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Mongolia's wariness over Chalco's SouthGobi buy sparks resource nationalism fears

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Threats made by Mongolia to suspend the mining and exploration activities of coking coal producer SouthGobi, after the miner announced the sale of a majority stake to a Chinese state-owned aluminium company, have cast doubts over the country’s attractiveness for investment in emerging resources.

In early April, Aluminum Corp of China (Chalco) announced its intention to buy as much as 60% of Toronto-listed SouthGobi.

Two weeks later, the Mineral Resources Authority of Mongolia (MRAM) said in a press conference in Ulaanbaatar that it wanted to suspend exploration and mining activity on certain SouthGobi licences.

This would allow Mongolia’s government to review the implications of Chalco’s takeover bid, MRAM said.

But SouthGobi has not received any official notification to suspend mining activities and its mines “are still operating, running and producing coal”, vp Dave Bartel told Metal Bulletin on April 24.

International tension

The MRAM announcement itself prompted discussions in the industry about whether it pointed to a wider move by the Mongolian government to maintain ownership of its resources, or was another example of the tension between the land-locked country and its neighbour, and biggest customer, China.

Industry insiders told Metal Bulletin that a bid by Chalco, a Chinese state-owned company, for control of Mongolian resources was particularly threatening to the government.

“If an international company was going to buy [SouthGobi] from [majority owner] Ivanhoe, maybe it wouldn’t be an issue at all,” a Hong Kong-based analyst told Metal Bulletin.

The Mongolian government made no similar move, however, to prevent the takeover by Thai coal producer Banpu of Australia-based explorer Hunnu Coal late last year. Hunnu owns eleven coking and thermal coal projects in Mongolia.

Biggest coal customer

China is already the biggest importer of Mongolian coking coal.

“The issue with this deal is that Chalco is a state-owned company and China is the main importer of Mongolian coking coal,” a source in Mongolia said.

“If you have the supply side in one hand and the buyer side in the other hand, you can control the commodity price – you can set a monopoly price or even import coal only from your state-owned company,” he said.

“In any industry, including mining, no country wants to let control of both supply and demand go to another country,” he said.

The natural reaction for a government is to review these transactions to make sure they are in the national interest, a senior executive at a mining company with assets in Mongolia told Metal Bulletin.

Possible legislation

Mongolia has yet to pass legislation about whether natural resources companies in the country will be permitted to sell majority stakes to foreign companies in the future.

The SouthGobi sale prompted strong reactions from some market observers.

“Wait a second, this can’t be right. This is a major deposit in Mongolia that’s changing hands without the Mongolian government having any say,” the analyst in Hong Kong said.

Chalco said on April 25 that the Mongolian government is considering introducing new legislation on foreign investment that will allow it to assess such investments. It will look to model the legislation on precedents in other major jurisdictions.

“The key issues to be considered by the government of Mongolia include the establishment of fair transfer pricing and taxation regimes with foreign investors,” the company noted.

Review process

Legislation is reported to have been drafted by the Mongolian government which will limit all foreign investment in the country. It will also institute a formal review process for inbound investment in strategic sectors, including natural resources, transport, food, real estate, communications and agriculture.

Such legislation would focus more on ensuring the creation of a process under which the Mongolian government, or the mining ministry, can accurately assess transactions, rather than taking issue with foreign ownership itself, the analyst said.

“There needs to be some kind of regimented framework,” he added.

“[Mongolia] is certain of the importance of the mining industry to the country. Moving into any kind of wider resource nationalism would be absolutely disastrous for the country. It would severely affect foreign investment, and would basically destroy the mining industry,” he said.

National coal project

Further, the Mongolian government is eager to bring to market its national coal project, Erdenes Tavan Tolgoi, for which an initial public offering (IPO) is expected early next year.

The IPO could raise about $3 billion and every Mongolian citizen is entitled to own 1,072 shares in the company.

“If [the Mongolian government were to do] something industry-wide, it would affect the IPO, and it’s very unlikely the government would willingly do that,” the analyst added.

The legislation is not expected to come into force before the upcoming Mongolian elections in late June.

Pre-election ‘noise’

The analyst suspected the issue surrounding the request to suspend SouthGobi’s licence was “a function of noise leading up to the election” because relationships already exist between Mongolia and China, and the latter is a natural customer for Mongolian coal.

Chalco even signed an offtake agreement with Erdenes Tavan Tolgoi in July last year to purchase practically all of the coal produced by the eastern portion of the Tavan Tolgoi mine.

“There’s a lot of history between China and Mongolia, and no [Mongolian] political party wants to be seen as bowing down towards the Chinese,” the analyst said.

“Going into the election, there will probably be more of these kind of stories. Overall, I don’t think the issue should be as exaggerated as it is at the moment,” he added.

Daisy Tseng
daisy.tseng@metalbulletinasia.com

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