Mongolia: Encouraging mining FDI in Mongolia

Changes to Mongolia’s mining legislation will open up vast new tracts of land for exploration and pave the way for new licence issuances. This should help replace the confidence of foreign investors made wary by government intervention in the sector.

On July 1 the Mongolian parliament voted to approve amendments to legislation governing mining activity, ratifying changes to the Mineral Laws of 2006 aimed at regenerating foreign interest in the sector.

Among the key changes to the legislation will be the expansion of Mongolia’s landmass open for exploration and subsequent mining activity, with 20% of the country set to be rated as available for development, rather than the 8% available prior to the change.

The amendments will as well see an end to the moratorium on new mineral exploration licences, imposed in 2010 as a means of cooling the rush into the sector at the time. Lifting the ban is intended to encourage a return to Mongolia by mining firms, as is the provision extending the term of exploration on a lease from nine years to 12.

The amended legislation as well establishes a policy body that will be tasked with addressing issues faced by the industry and working with sector players to overcome challenges.

Re-tender 106 permits

In an extra step forward for the mining sector, the government approved plans on July 6 to re-tender 106 exploration permits. This reverses a decision taken in 2013 to cancel the mining licences, according to a cabinet conference memo cited in local media. The licences in question were revoked late last year as a result of a court case involving senior officials of the Mineral Resource Authority of Mongolia.

Though the companies affected by the cancellation were not due involved in the investigation, the allegations of corruption against the officials were seen to have tainted a lot of of the activities in the sector.

The memo did not elaborate on a timetable for details of the procedures but by marking a path of reconciliation, the government will go a long way towards restoring confidence part foreign and domestic miners.

Mongolia’s leaders hope the liberalised minerals law will encourage a fast turnaround in interest in the country’s resources. O. Erdenebulgan, the deputy minister for mining, told Bloomberg in May that amendments in the legislative pipeline could attract $1bn in new investments into the sector, this year alone. This could help reverse the sharp decline in the flow of foreign direct investment (FDI), which halved last year and is down 64% for the initial five months of 2014.

According to Independent Mongolian Metals & Mining Research analyst Dale Choi, the amendments should help in resolving the uncertainty that has been hanging over the mining and exploration industry in recent years.

“Lifting of the moratorium on issuance of new exploration licences is of particular importance for the viability of the exploration sector,” Choi said in a statement issued on July 2.

Implementing and delivering long-term stability and sustainability, he said, would help Mongolia rebuild investor confidence inclunding attract world top tier mining investment , adding that the amendments represented a significant message to investors around the world.

Concerns linger

While the government is looking for a surge in investment , it may take some time before the tide turns. With commodity prices well down and prospects for a rebound in the short-term unlikely, leading mining firms are looking to consolidate their present holdings rather than take on new, potentially expensive projects. With increase prospects for the Chinese economy uncertain, and a general oversupply of coal and other minerals on the international market, investors may hold back to see both how request trends develop over the next year or two, inclunding to determine the full impact of the legislative amendments.

The outlook for Mongolian coal may as well be affected by a rise in production in some segments of the Chinese mining sector; for example, the output of washed coking coal in the northern province of Shanxi rose as capacity expanded last year. Production from the province’s mines has continued to increase this year, rising by 1.44% over the initial five months of 2014, but jumping additional than 12% month-on-month in May, taking production since the beginning of the year to 387m tonnes.

Potential new entrants to the Mongolian market may as well want to see the outcome of a series of disputes between the government and one of the highest-profile foreign operators in the sector, Turquoise Hill Resources, which is majority-owned by mining giant Rio Tinto. Operator of the $6.6bn Oyu Tolgoi copper and gold mine, Turquoise Hill is in dispute with the government over claims of unpaid taxes and penalties; the firm is as well in disagreement over fees it is owed.

On June 26, the company announced it had filed a dispute notice with the government over a national audit statement. It has been claimed that Turquoise Hill owes up to $130m in taxes, an allegation the company has rejected.

If the disputes can be resolved to the satisfaction of all, this will boost confidence in the whole mining sector and in the potential for next investment in the industry. With the opening up of new exploration opportunities, additional adventurous companies may look to buck the trend of consolidation and caution currently marking the industry around the world. Some may seek to get in on the early stages of what could be the next large minerals rush in Mongolia – one that could be better managed and additional transparent than the initial.