Sitting on a gold mine
Mongolia boasts a massive wealth of resources waiting to be tapped but poor infrastructure is hindering the country's ability to be competitive
Sitting atop vast mineral wealth and wedged between the fast growing economies of Russia and China, the potential for Mongolia to become a Norway of the steppes is tantalisingly close.
Miners have found vast deposits of coal, iron and copper, with much of the country yet to be geologically surveyed. One copper and gold mining project alone, Oyu Tolgoi, is expected to boost gross domestic product by a third once at full capacity. The challenge is to extract these minerals efficiently and invest the proceeds in a sustainable way.
With an area of more than 1.56 million sq km and with nearly half its 2.8 million populace in the capital Ulan Bator, Mongolia is one of the world's most sparsely populated countries. Outside the cities, a nomadic lifestyle means limited need for road or rail.
This lack of infrastructure is having an impact on Mongolia's ability to mine its resources efficiently. While extraction costs are highly competitive, it costs up to US$18 a tonne to truck coal from Mongolia's mines to China's border, double the cost of shipping a tonne from Australia.
The challenge is made tougher by price projections over the coming decade. Data from commodity research specialists CRU indicate additional supply from new mines will mean softer prices for iron ore and copper while coal should remain stable. "The party is largely over," said CRU's China chief executive John Johnson.
Investing in infrastructure is cited as a key first step to help the country upgrade its competitiveness. Using money raised on the global debt markets, the Mongolian government is building thousands of kilometres of roads, and rail links are being discussed.
"The average age is 26 years old," he said. "Mongolia's population is growing at 1.5 per cent per year and population growth is going to be a driver."
With the country's fortunes linked to the cyclical commodities market, Mongolians are becoming accustomed to a volatile ride. When commodity prices crashed in 2009, the International Monetary Fund came in to support its currency, the tugrik, and helped oversee a raft of reforms. Last year, when China's economy decelerated and commodity prices fell, mines started closing as operating costs exceeded revenues.
Events, however, took a turn for the worse in May last year, after a bid by the Chinese state-run Aluminum Corp of China for Hong Kong- and Toronto-listed SouthGobi Resources ignited fears in the Mongolian parliament of a Chinese takeover. In response, a hastily drafted Strategic Entities Foreign Investment Law was introduced restricting foreign investment in industries of national importance, including mining.
More than 100 mining licences were suspended and other regulatory changes were made in quick succession, including attempts by the government to renegotiate ownership and financing terms with miners following complaints the country was not getting a good enough share of resource revenue. With loans often secured against mining licences, investors retreated. Foreign direct investment fell 20 per cent last year and a further 43 per cent this year. GDP growth went from 17.5 per cent in 2011 to 11.2 per cent last year, according to World Bank and IMF data, with the IMF forecasting GDP growth of 14 per cent this year.
The drop in foreign currency inflows has led to swings in the exchange rate. The tugrik has devalued by 17 per cent against the US dollar since the start of the year, driving up the costs of imported goods and electricity and prompting debate in parliament about managing the currency.
At a recent gathering of businessmen and government officials at the Frontier Investment Forum in Ulan Bator, hopes were high that parliament would soon repeal the contentious investment law. Officials at the forum preferred to focus on the future and talked of the possibility of public-private partnership infrastructure investment projects and opportunities outside the mining sector. According to PwC, only 20 per cent of exports were non-mining-related last year. Including agricultural commodities and textiles, the sector grew by 85 per cent and was valued at US$500 million last year.
There is gold to be mined in Mongolia but investors may have to wait a little longer to get it.
