Mongolian Millions from Mining: Erdenes Tavan Tolgoi

A Mongolian Breakthrough?

In 2010, the state-owned Erdenes MGL LLC formed a new company - Erdenes Tavan Tolgoi - which would hold the licenses and manage the Tavan Tolgoi deposit. The Tavan Tolgoi deposit is one of the world’s largest undeveloped coal coking mines. Together with the gigantic copper and gold mine Oyu Tolgoi, these two mines have the ability to transform Mongolia, with a population of around 2.8 million people, into a Qatar or Brunei that becomes one of the world’s richest countries by GDP per capita just on the back of its abundant commodities. With eye-popping potential, foreign investors who manage to jump on this bandwagon could be set for millions of Benjamin Franklins.

Part of it is buying into the future Mongolian economic miracle. Mongolia transitioned from a one-party communist political system into a democratic system in the 1990s. The Economic Political Stability Index 2013 and Economic Freedom Index 2013 highlight that Mongolia, ranking 75^th out of 177 countries, fares above average in the world. Corruption is also down with Mongolia ranking 94^th out of 174 countries on the 2012 Corruption Perception Index. Yet there have been some political problems with the government in 2012 suspending South Gobi Sands mining licenses and then asking to renegotiate the Oyu Tolgoi investment agreement. Economically, Mongolia, bordering two monoliths - Russia and China, is the most sparsely populated country in the world with just 2.8 million people within a country boasting more than 6,000 known mineral deposits that could enable Mongolia to become a major determinant in global gold, copper, zinc, coal, oil, uranium and molybdenum markets. Since the 1990s, Mongolia’s economy has shifted from largely agriculture-driven to a reliance on the minerals industry. Mongolia also has one of the world’s fastest growing economies with real GDP growth averaging 13.5% annually over the next five years, comparing favourably with China’s at 8% and India’s at 7.6%. Yet due to an undiversified economy and inflationary monetary and fiscal policy, Moody’s have given Mongolia a speculative grade B1 credit rating. The mining boom has increased foreign direct investment into Mongolia from US$100 million in 2003 to US$6.1 billion in 2012 with the majority of those flows derived from China, Canada and the Netherlands. In addition, Mongolia possesses competitively priced raw materials, low operating costs for foreign companies, a low corporate tax rate, favourable tax credits and cheap labour culminating in a favourable investment environment. In fact, according to the World Bank’s 2012 Ease of Doing Business Rankings, Mongolia is ranked very similar to Italy and higher than China and Russia.

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To the mine itself, Tavan Tolgoi is located in the middle of the Gobi Desert. It has enough coking coal to supply China for 43 years. The mine is still being developed but this year exports from the mine totalled around US$1 billion when Mongolia’s GDP was around US$9 billion. By 2020, the mine should contribute US$4 billion of exports. The mine boasts 6.4 billion tons of coal of which 1.8 billion tons are high-quality coking coal and 4.6 billion tons are thermal coal. All infrastructures to make the mine truly operational, such as water and electricity supply, roads, and railroads, are being developed. Tavan Tolgoi is 540 kilometers south of Ulaanbaatar, the Mongolian capital and 270 kilometers from the Chinese border. The company Erdenes Tavan Tolgoi plan a US$3 billion initial public offering on the Hong Kong stock exchange, which would be a great opportunity to cash in on one of the world’s largest coking coal mines.

Tavan Tolgoi Mine

Yet there have been some worries. In February 2013, Erdenes Tavan Tolgoi’s mismanagement and weak world coal prices forced it to suspend shipments to its main customer Chalco as it was so short of cash. Yet in April, they resumed shipments to Chalco. Mongolia’s Erdenes Tavan Tolgoi have also realised they need foreign expertise to really generate a strong profit-making mine and have launched a tender in May 2013 for a contract to mine the west Tsankhi portion of Tavan Tolgoi as well as for technological assistance. There is also worry over Mongolia’s new draft investment law that mandates that Mongolian citizens must possess a 34% equity stake in any mining project as well as giving Mongolian state-owned companies a pre-emptive right to any mining or exploration licenses that are transferred from one entity to another. Yet it is likely to change significantly as a result of uproar from the Mongolian business community who worry that the draft law in its current state could rein in foreign investment in mining and hinder its trickle-down to other sectors such as logistics. It must also be remembered that Mongolia’s regulatory environment is more conducive to the starting and operation of a local firm than its neighbors China and Russia so it is not all that bad on a relative scale.