By Lindsay Beck – Analysis
ULAN BATOR (Reuters) – Mongolia’s political parties are locked in post-election squabbling, but once the dust settles a new government could finally pass deals to tap the coal, copper and uranium that sit beneath its vast deserts and grasslands.
But analysts say the deal that goes ahead would be less than ideal for either Mongolia or foreign investors, with the country better served by taxing its mineral wealth, rather than seeking direct government ownership in massive mines.
The current law gives the state either a 34 percent stake or a controlling 51 percent stake in mining projects. An investment agreement with Ivanhoe Mines (IVN.TO: Quote, Profile, Research, Stock Buzz) and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz)(RIO.AX: Quote, Profile, Research, Stock Buzz) for the Oyu Tolgoi project, still under negotiation, would be the first such deal.
“I don’t think ownership stakes are a good idea,” said Julian Dierkes, a specialist in resources and public policy at the University of British Columbia.
“I wish the government would just collect cash and throw it in postal savings. If they make 3 percent on it, they’re set.”
Since Oyu Tolgoi’s discovery in 2001, Mongolia’s laws have gone from among the most attractive in the world for foreign miners to increasingly protectionist, on populist fears the country would trade its wealth for an environmental disaster.
During that time, metals prices have soared to record highs.
An Oyu Tolgoi deal would likely be the template for future deals with foreign miners digging coal, zinc, gold and uranium, raising the prospect of government stakes in a host of projects.
The government is unlikely to take an active management role, but has not specified how it would manage its stakes or whether it would set up a separate body to do so.
“It creates a conflict of interest for the government — do you represent the people or the shareholders in a company,” said Adrian Ruthenberg, Asian Development Bank’s Mongolia director.
Partial ownership by the government, rather than taxation or royalties, also leaves it more vulnerable to dips in production, said D. Ganbold, president of the Mongolian National Mining Association, an industry group.
“Participation through taxation yields the most effective outcome because there are taxes that have to be paid even at times production goes down,” he said.
Mongolia does not have the resources or capital required to undertake mine development on the massive scale required by Oyu Tolgoi or the $2 billion Tavan Tolgoi project to mine the world’s biggest untapped coking coal deposit.
“There’s a lot of infrastructure needed. You’re talking about railroads,” said Senden Batjargal, deputy director of Baganuur Joint Stock Company, a state-run coal mine. “Of course, the government couldn’t provide that infrastructure alone.”
But the idea of ownership stakes has symbolic importance among Mongolians wary of foreign investors on the make and mindful that Mongolia’s mineral wealth was used to feed Russian industry when the country was a Soviet satellite.
Analysts say successive governments have failed to provide objective and realistic information about the potential deals, and exacerbate misconceptions with promises of revenues from projects still years away from production.
Ahead of the elections, the ruling Mongolian People’s Revolutionary Party was pledging 1.5 million tugkrits ($1,290) to each citizen once mining begins, while its rival Democratic Party said everyone would get 1 million tugkrits worth of mining company stocks.
“There is a deficit in terms of communication. Ignorance makes the discussion difficult and it prepares the ground for some of the populist claims,” said Dierkes.
The last deal for Oyu Tolgoi before parliament, which was never put to a vote, gave the government a 34 percent stake. There has since been talk of that rising to 51 percent.
In exchange, the project would be exempt from a 68 percent windfall profits tax while it built a copper smelter in the Gobi.
Even at 51 percent, Rio and Ivanhoe say they could go ahead at the site, also known as Turquoise Hill, which is one of the world’s largest copper deposits.
“We’re totally comfortable” with a sizeable government stake, said Andrew Cuthbertson, head of Rio Tinto Mongolia.
“The investors are really waiting for the government to take the leadership and make a decision and move on.”
Ivanhoe and Rio Tinto say Oyu Tolgoi could raise Mongolia’s GDP by more than a third, and a mining boom could create huge wealth for a country of less than 3 million people, many of whom are nomadic herders on the country’s windswept steppes.
Mongolia also sits on about 2 percent of the world’s uranium reserves, but the government lacks regulations covering the extraction of the nuclear fuel.
Still, whatever imperfections there may be in the model the government settles on — no matter who is in power — most say the main thing is simply to get the Oyu Tolgoi deal done.
With no guarantee that mineral prices will stay high forever and with a population whose top concerns are unemployment and double-digit inflation, much is at stake.
“We have already lost a lot of time,” said Ganbold. “Maybe if we hadn’t we could be reaping the first fruits of Oyu Tolgoi.”
(Editing by Benjamin Kang Lim)