Mongolia’s Mining Woes Start Taking Their Toll

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by Guest on 8/21/2013 · 5 comments

by Mathieu Boulègue

On 26 June 2013, President Tsakhiagiin Elbegdorj was reelected for a second four-year term in office upon winning 50.89 percent of the ballots in the first round of election. Behind the curtain, the 6th presidential elections appeared as a litmus test on mining policies in the young Asian democracy. In this, Mongolia is currently torn between the perks of the mining boom it has been experiencing since the early 2000s and the call for resource nationalism voiced by local populations negatively impacted by mining activities. This fact also echoes an increasingly visible political fragmentation between nationalist-protectionist factions and more business-prone forces. In other words, and as embodied by the ongoing struggle around the Oyu Tolgoi mining super-project, Mongolia finds itself at a crossroads between necessary openness to international investments needed to support the economy and demands for responsible and sustainable mining aimed at protecting national natural reserves. At stake could be the very survival of the Mongolian economic and political stability.

With a turnout of 66.5 percent of registered voters, the incumbent Democratic Party (DP) candidate heavily benefited from the support of the Civil Will-Green Party, in tune with the DP’s environmental activism, as well as the Republican Party and the Motherland Party, thereby limiting overall competition and voter’s choice.

The presidential campaign started on 22 May 2013 and was notably marked by several interesting features, such as the possibility for Mongolians residing abroad to cast their votes for the first time – which accounts for 39,800 citizens enlisted through the diplomatic channel. Only three candidates officially registered by the General Election Commission (GEC) to run for President – i.e. contenders stemming from political parties holding seats in the State Great Khural. Hence, Elbegdorj competed against former wrestling champion and Member of Parliament Badnaanyambuugyn Bat-Erdene for the Mongolian People’s Party – the former Communist Party – who obtained 42.52 percent of the votes and against female Health Minister Natsag Udval with the Mongolian People’s Revolutionary Party, who gathered 6.58 percent of the votes.

Right after the release of the GEC’s official report, the Parliament endorsed Elbegdorj’s reelection and the latter was sworn in on 10 July in Ulaanbaatar. The Organization for Security and Cooperation in Europe (OSCE) carried out an Election Observation Mission for the first time after Mongolia became a member of the organization last year: the mission concluded that the election was “free and competitive.

Now that the Democratic Party has secured the political positions of President, Prime Minister, Chairman of the Parliament, and Ulaanbaatar mayor, the reform of the mining law will effectively move on. Although the President does not have the final say in mining regulations, his administration was responsible for the suspension of the issuance of mining and exploration licenses in 2010, which was confirmed by the State Great Khural in December 2012. The government also initiated the complete overhaul of the mining law after setting up a working group by the President’s Office in 2011. Exploration licenses already plummeted from 6,000 after the 1997 Mineral Law to 3,000 today. The first draft of the revamped Mineral Law was made public in December 2012, yet came under heavy criticism from both mining companies and investors. As such, the draft law restricts the issuance of mining licenses – prospecting licenses will be reevaluated every year – as well as state involvement in shares ownership.

The new draft law also takes into consideration environmental protection through the framework of the 2009 Law on the Prohibition of Minerals Exploration in Water Basins and Forested Areas as well as local development for populations concerned by mining activities. Finally, President Elbegdorj announced last February that greater national oversight should be implemented in international mining projects through the presence of Mongolian representatives on the managing boards of concerned companies as well as greater responsibility in managing costs and resources allocation. This was further reinforced by the April 2013 amendments to the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance (SSI Regulation) of May 2012: new provisions of the foreign investment law differentiate bids made by state-owned enterprises (SOE) from those made by foreign companies as well as introduces monetary thresholds for international private players.

Taking to heart the concept of “resource nationalism”, President Elbegdorj is seeking to reach a balanced point of view between openness and closure in order to please both his electorate at home and international investors. Comparing election results lead to the conclusion that incumbent Elbegdorj was mostly backed by the young urban populations and the middle-class of the capital city – he scored an average of 55 percent votes in urban areas against 47 percent outside Ulaanbaatar – whereas Bat-Erdene reached higher scores in the rest of the country, especially in mining regions.

This fact is further reinforced by the existence of two major political factions presently irrigating Mongolian politics. On the one hand, the outcome of the June 2012 parliamentary elections led to the formation of a nationalist-prone coalition that could sensibly renege on economic openness at the expense of foreign investors: nationalist Members of Parliament could very well decide to increase their pressure on bills fostering greater national sovereignty, especially since the Democratic Party only retained 31 seats in the 76-seat legislature in the last ballot. Nationalist-oriented forces could, for instance, back up “Resolution 57” (named after the 57th Resolution of the State Great Khural) whereby Mongolia could seek to acquire 50 percent of the stakes in the Oyu Tolgoi mine and thus ensure greater control over national resources. On the other hand, business-oriented political forces are trying to push for an increasingly larger part of the mining cake: the importance of foreign investments in Mongolia is constantly used by certain politicians as a leitmotiv in international-oriented speeches. Therefore, Mongolian statesmen find themselves increasingly conflicted between business opportunities and people’s demands for responsible and sustainable mining.

