The mining sector is the key driver
for the Mongolian economy, says the Mongolia Mining Report Q4 2010. In 2001,
mining earned just USD110 million and made up 9.5% of GDP. But in 2010, mining
revenue is expected to total a comparatively massive USD2.4 billion and to
dwarf all other economic sectors, making up over half the total economy. The
growth of Mongolian mining however has only just begun; the country has vast
and untapped mineral resources which are yet to be fully explored.

Leading the way will be two giant
projects that should both come on stream in 2013. The biggest is the
gold/copper mine at Oyu Tolgoi which is considered to have the potential to be one of the
world’s richest producing mine with reserves that will last 60 years. The other
is the 6.4 billion tons of coking coal deposits at Tavan Tolgoi, which while
smaller in financial potential is still attracting the attention of the biggest
corporate players in the mining world.

Mongolia’s riches are, however, not confined to these two projects and there is
much more to be discovered and developed in the future. The difficulty is not
resource scarcity, but a lack of finance and expertise as well as the
logistical problem of extracting the resources and getting them to buyers. That
the nearest road to Oyu Tolgoi is 500 miles away gives an idea of the scale of
infrastructural investment required. Indeed, the investment required in Oyu
Tolgoi before production can start is estimated at USD4.6 billion and already
there are reportedly cracks appearing in the financing agreements between
Ivanhoe, Rio Tinto and the Mongolian government. While Rio and Ivanhoe are
rowing over who will own what, the government, through a Treasury Bill issue
and the use of ‘tax prepayments’, is planning to raise USD250 million before
production has even begun.

This was not the only incident where the spotlight has shone on government
interference in the sector. Canadian company Khan Resources suspects that the revocation of its uranium prospecting
licenses in April came after pressure from the Russian state-owned uranium
miner ARMZ and has successfully argued its case in the Mongolian courts winning
two recent judgments. However with the Nuclear Energy Agency (NEA) giving
notice that it will appeal, one of the rulings the issue is still unresolved.

The Mongolian government is in a
potentially difficult spot. Located between Russia and China, there are fears
that these geopolitical giants will pressure Mongolia in an attempt to gain
access to its valuable resources. Fear of this occurring, as well as the
government’s recent actions, could damage investor perceptions of Mongolia as a
business friendly environment. Given the huge capital investment required to
get Mongolian mining projects up and running, many global players will be
watching developments closely.