Mongolia backtracks on state ownership of mining companies

Mongolian elections are set for the end of June and in the run-up draft legislation put forward new provisions to cap foreign ownership of domestic companies at 49%, rules similar to Zimbabwe’s indigenization policy.

Fearing a backlash by foreign investors in the mining sector – the foundation of the country’s economy – Mongolian legislators on Tuesday watered down many of the provisions, reports Reuters, “although mining, media and banking projects will still be subject to stringent restrictions.”

“A provision saying that projects worth more than 100 billion tugrik ($80 million) should be subject to majority Mongolian ownership has also been removed,” the news agency reported adding that many believe the proposed new law will be toned down further before it is enacted.

Last year gross domestic product in the nation of fewer than 3 million people expanded by 17.3% and this year it should easily top 20% thanks to billions of dollars of foreign investment in the country’s coal, copper and gold mining industry.

The unhappiness about foreign involvement in the resource industry seems to have been sparked by a takeover bid by Chalco, China’s largest aluminum firm, of SouthGobi Resources, a coking coal producer.

That $925 million deal is now on ice pending a government review and the suspension of some of SouthGobi’s licences. SouthGobi is majority owned by Canada’s Ivanhoe Mines.

The SouthGobi fiasco is not the first time Mongolian politicians have interfered in the mining industry.

After a shambolic bidding process that stretched as far back as 2007, Mongolia struck a deal with US giant Peabody Energy, China’s Shenhua and a Russian-Mongolian consortium in July last year to develop the western block of Tavan Tolgoi, the world’s largest coking coal deposit.

Barely two months later the country’s National Security Council threw out the agreement after losing bidders complained and in March stopped talks with foreign miners altogether.

West Tsankhi alone holds 1.2 billion tonnes of high-quality coal used for steelmaking and Shenhua, the world’s largest coal miner with 53 operating mines, said in March it is still confident of signing a deal post elections.

Given the reaction to Chalco and calls by some politicians that Mongolia develop West Tsankhi itself, that optimism may be misplaced.

Mongolia also still hopes to privatize its Erdenes-TT mining company which controls the remainder of the 6 billion tonne Tavan Tolgoi resource.

The government was hoping to raise as much as $3 billion through a listing in London, Ulan Bator and Hong Kong, but that process has also been thrown into disarray by the upcoming elections.

Tavan Tolgoi is not even the largest mining investment in Mongolia. That honour goes to Oyu Tolgoi, a $13 billion copper-gold-silver-project.

In October Ivanhoe and partner Rio Tinto dodged a bullet when the Mongolian government said it was rethinking a 2009 deal that gave Ivanhoe and Rio Tinto a 66% stake in Oyu Tolgoi and that it wanted half of the mine, already three-quarters built.

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