Mongolian economy suffers as another row erupts over flagship mining project
Mongolia has called a special two-week-long session of parliament to begin September 16 as it scrambles to relaunch the development of its flagship copper-gold mining project.
Oyu Tolgoi has been a magnet for investment, and the circumstances surrounding it are how most investors gauge the investment climate in Mongolia. So it came as a shock when Mongolia's private partner in the project, diversified miner Rio Tinto, announced in August it would lay off 1,700 workers because the development of an underground mine would have to be suspended after it received word from the government it needed permission from Mongolian parliament to raise the financing for it.
The government controls 34% of the project while Rio controls the remaining 66% through majority-owned Turquoise Hill Resources, though the partnership has been a volatile one. The tunnel mining is poised to propel the copper mine from being the fifth largest in the world to the third largest. Rio was pushing to get a $4bn financing package in place to fund development, but the government baulked, saying that reported costs of $6.5bn for phase one of the mine were already exorbitant.
Rio has said that it will suspend operations until it receives parliamentary approval for the financing package. Meanwhile, the government is waiting to hear from Rio on some oustanding questions. "We are still expecting two replies that are supposed to be made from Oyu Tolgoi," Economic Development Vice Minister Ochirbat Chuluunbat told bne on the sidelines of the "Discover Mongolia" Forum in September. "There is the report about the investment that is being made; the second is about the feasibility study for the underground mining. It [the feasibility study] should have been submitted to the government."
From bad to worse
Mongolia was already seeing flagging foreign investment due to the 2012 "Strategic Entities Foreign Investment Law" (SEFIL), which raised obstacles for investors to clear before they could acquire assets in mining and other "strategic" sectors named in the legislation. According to government data posted on state-run website Montsame, in the first half of 2013 Mongolia saw foreign investment fall 43% from the same period last year, with the mining industry taking a hit of some 32%. Another industry hit hard was tourism, down 98.5%, where spending is largely related to mining because of foreign workers and investors visiting the country, and the chartering of planes to visit mine sites.
Mongolia is also hurting from a decline in coal sales, caused by weak global economic conditions and slowing growth in the country that consumes over 90% of Mongolia's mining products, China. This shortfall in coal sales is leading to an ever-widening deficit in the state budget. According to a budget update from the Ministry of Finance in September, the deficit stands at MNT222bn ($129.3m), with about MNT830bn of budget spending still needing to be made.
But if Mongolia was betting it had Rio up against a wall, the miner's response has had the government scrambling to fix the economic fallout. Since the August 14 announcement of redundancies at Oyu Tolgoi – mostly contractors specifically assigned to the construction of the underground tunnel – the currency has taken a nosedive, plummeting 9.5%. The tugrik is now 23% lower than it was a year ago. That has been particularly painful given Mongolia's reliance on imports for much of its groceries and retail goods. The government also has to service dollar-denominated bonds; it raised $1.5bn in a sale of bonds last year.
The government has so far played it cool in public, with the prime minister and other officials repeatedly stating the economy is not such terrible shape as reported. "The country is not facing any difficulties," Dondogdorjyn Erdenebat, secretary general of the coalition-leading Democratic party, told a press conference in August. "We can survive without Oyu Tolgoi for a while. We have survived this long with our livestock."
In August, data showed that Mongolia’s second-quarter economic growth accelerated from the first three months of this year as the government boosted spending on infrastructure. GDP grew 14.3% in the April-June period, compared with 7.2% in the previous quarter. That brought growth in the first half of the year to 11.3% on year, compared with an annual pace of 12.4% in 2012.
The government is also quick to point out that annual inflation had fallen to 8.3% in in August compared with 15.6% a year ago. That may be, but year-on-year inflation has since climbed to 9.4% and analysts are predicting more trouble further down the line. "We believe that there are more negative implications for the Mongolian public to follow before this economic 'crisis' is over," Ulaanbaatar-based Mongolian Investment Banking Group wrote in a research note. "In addition to the impact on the Mongolian people, companies will also continue to face hardship. We know of many corporations both in mining and other sectors that have been forced to downsize due to a decrease in business activity. To this end, we believe that the widely publicized 1,700 jobs that were cut at [Oyu Tolgoi's] underground development could be the tip of the iceberg."
Called back
Despite the reassuring public face, the government is in overdrive, calling in members of its parliament early from recess for what they're calling an "extraordinary" session of parliament scheduled for September 16-19.
Up for discussion at the session are five different pieces of legislation, including an investment law that would replace the original law from 1993 and scrap the 2012 SEFIL that has done so much to scare off investment. MIBG argues the new legislation would "create a significantly positive legal environment for existing and prospective foreign investors".
The bank also notes the potential benefit from a law intended to create greater transparency in the gold mining industry and boost government revenues from it. "There are lots of changes in the gold sector for the positive," says Ankhbayar Bilguun, chief executive of MIBG. "It is a strong signal that Mongolia is taking action towards a hard currency… In the next five to six months, we're looking at a significantly revamped legal landscape."
Oyu Tolgoi will be the main topic for discussion, though, and the official in charge of the government stake in the project, Davaadorj Ganbold, and the mining minister are planning to fly to London to discuss the points of contention with Rio management. "Those who are hoping for a quick resolution to the issues surrounding phase 2 [of Oyu Tolgoi] should temper their enthusiasm," reckons Nick Cousyn, chief operating officer of Ulaanbaatar-based broker BDSec, who alerts investors to comments made by Ganbold that the dispute could not be resolved solely by the shareholders, but by government too, probably extending the delay.
