Mongolia’s Mining Troubles: Opportunity or Calamity?

Several years ago, Mongolia was touted as a hot investment locale for mining companies, given its rich mineral resources – particularly gold, copper, uranium, and coal – and the previously low level of exploration and development.
In 2015, that outlook looks slightly more gloomy.
Throughout 2014, the Mongolian government has been battling with Rio Tinto over the massive Oyu Tolgoi gold and copper mine, with Mongolian officials demanding Rio Tinto pay $30 million in taxes. Rio suspended construction work at the mine in July 2014.
As a result, foreign direct investment in the country declined in 2014 by 81% compared to 2013, according to the Central Bank of Mongolia.
The very public dispute between Ulaan Bataar and a major mining corporation is not the only entanglement Mongolia has had with foreign mining firms.
Khan Resources, a Canadian firm looking to mine uranium in the country, took the Mongolian government to international arbitration in 2011 after the government canceled its licenses to mine the Durnod uranium project in 2009.
Earlier this week, the international arbitration body decided in favour of the Canadian firm, and ordered the Mongolian government to pay $100 million for compensation. The company had initially submitted a claim to recover $354 million in compensation.
The indemnity will be an additional stress for the Mongolian economy, already reeling from the precipitous drop in FDI and crashing commodity prices. Mining accounts for nearly 20% of the country’s gross domestic product.
Silver lining?
But the CEO of Mongolia-based market intelligence firm Cover Mongolia sees reason for optimism on the mining front.
“I think that the verdict that came out is good for Mongolia’s reputation,” Badral Munkhdul told Silk Road Reporters on March 5.
“This shows that investors can have a dispute with the government and it can be settled, and that the government of Mongolia can be held accountable.”
Munkhdul said that the new government of Prime Minister Chimed Saikhanbileg is eager to reverse the missteps made by his predecessor in regards to unpopular changes to the overall mining regime and the cancellation of mining licenses.
Repairing the relationship with Rio Tinto appears to be a top priority of the new government, in power since November 2014. PM Saikhan told a question-and-answer session at the American Chamber of Commerce in Mongolia on March 4 that he would like to have the Rio Tinto/Oyu Tolgoi issue resolved by the end of this month.
The downtick in mining-related investment might also push the diversification of the Mongolian economy ahead at a quicker pace, Munkhdul said.
“What this crisis has taught us is that we need to diversify, or else we’ll be in the same economic cycle that we are in right now,” he said. More focus should be placed on small and medium enterprises, domestic manufacturing, and import-substituting manufacturers.
There is also real potential in Mongolia’s meat exporting industry, he said.
“In Soviet times, Mongolia was a big exporter of meat to Russia, but in the 1990s, Russia stopped buying and we never recovered as a meat exporter,” he said. “No one doubts that there’s a huge potential here. Mongolia has a huge advantage for the whole organic movement to produce non-farmed meat, which I’m sure there will be a huge market for. We could even export to Korea and Japan, but of course I think the biggest customers will be Russia and China.”

Mongolia desperate to kick-start deal - TT

Talks to allow a consortium led by China's Shenhua Energy to take over Mongolia's largest coal mine have yet to be completed, with the project still paying off debts to another Chinese state miner, an official has said.

Mongolia is desperate to kick-start a deal expected to be worth as much as US$4 billion, with foreign investment into the country falling 74% last year, largely because of disputes between companies and the government.

Last year, China's top coal firm Shenhua formed a consortium with Japan's Sumitomo Corp and Energy Resources LLC, a wholly-owned unit of the Mongolian Mining Corp, to take over the management of the Mongolian state-owned firm in charge of the huge Tavan Tolgoi coal deposit.

The mining project in the country's southern Gobi region includes the East and West Tsankhi blocks.

Negotiations with Shenhua were due to be completed before Mongolia's lunar new year in February, but have already missed the deadline, according to Mongolian Minister Mendsaikhan Enkhsaikhan, who oversees Tavan Tolgoi and other giant mining projects.

One challenge is how to handle debts owed to China's Chalco Group by Erdenes Tavan Tolgoi, the Mongolian state-owned firm in charge of the project.

Erdenes Tavan Tolgoi borrowed US$350 million from Chalco in 2011 and agreed to pay back the debt in the form of coal deliveries from its East Tsankhi block. It still owes about US$150 million to the company, as well as other commitments.

The government used most of the funds it borrowed from Chalco to finance a short-lived social welfare programme that distributed about US$15 to every citizen each month.

"After the repayment of outstanding loans to Chalco, Erdenes Tavan Tolgoi still has an obligation to sell 80% of its coal (to Chalco) from the East Tsankhi mine for five years," said Enkhbaatar Myagmarulzii, a project manager working under the minister.

Mongolia has set up a working group to lead negotiations with the consortium, which will be entrusted with developing and managing both the East and West Tsankhi blocks, which hold a combined 1.8 billion t of coking coal.

The Tavan Tolgoi project has attracted the attention of dozens of foreign investment banks and mining conglomerates, but its progress has stalled as a result of financial strains and interference from the government.

Mongolia's previous attempt to find investment for Tavan Tolgoi ended in failure, when its decision to award the project to a consortium consisting of Shenhua, Peabody Energy and a team of Russian and Mongolian firms was criticised by Japanese and South Korean rivals and subsequently annulled.

Erdenes Tavan Tolgoi is also still in dispute with MacMahon Holdings, which was contracted to develop the mine's east block. MacMahon claims it is owed about US$30 million.

"It's a complicated issue, but the working group and consortium are seeking to reach a win-win solution now," said Myagmarulzii

Samsung wins return of material - Roy Hill

The Supreme Court has ordered Laing O'Rourke to hand over construction materials for the Roy Hill iron ore project under a dispute with head contractor Samsung C&T.

Laing O'Rourke left the project last month after failing to resolve commercial differences with Samsung over a $212 million port stockyard construction contract.

Gina Rinehart's majority-owned Roy Hill Holdings told the court that a delay to the $10 billion Pilbara project would cost at least $77 million a month.

Roy Hill chief executive Barry Fitzgerald accused Laing O'Rourke of removing materials and equipment in breach of its contract and a termination agreement struck last month.

"Laing O'Rourke's motive for their actions has been questioned," Mr Fitzgerald said.

"This win allows Samsung and its subcontractors to continue with construction works and maintain the schedule for delivery of this important project."

A spokesman for Laing O'Rourke said the contractor had not removed any materials from site or sought to do so.

"Laing O'Rourke took delivery of materials at the direction of the court last week, with the judge ruling they be stored in a secure compound whilst Samsung's 'emergency relief' application was heard," he said.

The spokesman said the items had been delivered, with the court recommending the matters be referred for further commercial proceedings.

Supreme Court Justice James Edelaman found that Laing O'Rourke had retained the $35 million materials because it claimed not to have been paid in full for the items.

According to the judgment, Laing O'Rourke is claiming about $39 million from Samsung in outstanding payments under their contract.

Samsung claimed to owe the contractor about $17 million, it said.

Contractors Goodline and Civmec have taken over Laing O'Rourke's work on the project.

Roy Hill also said Samsung had also reached a commercial settlement with Leighton Holdings subsidiary Thiess over work on the mine processing plant.

The Thiess contract was originally valued at $330 million.