the largest investors in Mongolia”s mining sector,
referring to the ownership restrictions.

The source added that in its unamended form, the required 51 percent Mongolian
ownership in the draft law would “scuttle” the deal by China aluminum
giant Chalco to acquire Ivanhoe”s stake in South Gobi resources.

Toronto and NYSE-listed Ivanhoe is
the majority owner of the Oyu Tolgoi mine in Mongolia. Oyu Tolgoi, which means
“Turquoise Hill”, is the world”s largest undeveloped gold and copper project
and enters full commercial production in the first-half of 2013.

Rio Tinto, which co-develops and manages Oyu
Tolgoi, has invested more than $4 billion in Ivanhoe over the past six years to
position itself to take over the company founded by billionaire Robert
Friedland and get its hands on the Canadian miner”s 66 percent stake in the
giant Mongolian mine, Reuters has reported.

Metal extracted from Oyu Tolgoi is
being used to produce the 4,700 gold, silver and bronze medals that will be
awarded during the London 2012 Olympic and Paralympic Games, said Rio — the
official supplier of the awards — on its website. The metal is also coming
from Rio”s Kennecott Utah Copper project in the U.S.

Source: CNBC.com