SOURCE OF THIS ARTICLE : bne.eu
Oyu Tolgoi has been a magnet for investment, and the circumstances surrounding it are how most investors gauge the investment climate in Mongolia. So it came as a shock when Mongolia's private partner in the project, diversified miner Rio Tinto, announced in August it would lay off 1,700 workers because the development of an underground mine would have to be suspended after it received word from the government it needed permission from Mongolian parliament to raise the financing for it.
The government controls 34% of the project while Rio controls the remaining 66% through majority-owned Turquoise Hill Resources, though the partnership has been a volatile one. The tunnel mining is poised to propel the copper mine from being the fifth largest in the world to the third largest. Rio was pushing to get a $4bn financing package in place to fund development, but the government baulked, saying that reported costs of $6.5bn for phase one of the mine were already exorbitant.
Rio has said that it will suspend operations until it receives parliamentary approval for the financing package. Meanwhile, the government is waiting to hear from Rio on some oustanding questions. "We are still expecting two replies that are supposed to be made from Oyu Tolgoi," Economic Development Vice Minister Ochirbat Chuluunbat told bne on the sidelines of the "Discover Mongolia" Forum in September. "There is the report about the investment that is being made; the second is about the feasibility study for the underground mining. It [the feasibility study] should have been submitted to the government."
From bad to worse
Mongolia was already seeing flagging foreign investment due to the 2012 "Strategic Entities Foreign Investment Law" (SEFIL), which raised obstacles for investors to clear before they could acquire assets in mining and other "strategic" sectors named in the legislation. According to government data posted on state-run website Montsame, in the first half of 2013 Mongolia saw foreign investment fall 43% from the same period last year, with the mining industry taking a hit of some 32%. Another industry hit hard was tourism, down 98.5%, where spending is largely related to mining because of foreign workers and investors visiting the country, and the chartering of planes to visit mine sites.
Mongolia is also hurting from a decline in coal sales, caused by weak global economic conditions and slowing growth in the country that consumes over 90% of Mongolia's mining products, China. This shortfall in coal sales is leading to an ever-widening deficit in the state budget. According to a budget update from the Ministry of Finance in September, the deficit stands at MNT222bn ($129.3m), with about MNT830bn of budget spending still needing to be made.
But if Mongolia was betting it had Rio up against a wall, the miner's response has had the government scrambling to fix the economic fallout. Since the August 14 announcement of redundancies at Oyu Tolgoi – mostly contractors specifically assigned to the construction of the underground tunnel – the currency has taken a nosedive, plummeting 9.5%. The tugrik is now 23% lower than it was a year ago. That has been particularly painful given Mongolia's reliance on imports for much of its groceries and retail goods. The government also has to service dollar-denominated bonds; it raised $1.5bn in a sale of bonds last year.
The government has so far played it cool in public, with the prime minister and other officials repeatedly stating the economy is not such terrible shape as reported. "The country is not facing any difficulties," Dondogdorjyn Erdenebat, secretary general of the coalition-leading Democratic party, told a press conference in August. "We can survive without Oyu Tolgoi for a while. We have survived this long with our livestock."
In August, data showed that Mongolia’s second-quarter economic growth accelerated from the first three months of this year as the government boosted spending on infrastructure. GDP grew 14.3% in the April-June period, compared with 7.2% in the previous quarter. That brought growth in the first half of the year to 11.3% on year, compared with an annual pace of 12.4% in 2012.
The government is also quick to point out that annual inflation had fallen to 8.3% in in August compared with 15.6% a year ago. That may be, but year-on-year inflation has since climbed to 9.4% and analysts are predicting more trouble further down the line. "We believe that there are more negative implications for the Mongolian public to follow before this economic 'crisis' is over," Ulaanbaatar-based Mongolian Investment Banking Group wrote in a research note. "In addition to the impact on the Mongolian people, companies will also continue to face hardship. We know of many corporations both in mining and other sectors that have been forced to downsize due to a decrease in business activity. To this end, we believe that the widely publicized 1,700 jobs that were cut at [Oyu Tolgoi's] underground development could be the tip of the iceberg."
Called back
Despite the reassuring public face, the government is in overdrive, calling in members of its parliament early from recess for what they're calling an "extraordinary" session of parliament scheduled for September 16-19.
Up for discussion at the session are five different pieces of legislation, including an investment law that would replace the original law from 1993 and scrap the 2012 SEFIL that has done so much to scare off investment. MIBG argues the new legislation would "create a significantly positive legal environment for existing and prospective foreign investors".
The bank also notes the potential benefit from a law intended to create greater transparency in the gold mining industry and boost government revenues from it. "There are lots of changes in the gold sector for the positive," says Ankhbayar Bilguun, chief executive of MIBG. "It is a strong signal that Mongolia is taking action towards a hard currency… In the next five to six months, we're looking at a significantly revamped legal landscape."
Oyu Tolgoi will be the main topic for discussion, though, and the official in charge of the government stake in the project, Davaadorj Ganbold, and the mining minister are planning to fly to London to discuss the points of contention with Rio management. "Those who are hoping for a quick resolution to the issues surrounding phase 2 [of Oyu Tolgoi] should temper their enthusiasm," reckons Nick Cousyn, chief operating officer of Ulaanbaatar-based broker BDSec, who alerts investors to comments made by Ganbold that the dispute could not be resolved solely by the shareholders, but by government too, probably extending the delay.
SOURCE OF THIS ARTICLE : bne.eu
0 Response to " Mongolian economy suffers as another row erupts over flagship mining project"
Post a Comment