Mongolia’s coal resources have
thrust the world’s least densely populated country into the midst of
geopolitical diplomacy.

Dealing with the current coking coal
market downturn is just one concern for Mongolia’s national coal mining
company, Mongolian Mining (MMC) (HKEX:0975). MMC’s stock value has
dropped
25 percent this year on slowing Chinese demand; coking coal prices have fallen
as much as 15 percent in the last six months.

But the fact that Mongolia is a
landlocked country, located between Russia and China, adds a whole other
dynamic to the development of its coal resources.

MMC is confident that Chinese demand
will return, and plans on investing US$800 million into a rail line that will
help double coking coal exports to China by 2015. The company is looking to
double 2011 output at its Ukhaa Khudag mine at the Tavan Tolgoi deposit by
2013.

China’s influence over the country’s
coal development is seen as a blessing and a curse by Mongolia’s government.
The country’s newly-minted foreign mining investment laws are aimed at limiting
foreign shares in mining operations to 49 percent – unless parliamentary
approval is received – due to fears that the country’s emerging democracy could
be compromised by foreign powers; China, specifically.

In mid-April, Vancouver-based miner Ivanhoe Mines (TSX:IVN,NYSE:IVN) announced that
it reached a takeover bid for its subsidiary SouthGobi
Resources (TSXV:SGQ)
from state-owned Aluminum
Corporation of China (CHALCO) for US$889 million. The deal will give CHALCO
up to a 60 percent share of Vancouver-based SouthGobi, above the 49 percent
threshold.

At the end of June, Mongolian
authorities asked SouthGobi to suspend
production as they review CHALCO’s plan to acquire a majority stake in
SouthGobi from Ivanhoe. The takeover bid deadline has since been bumped from
July 5 to August 3, SouthGobi said in a news release.

Mongolia’s Chinese paradox

While China’s massive coal market
appears to be a logical partner in developing Mongolia’s reported 5 billion
tonnes of coal, the country’s political past has left it leery of leaning too
heavily upon one country.

During the 20th century, the
country yo-yoed between being dominated by the Soviet Union and being
influenced by the Chinese Qing Dynasty. It is only in the last decade that the
country has gained political autonomy, increasing transparency and freedom
through democratic reforms and lively elections.

Current elections are
illustrating that the world’s fastest growing economy wants to ensure that its
mineral wealth – currently 80 percent of its exports – stays within the
country.

The table was set for a showdown
over potential resource nationalism in October of last year, when the Mongolian
government said it wanted a greater share of the massive Oyu Tolgoi project –
considered one of the richest copper–gold deposits in the world. The mine
is being built by Ivanhoe Mines, which owns 66 percent.

Mongolia’s shared border with China
has made its southern neighbor a fast friend again as all of its coal exports
have gone to China through new and old paved highways and rail lines. The
result so far has been increased integration of the two economies, not the
development of economic autonomy that Mongolia desires.

Chuluuntseren Otgochuluu, director
of Mongolia’s Economic Policy and Competitiveness Research Center, told
Reuters that mining has only made Mongolia “far more integrated with the
Chinese economy than the domestic economy.”

Efforts to diversify away from China
have led the country to seek
international suitors for its estimated 900 million tonne Tavan Tolgoi coal
deposit, the world’s largest untapped source of coking coal. But,
potentially reflecting Mongolia’s mining fate, the frontrunners thus far have
been US-based Peabody Energy (NYSE:BTU) and Chinese state-owned
Shenhua Energy. Both companies have received
strong diplomatic support from their respective governments.

Attempts have also been made to
include Russian interests, and a Russian-Mongolian consortium headed by Russian
Railways is another bidder for the rights to buy into Tavan Tolgoi. Mongolia’s
northern neighbor is also aware of the influence it holds with the country, a
reality not lost on Mongolia’s government.

Puntsag Tsagaan, a presidential
advisor on mining in Mongolia, commented, “[w]e’re a small country
sandwiched between two elephants. We can’t go to war and fight, so we have to
secure our economic growth through diplomacy.”

Source: coalinvestingnews.com