Bloomberg Businessweek
Mongolia joins Indonesia in controlling its natural assets
Edited by : AL CIRCLE
4 min read
Mongolia, the commodity-rich nation that posted the world’s fastest economic growth in 2011, is on course to pass a law by June that will bar foreign state-owned companies from controlling its key assets.
The draft law, submitted to parliament two years ago, was accelerated after a public outcry following state-run Aluminum Corp. of China Ltd.’s move last month to take control of SouthGobi Resources Ltd. (SGQ), Vice Finance Minister Ganhuyag Chuluun Hutagt said in an interview. The law isn’t likely to apply to any existing operations, he said. Rio Tinto Group is developing the $6 billion Oyu Tolgoi copper mine in the nation.
Tightening the legislation would mean Mongolia joins Indonesia and Argentina in seeking to control ownership of resource assets to secure their economic future. The draft law, due to be passed before parliamentary elections next month, will be applied to the bid by Chalco, as Aluminum Corp. is known, and is aimed at ensuring no one country or product dominates the economy, according to Ganhuyag.
“Investors don’t like it when the rules of the game are changed after the game has started, and changed often at that,” Dale Choi, chief investment strategist at Frontier Securities in Ulan Bator, said by phone. “It would be in the interests of Mongolian people to make a decision based on commercial factors, rather than geopolitical factors.”
Chalco rose 0.3 percent to HK$3.23 at 3:56 p.m. in Hong Kong, valuing the company at HK$93.3 billion ($12 billion). Controlling Assets
Mongolia, a nation of 2.8 million people that broke off from Communist rule and dependence on the then-Soviet Union in 1990, wants foreign investment in key assets to be made by entities that represent several nations, Ganhuyag said. The country currently exports most of its coal and copper to China.
“We don’t want to be faced with one sovereign,” he said by phone from Ulan Bator. “Our struggle to get political freedom was a long one and we cherish that. We will not let foreign government-owned entities control strategic assets in Mongolia.”
The land-locked country is squeezed between China and Russia, two of the world’s ten largest economies and the No. 1 and No. 3 countries by land mass. China accounts for over 80 percent of its neighbor’s import and export trade, according to the World Bank. Exports to China rose to 92 percent of the total in the first quarter, Mongolia’s statistics office said last week.
Resource nationalism, or state demands for higher taxes, royalties or stakes, was cited as a growing concern by Rio Tinto (RIO) and Freeport McMoRan (FCX) (FCX) Copper and Gold Inc. at their most recent earnings. The issue was the number-one concern among mining executives in 2011, replacing capital allocation, Ernst & Young said in its annual risk survey published in August.
Government Review
Chalco said April 2 that it agreed to buy Toronto-listed Ivanhoe Mines Ltd. (IVN)’s 58 percent stake in SouthGobi in a deal worth as much as C$925 million ($914 million). Mongolia’s Mineral Resources Authority said it would ask SouthGobi to suspend exploration activity and mining on certain licenses while it reviews the deal. Some customers have cut orders because of the request, SouthGobi said May 14.
Chalco won’t proceed with the deal unless it gets approval from Mongolia, it said on April 25. Yuan Li, a spokesman for Aluminum Corp. of China, Chalco’s parent, declined to comment, saying he can’t provide more information.
“There’s a big issue of discrimination and foreign investors should be just foreign investors,” Frontier’s Choi said. “You can’t create separate rules for Chinese state-owned companies or Canadian companies. Chalco’s accord is market- based, it represents the way the market wants to go.”
Coal Deposit
Plans to develop Mongolia’s Tavan Tolgoi coal deposit, one of the world’s largest, have also stalled ahead of the June elections. Progress on talks with companies including Peabody Energy Corp. (BTU) (BTU), OAO Russian Railways, and China’s Shenhua Group to develop the West Tsankhi part of Tavan Tolgoi have “stopped,” Prime Minister Sukhbaatar Batbold said in March.
Mongolia first announced and then said it would review an accord in July that planned to give Shenhua Group a 40 percent stake in West Tsankhi, with Peabody taking 24 percent and a Russia-Mongolian group the rest. The government didn’t clarify who the Russia-Mongolia group included.
