Mongolia is a wealthy country. Its just all
With a GDP of $5bn. and a third of the population living under
the poverty line, Mongolia does not seem like a rich country.
Nor does it look the part.
The skyline of Ulaanbaatar is
dominated by Soviet-era apartment blocks, while the outskirts
are met with broad stretches of seemingly barren
Dont be fooled,
argues Thomas Flahive of Ulaanbaatar-based investment bank
MICC. Mongolia is a wealthy country. Its just all
Mongolia has long been overshadowed
by its southern neighbour, as Chinese dominance in the
Asia-Pacific region has never been more pronounced in the
China is the worlds largest
producer and exporter of coal, fluorspar, antimony, barytes,
bismuth, cement, phosphates, rare earths and many other
But with the countrys rapid
industrialisation, Chinese supply is not keeping pace with
booming demand, and nowhere is this more starkly apparent than
in coal production.
Even though Chinas coal
production will top 1,000m. tonnes, the country will be a net
importer of coal by over 100m. tonnes. For certain key
minerals, China is looking to Mongolia to supplement its
Over the past decade the Mongolian
and Chinese economies have become increasingly intertwined.
From 2001 to 2009, Chinas
share of Mongolian exports rose from 48% to over 80%. China
similarly dominated foreign direct investment into Mongolia,
accounting for over half of its FDI. More than 60% of this
total can be attributed to investments in the Mongolian mining
Mongolia is also making efforts to
diversify and strengthen its relations with other north-east
Asian nations. South Korea is the third largest source of FDI,
and Japan has perennially been in the top five.
At the height of the financial
crisis in 2009, Japan pledged $50m. to the Mongolian government
to assist with public finances. Recent state visits and
strategic partnerships bode well for future economic ties.
Although not fully mapped,
Mongolias untapped mineral deposits are vast by all
accounts. As China shifts its focus from exports to domestic
demand-led growth, Mongolia has an opportunity to supply
Chinese industry as well as other neighbouring countries.
Regulatory concerns aside, Mongolia
is well positioned to attract foreign investors and take
advantage of its underground wealth.
Mongolia and its provinces (shaded provinces host key
Chinas appetite for coal
While not defined strictly as an industrial mineral, coal, or
more precisely, availability and access to sources of coal, is
a crucial factor for many industrial mineral operations in
developing regions which depend on coal for fuelling plant
The US Geological Survey estimates
that Mongolia has coal reserves of more than 100bn. tonnes,
with proven reserves of 12bn. tonnes. The industry is in the
early stages of development, so production and exports are
still relatively insignificant, but the opening of the Tavan
Tolgoi mine will quickly make Mongolia a global player.
Located in the southern Gobi
Desert, Tavan Tolgoi is often described as the worlds
largest undeveloped coal deposit. The licensed mining area
contains 6.4bn. tonnes of proven reserves, including 1.8bn. of
high-quality coking coal.
This coking coal is low in ash and
volatile matter and integral to the steel production process.
At full production the mine will be able to produce 20m. tpa,
mostly for export.
Demand for Mongolian coal will come
largely from neighbouring China, which became a net coal
importer for the first time in 2009. Although China remains the
worlds largest coal producer, much of it is lower-grade
Instead, large government-led
infrastructure projects in the western and central provinces
have created ravenous demand for coking coal imported from far
In 2009, 66% of coal imports came
from Australia and only 11% from Mongolia. However, 2010 saw
Mongolias share jump to nearly 40%, while imports from
Australia dropped below 50%.
In the race to tap Mongolian coal
reserves, China may have to compete with Japan and South
Nippon Steel, the worlds
second largest steel company, recently hosted Mongolian
President Elbegdorj Tsakhia during a state visit to Japan.
Following the meeting, Nippon Steel demonstrated interest in a
closer partnership on infrastructure projects to connect Tavan
Tolgoi to export markets.
South Korea has also moved to
secure a coal supply in Mongolia, with state-run Korea Coal
Corp. (KOCOAL) committing $18m. for partial ownership of a
northwestern Mongolia thermal coal mine.
A string of successful Mongolian
mining-related IPOs on the Hong Kong Stock Exchange reflects
investor optimism in the coal sector. Winsway Coking Coal
Holdings Ltd, a logistics company that handles shipments from
Mongolia to China, raised $472m. in September 2010.
Just a month later, Mongolian
Mining Co. (MMC), which controls a small portion of the Tavan
Tolgoi mining area, raised $651m. in a public offering of 20%
of the companys equity.
