Mongolia: Ongoing mining disputes hurt growth

Following disagreements between the government and major international mining firms, Mongolia is taking steps to reassure investors. However, it has proven difficult to convince interested parties that these disputes are not indicative of a deeper conflict building between the present leadership and the foreign firms that are extracting minerals.

In mid-March government officials said a disagreement with multinational mining firm Rio Tinto on key points relating to cost overruns, the feasibility study for phase two of the Oyu Tolgoi copper-gold mine and the employment of Mongolian workers would not delay the start of production, which is scheduled to take place at the end of June 2013.

“The Mongolian government and the investor both [want to] highlight the importance of production starting on time,” Dorjsuren Javkhlanbold, a senior official at the Ministry of Mining, told Reuters.

In a further bid to calm sentiment, Ulaanbaatar also announced in March that it will ease recently introduced limits on foreign investment. Referring to legislation that required any deal worth more than MNT100bn ($71.9m) and involving the transfer of more than 49% of a Mongolian company to a foreign group to be referred to parliament for approval, Luvsanvandan Bold, the minister for foreign affairs, said on March 21 that the threshold would be raised to MNT1trn ($719.7m). “There will be changes in the law in the near future so that the international community and investors will be happy,” said Bold.

However, such steps will likely be condemned by politicians who say major international firms, such as Rio Tinto, are taking advantage of the country’s surge in resource wealth. Under its original deal with Rio Tinto, signed in 2009, the government was granted a 34% stake in the Oyu Tolgoi project, which will rise to 50% after the first 30 years of operation. Pressure from opposition politicians, however, saw the government attempt to renegotiate this in October 2012, as well as increase the size of royalty payments, but a revised deal has yet to be reached.

The massive Oyu Tolgoi copper and gold mine is important to the future growth of Mongolia, as it is set to double the size of the economy when it comes on stream in 2013. Meanwhile, the equally giant Tavan Tolgoi coal deposit, which is estimated to hold some 6bn tonnes of reserves, will also play a significant role in economic expansion.

Yet the coal sector has also fallen victim to a dispute between the government and mining firms. The China Aluminium International Trading Company (Chalco) said in January 2013 that it would seek legal redress if the Mongolian government followed through with a decision to try to alter an agreement signed in 2011. State-owned Erdenes-Tavan Tolgoi (ETT), the firm that manages the Tavan Tolgoi coking coal mine, said it wanted to renegotiate that deal with Chalco. The agreement between the two firms saw the Chinese firm lend ETT some $350m, which the Mongolian company would then repay with Tavan Tolgoi coal.

Meanwhile, Chalco had also planned to make a $926m bid for SouthGobi Resources, a Canadian firm based in Mongolia, but abandoned its proposal in October 2012 after strong suggestions that the government would not approve it. The firm also cited uncertainty over the regulatory environment as a cause.

In addition to disputes between the government and mining firms, critics say that to ensure its citizens benefit wholly from resource wealth, the country also has to build human resources capacity to ensure there is sufficient scope for its people to take on more than unskilled jobs within the mining sector.

“There is a significant need for techno-economic based capacity building and associated technology awareness training to be provided, covering the efficiency and environmental impacts of clean coal and alternative technologies,” Andrew Minchiner, the principle associate at the IEA Clean Coal Centre, wrote in March 2013. “This is necessary both to assist the nation in its near-term development plans and also to build up the national capacity from a longer-term sustainable perspective.”

Indeed, unless the country is able to strike a proper balance between nationalist sentiment, protecting its resources and keeping foreign investors happy, the basis for healthy economic assessments for the near term could be significantly impacted. To ensure continued prosperity, Ulaanbaatar needs to improve its ability to communicate, as well as take a more inclusive approach to dealing with international mining firms.

SOURCE OF THIS ARTICLE : The Oxford Business Group

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