Uncertainty about the fate of the foreign tender has meant that the $3 billion initial public offering of state-run Erdenes Tavan Tolgoi, which is developing the East Tsankhi part of the 6-billion-metric-ton field, was delayed in March as some politicians call for Mongolia to develop West Tsankhi itself.
The draft law, submitted to parliament two years ago, was accelerated after a public outcry following state-run Aluminum Corp. of China Ltd.’s move last month to take control of SouthGobi Resources Ltd. (SGQ), Vice Finance Minister Ganhuyag Chuluun Hutagt said in an interview. The law isn’t likely to apply to any existing operations, he said. Rio Tinto Group is developing the $6 billion Oyu Tolgoi copper mine in the nation.
Tightening the legislation would mean Mongolia joins Indonesia and Argentina in seeking to control ownership of resource assets to secure their economic future. The draft law, due to be passed before parliamentary elections next month, will be applied to the bid by Chalco, as Aluminum Corp. is known, and is aimed at ensuring no one country or product dominates the economy, according to Ganhuyag.
“Investors don’t like it when the rules of the game are changed after the game has started, and changed often at that,” Dale Choi, chief investment strategist at Frontier Securities in Ulan Bator, said by phone. “It would be in the interests of Mongolian people to make a decision based on commercial factors, rather than geopolitical factors.”
Chalco rose 0.3 percent to HK$3.23 at 3:56 p.m. in Hong Kong, valuing the company at HK$93.3 billion ($12 billion). Controlling Assets
Mongolia, a nation of 2.8 million people that broke off from Communist rule and dependence on the then-Soviet Union in 1990, wants foreign investment in key assets to be made by entities that represent several nations, Ganhuyag said. The country currently exports most of its coal and copper to China.
“We don’t want to be faced with one sovereign,” he said by phone from Ulan Bator. “Our struggle to get political freedom was a long one and we cherish that. We will not let foreign government-owned entities control strategic assets in Mongolia.”
The land-locked country is squeezed between China and Russia, two of the world’s ten largest economies and the No. 1 and No. 3 countries by land mass. China accounts for over 80 percent of its neighbor’s import and export trade, according to the World Bank. Exports to China rose to 92 percent of the total in the first quarter, Mongolia’s statistics office said last week.
Resource nationalism, or state demands for higher taxes, royalties or stakes, was cited as a growing concern by Rio Tinto (RIO) and Freeport McMoRan (FCX) (FCX) Copper and Gold Inc. at their most recent earnings. The issue was the number-one concern among mining executives in 2011, replacing capital allocation, Ernst & Young said in its annual risk survey published in August.
Government Review
Chalco said April 2 that it agreed to buy Toronto-listed Ivanhoe Mines Ltd. (IVN)’s 58 percent stake in SouthGobi in a deal worth as much as C$925 million ($914 million). Mongolia’s Mineral Resources Authority said it would ask SouthGobi to suspend exploration activity and mining on certain licenses while it reviews the deal. Some customers have cut orders because of the request, SouthGobi said May 14.
Chalco won’t proceed with the deal unless it gets approval from Mongolia, it said on April 25. Yuan Li, a spokesman for Aluminum Corp. of China, Chalco’s parent, declined to comment, saying he can’t provide more information.
“There’s a big issue of discrimination and foreign investors should be just foreign investors,” Frontier’s Choi said. “You can’t create separate rules for Chinese state-owned companies or Canadian companies. Chalco’s accord is market- based, it represents the way the market wants to go.”
Coal Deposit
Plans to develop Mongolia’s Tavan Tolgoi coal deposit, one of the world’s largest, have also stalled ahead of the June elections. Progress on talks with companies including Peabody Energy Corp. (BTU) (BTU), OAO Russian Railways, and China’s Shenhua Group to develop the West Tsankhi part of Tavan Tolgoi have “stopped,” Prime Minister Sukhbaatar Batbold said in March.
Mongolia first announced and then said it would review an accord in July that planned to give Shenhua Group a 40 percent stake in West Tsankhi, with Peabody taking 24 percent and a Russia-Mongolian group the rest. The government didn’t clarify who the Russia-Mongolia group included.
Uncertainty about the fate of the foreign tender has meant that the $3 billion initial public offering of state-run Erdenes Tavan Tolgoi, which is developing the East Tsankhi part of the 6-billion-metric-ton field, was delayed in March as some politicians call for Mongolia to develop West Tsankhi itself.
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