Bigger IPOs will surely follow,
with the government-owned mining company Erdenes Tavan Tolgoi
planning to offer 30% of its equity in late 2011.
Considering that their deposit is
ten times larger than MMCs, the IPO will likely make
Erdenes the largest company by market capitalisation in all of
Increased coal production will
create many opportunities for foreign investors to provide
value-added technology and services. The Ministry of Fuel and
Energy lists coal liquefaction, clean coal technology and coal
chemicals as possible areas for future development in
An alternative source for RE
As with many mining booms, the first opening usually occurs
with energy and precious metals, paving the way for industrial
minerals. Mongolia is no exception, and forward-thinking
investors should look beyond coal, copper, and gold to explore
the countrys mineral reserves.
Though much of the country is yet
to be mapped, significant proven deposits have been found in
fluorspar, phosphates, molybdenum, tungsten, in addition to
rare earth elements (REE).
Mongolias rare earth
potential must be understood within the context of Chinas
stranglehold on global production. China boasts 95% of global
REE production, but only 30% of proven global REE reserves.
While Chinas deposits are
well documented, proven reserves have been found all over the
world. In fact, the worlds largest rare earth mine is
just 50 miles from the Mongolian border in northern China.
One significant deposit has already
been identified in the western Hovd province. The Halzan
Buregtei deposit contains 100,000 tonnes of the heavy rare
earth element yttrium as well as 1m. tonnes of other rare earth
Geologists have further singled out
western and southern Mongolia as the most promising regions for
additional REE exploration.
Rare earths are essential for the
production of green technology and high tech electronics,
industries increasingly dominated by China, Japan, and South
Despite Chinas lead in rare
earth production, domestic demand is rapidly catching up with
supply. In 2010, the Ministry of Commerce cut rare earth
exports by 40% in an effort to support Chinas move up the
manufacturing value chain. The resulting price increase caused
more than outrage, as major international importers began
re-evaluating their supply choices, many consider Mongolia as a
Chinas recent diplomatic
moves have only served to intensify interest in Mongolian rare
earths. When the Japanese Coast Guard arrested a Chinese
trawler captain near disputed islands in the East Sea, China
responded by blocking the export of these coveted commodities
According to Japanese traders, it
took two months for shipments to resume. Needing a source for
its large high tech industry, Japan formed a strategic
partnership with the Mongolian government to explore and
map the countrys reserves.
Ties between the two countries
continue to grow, as Toshiba has recently inked a deal with the
Mongolian company MNFCC LLC to conduct a feasibility study on
Mongolias rare earth supply infrastructure.
Beyond these preliminary deals,
Mongolian companies that lack the technology to harness the
countrys rare earth potential will look to form
partnerships with foreign investors.
Significant opportunities exist in
the exploration, extraction and processing of these minerals.
Unlike in China, foreign companies in Mongolia are not
prohibited from mining rare earths or rare-earth smelting and
Proximity to demand
Among its neighbours, Mongolia can count some of the strongest
and most mineral-hungry nations in the world. China, Japan,
Russia, and South Korea together account for 47% of coal
consumption and 80% of global rare earth demand.
Mongolia is also unique among its
neighbours in having healthy diplomatic relationships with all
four countries. When key infrastructure is in place, Mongolia
may be able to undercut more distant mineral suppliers.
The majority of Chinese coal
imports come from Australia and Indonesia, not Mongolia. But
this is likely to change, argues Wal King, chief executive
officer of the mining company Leighton Holdings Ltd. According
to Leighton, the opening of Tavan Tolgoi and other expansion
projects should allow Mongolia to deliver coal to China for
under $100/tonne, less than half of the $220/tonne for
The story is similar for
Japans would-be rare earth sources. Besides Mongolia,
Japan is exploring rare earth prospects in Vietnam, Australia,
and India. But if Mongolia has sufficient access to the
Japanese market, the other countries will be at a disadvantage
if supplying the same elements, because of shipping costs.
The Mongolian government realises
that China and Japan will be the primary consumers of their
minerals, so they are set on improving transport links between
Plans are underway to link Tavan
Tolgoi and the southern Gobi Desert region to the Chinese
railway system through the Gashuun Sukhait border crossing. For
export to Japan, the Mongolian government is considering a
northern connection with the Trans-Siberian railroad to the
port of Vladivostok. It remains to be seen which project the
government and investors will sponsor first.
