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
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
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.
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
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.
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
"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
"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.
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
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
"[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.
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
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.