In order to keep tabs on extraction-related legislative changes, public debates are now being organized under the auspices of the Citizen’s Hall of Mongolia in order to hear the suggestions and the concerns of the interested parties. Monthly government-approved “Transparent Mining” press conferences are also held every month to keep the public informed with mining activities in the country, including relations with international extracting companies.

A relevant example of the mining intricacies is embodied by the quarrel currently pitting Anglo-Australian company Rio Tinto and its partner Canadian Turquoise Hill against the Mongolian state over the Oyu Tolgoi copper and gold mine super-project located in the South Gobi Desert. Presently the world’s second largest mine, Oyu Tolgoi plans to produce up to 54 million tons of copper by 2018. On 9 July 2013, the Oyu Tolgoi copper concentrator plant started its first ever exports of 400,000 tons of copper concentrate: operations at the Rio Tinto unit had begun on time in early 2013 and full production capacity of 100,000 tons a day had been reached last June.

Despite these positive results, the Mongolian government has been putting pressure on Rio Tinto and its business partner Turquoise Hill since last February when it was unveiled that the first phase of the project was 2 billion dollars more expensive than initially planned, namely a total of 6.6 billion dollars as of today. A parliamentary session was opened in early February 2013 and both parties have met several times over the course of the year in order to discuss cost overruns, the alleged lack of Rio Tinto’s accountability and transparency, as well as the absence of timely reporting. In this, President Elbegdorj announced that the time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands”.

At the end of the day, the government is afraid of how much Oyu Tolgoi will actually cost. Due the “called sums” principle stipulated in the 2009 agreement, Mongolia has to pay for a part of the cost overrun equivalent to its share in Oyu Tolgoi – “called sums” represent payments made to capital expenditures proportional to share ownership. According to the terms of agreement, Mongolia owns 34 percent shares in the mining project, with a purchase option of another 16 percent after the initial 30 year, as per. As evidenced by these strained relations, Oyu Tolgoi might represent a landmark in the way Mongolia reflects on the integration of foreign actors in the national mining sector.

In spite of the mining woes somewhat darkening the landscape, Mongolia remains a booming economy characterized by a growth rate of 12.3 percent in 2012 and a World Bank forecast of 13 percent for 2013. The figures were however considerably decreased due to a structural fiscal deficit of 8.4 percent of the GDP – this sharply contrasts with the 2 percent limit provisioned by the Fiscal Stability Law – while inflation remains high. In the end, the calls for resource nationalism hardly make up for the sirens of foreign investments that Mongolia direly depends on. This was evidenced by the issuance in November 2012 of 1.5 billion dollars’ worth of governmental bonds in debt – dubbed the “Chinggis Bonds” by the local media – aimed at raising money on international financial markets. The multi-year bonds were successfully exchanged on the stock market at the end of November 2012 and the money has been used ever since to finance major development projects such as railway infrastructures, plants renovation, and the light industry sector.

If Mongolia wants to keep up with its economic rise, it will have to learn how to allocate its financial assets somewhat better, lest it will have efficiently fought the “resource curse” but will have been unable to guard itself from the damaging aftermath of continued two-figured growth.

 

A Sciences Po and King’s College London alumnus, Mathieu Boulègue is an analyst in the field of Russia/CIS security and geostrategic issues. He currently works as a project manager for a French risk management consulting firm.


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{ 5 comments }

Amy August 22, 2013 at 10:26 pm

Just a small thing: Rio Tinto is Anglo-Australian and Turquoise Hill (English for ‘Oyu Tolgoi’) is Canadian (not the other way around).

HF Frog August 23, 2013 at 1:34 am

“The multi-year bonds were successfully exchanged on the stock market at the end of November 2012 ”
?????

What a weird way to describe a sovereign US$ bond issuance!!!

That’s clearly a (shocking) first!!!

HF Frog August 23, 2013 at 1:46 am

I know Mongolia is an interesting topic that helps get attention and may start “selling”, but I would expect that somebody that “currently works as a project manager for a French risk management consulting firm” would not overlook the fact that the Securities Market Law has been approved by the Parliament of Mongolia in may 2013.
That is not exactly small potatoes while the OT-TRQ-RIO saga may be “l’arbre qui cache la forêt”…Mongole.

http://www.mse.mn/uploads/laws/27aba6dbc709e17d808f9abe4b9a40511f70dfdb.pdf
I am sure a project manager for a French risk management consulting firm would be so excited to read in length this document and provide his value added comments to the MSE for its next review. 

HF Frog August 26, 2013 at 3:44 am

“Presently the world’s second largest mine, Oyu Tolgoi plans to produce up to 54 million tons of coal by 2018.”

That would be an achievement for sure!!
Obviously not very well informed, I was lead to believe that OT was about COPPER and GOLD (and silver too), not COAL!

Luckily the author has not indicated for which “French risk management consulting firm” he is working, or may be was working…

MB August 27, 2013 at 4:31 am

To HF Frog,

I would like to warmly thank you for your constructive, yet somewhat aggressive remarks. Lest it be futile, I might as well implore your leniency concerning the mere unfortunate mistakes left in the copy that you have extensively pointed out (at that with a quite condescending tone) .

If you felt somewhat unhappy with my writing, I should recommend that you wrote your own paper and have it published. In turn, I would be more than happy to pore over it and appreciate its blunder-free quality.

As for my job, I shall remind you that writing articles is a simple occupational hazard that should not reflect on my professional activities.

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