The Mongolian government recognises the importance of a
thriving mining sector and regulates accordingly. However, the
recent history of mining regulations has been one of
considerable back-and-forth, with the pendulum swinging between
the promotion of foreign investment and the protection of
native Mongolian interests.
The fall of the former Soviet Union
and consequent loss of economic aid delivered a shock to the
Mongolian economy. Having lost its primary source of trade and
government aid, Mongolia recognised the need to attract new
The 1997 Minerals Law reduced
investment taxes, strengthened land tenure rights, and
increased transparency. In 2002, the government again ramped up
efforts to attract FDI, further lowering royalty payments on
all minerals to 2.5%.
From 1996 to 2006, foreign direct
investment in Mongolia grew 2,200% to an annual total of $344m.
The early 2000s mineral boom was highlighted by the discovery
of the worlds largest untapped copper and gold deposit at
Oyu Tolgoi in the south Gobi Desert.
Despite the promise of economic
growth, factions of parliament became uncomfortable with
increasing foreign dominance in the mining sector, fearing that
Mongolia was not keeping a big enough slice of the pie.
A 2006 revision of the Minerals Law
was significantly more protectionist. The new regulation
doubled royalty rates, imposed a Windfall Profits Tax of up to
68% on copper and gold, and reserved the right for the
government to claim ownership of strategically
This new concept allowed the
government to take up to a 50% equity stake in deposits
discovered with government assistance or 34% for privately
explored deposits. The definition of a strategically
important deposit is largely up for interpretation by the
Mongolian parliament, but in practicality it includes world
class deposits of copper and coal as well as all deposits of
uranium and rare earths.
Importantly, the government has
committed itself to compensating firms for the expropriated
equity share at market value.
Backlash to the new legislation was
sharp, and investor sentiment took a turn for the worse. As the
2008 global financial crisis spread, both demand and prices for
Mongolian commodities plummeted.
Foreign direct investment fell by a
third and total exports by one fifth. Mining-related revenue,
which at one time represented 40% of the government budget,
also fell sharply.
Amid the global downturn, Mongolian
legislators realised that their economic recovery largely rests
on the return of foreign investors. In 2009, the Windfall
Profits Tax was repealed and replaced by a sliding scale of
royalties effective at the beginning of 2011.
After five years of negotiations
regarding Oyu Tolgoi, Ivanhoe Mines finally reached an
investment agreement with the government, an important step in
framing a new minerals law.
Not all changes have been positive.
The government revoked a 10% VAT exemption on pre-production
mining equipment, though so far the law has rarely been
In mid-November, the Ministry of
Natural Resources suspended 1,700 licenses for mines that
violate a 2009 law restricting mining in forested areas.
Although only 10% of the country is covered by forests, and no
significant coal or mineral mines were affected, this action
may be a precursor to more environment-based restrictions on
Mongolias current mining
regulatory framework is still a work in progress. While the
Mineral Law allows 100% foreign ownership of businesses, only
individual Mongolian citizens can own the real estate under
mineral deposits to be exploited.
The current tax code is an
improvement on its predecessor with its flattened rate schedule
and more opportunities for deductions for capital
In a country experiencing such
rapid change, foreign companies must employ local sources of
knowledge to ensure they are well informed of planned
regulatory changes before they become law to ensure the
viability and long-term stability of their projects.
Recent regulation has raised questions about the
governments commitment to foreign investment in the
mining sector, but other challenges remain. In the short-term,
the profitability of industrial minerals projects will depend
largely on Chinas economic and diplomatic policies.
Rare earth developments, although
promising, are in the early stages of exploration and may take
up to a decade for significant production to begin. Even with
insatiable demand and proven supply, massive infrastructure
projects are needed to link the landlocked country with its
These concerns, although valid,
cannot obscure Mongolias mineral potential. The IMF
predicts the economy to grow 8.5% in 2010 and per capita GDP to
quadruple by 2018.
More than driving industrial
development, the mining sector has the opportunity to lift
thousands of people out of poverty over the next decade. The
future remains bright in the Land of the Blue Sky - Mongolia
Contributor: Alexander Czarnecki, Research Analyst,
Tractus Asia Ltd, Vietnam.
Exploration and mining
licences distribution 2009
Source: Mineral Resources Authority of Mongolia
Mongolian industrial minerals production 2008
Source: US Geological Survey
Natural resources of Mongolia
Source: Mineral Resources Authority of Mongolia