As June elections approach, mining investors in Mongolia worry that their
contracts might be targeted for a fresh round of renegotiation after the poll.

Former president Nambar Enkhbayar, who was arrested in April on corruption
charges his family says were fabricated, is the most popular figure fighting
the June 28 election, according to opinion polls.

He wants to review a landmark 2009 deal that gave 66 percent of the huge Oyu
Tolgoi copper project to Canada”s Ivanhoe Mines IVN.TO, and also says the
7.5-billion tonne Tavan Tolgoi coal mine – expected to be listed on overseas
stock exchanges next year – should remain in Mongolian hands.

Politicians are under constant pressure to be seen to getting a good deal
for the country from resources investors.

The priority for Mongolia is the development of its tiny economy, and foreign
investors want to know if the government can create a stable legal environment
while handling the pressures exerted by impatient citizens as well as its two
giant neighbours, Russia and China.

Following is a summary of key political risks to watch:

INVESTMENT POLITICS

The outcome of the June election will determine the investment climate, and
the pace at which Mongolia”s huge mineral deposits are brought to production.

Enkhbayar leads the Mongolia People”s Revolutionary Party (MPRP), a
breakaway faction of the ruling Mongolia People”s Party (MPP). His party is
expected to press for laws demanding more from foreign investors, which could
delay mine development.

Few of its major projects are progressing smoothly. Mongolia wants to launch
a $3 billion initial public offering of the Tavan Tolgoi or “Five
Hills” coal deposit. State-owned Erdenes Tavan Tolgoi had been planning to
list 29 percent of the company in London and Hong Kong by May, but it cannot
until Mongolia”s parliament passes a securities law.

An initial proposal to hand development rights in the project to China”s
Shenhua, Peabody of the United States and a Russian-Mongolian consortium was
rejected, and the government is trying to devise another deal that will include
Japanese and South Korean partners.

After struggling for years to find the right investors, Mongolia might yet
choose to develop Tavan Tolgoi”s western block on its own, an executive with
the state-owned firm in charge of the project said in April.

The current government has abandoned its idea of renegotiating the contract
for the Oyu Tolgoi copper-gold mine, after earlier saying it wanted to look
again at a 2009 deal with Ivanhoe Mines. The project will be taken over by Rio
Tinto , which already owns 49 percent of Ivanhoe and, as of mid-January, was
cleared to buy more.

Some politicians have called for the prime minister to resign over his
handling of the Oyu Tolgoi contract.

In mid-May, Mongolia”s parliament passed a controversial law aimed at
capping foreign ownership in “strategic” industries such as mining,
but investors expressed relief that the legislation was weaker than first
anticipated.

The bill was watered down considerably since first drafted by a group of
backbench lawmakers who were alarmed by a decision by Canada”s Ivanhoe Mines to
sell its 58 percent stake in coal miner SouthGobi Resources to the Aluminum
Corporation of China (Chalco).

It stipulates that foreign investors are allowed to own a maximum of 49
percent of companies involved in the mining, finance, media and
telecommunications sectors before being subject to scrutiny by a government
panel, but it now only applies to deals valued at above $75 million, or ones
involving state-owned companies like Chalco.

What to watch:

– Parliamentary elections in June. Shenhua Energy Co Ltd, China”s largest
coal producer, has said its negotiations to invest in Tavan Tolgoi are likely
to restart after the vote.

– Whether the government can produce an investment agreement for Tavan Tolgoi
that will satisfy foreign partners and keep the public happy, and whether it
can do it in time.

– More inward investment. In November, commodities trader Trafigura and
private equity investor Origo Partners Plc OPP.L, formed a joint venture to
develop Mongolian coal and iron ore deposits for export, and in February
Goldman Sachs bought a 4.8 percent stake in a Mongolian bank.

THE RESOURCE “CURSE”

Mongolia”s dependence on mining has alarmed environmentalists and opposition
politicians, and the country is already showing classic symptoms of “Dutch
disease”, including soaring inflation and high interest rates.

The government is trying to bring in structures that will protect it against
fluctuating commodity prices, and wants to use the proceeds from mining to pay
for infrastructure, health and education, and develop other sectors.

It is under pressure to spread the wealth, and has already extracted
pre-payments from foreign firms involved in both the Tavan Tolgoi and Oyu
Tolgoi projects in order to give money to the public.

What to watch:

– How Mongolia uses the income from its mining projects. It has set up
education and fiscal stabilisation funds, but it has also promised direct
dividends for Mongolian citizens.

– How it deals with rapid economic change as well as inflation as foreign
investment transforms the country”s mainly rural economy. The International
Monetary Fund warned in November that Mongolia”s economic policies are creating
inflationary pressures.

GETTING ON WITH THE NEIGHBOURS

Many of Mongolia”s 2.7 million citizens are concerned about growing Chinese
and Russian influence, and their fears were not allayed by the plan to hand the
majority of Tavan Tolgoi”s western block to Chinese and Russian interests.

China already dominates Mongolia”s economy, buying 90 percent of the
country”s exports in the first half of 2011.

Mongolia”s reliance on Russia and China for fuel, power and transportation
also poses a major risk to its mining sector. Russia has been known to turn off
supply taps, and China is not averse to closing crucial railway links.

Mongolia also depends on Russia”s railway network to fulfil plans to deliver
coal to Japan and South Korea. Mongolia”s plans to build itself a railway
network capable of transporting coal to foreign markets is likely to be
delayed, officials said in February.

By David Stanway

Source: Reuters