Mongolia: Mining boom takes shape

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Mongolia’s mining sector is riding high, with the vast Tavan Tolgoi “five hills” coal mine expected to start exports and secure an international partner in the next few months. Meanwhile, a large copper and gold mine is set to start producing ahead of schedule. However, a confusing outcome to an investment agreement signed over Tavan Tolgoi has weighed on investor confidence recently.

International media reported in July that three firms out of six shortlisted had secured an investment agreement over the mine’s western Tsankhi block, with China’s Shenhua Group to be given a 40% stake, a Russian-led consortium to control 36% and US miner Peabody Energy Corporation to own the remaining 24%. However, officials now say a “final” decision on it is not due until later this year.

The choice of US, Russian and Chinese contractors as international partners for Tavan Tolgoi, estimated to hold 7.5bn tonnes of coking coal deposits, had been criticised as geopolitical, with Ulan Bator seen as balancing the interests of its largest neighbours with those of the US superpower. It seemed the country’s two largest donors – Japan and South Korea – had not been invited to participate this time round.

However, Dulam Sugar, the chairman of the State Property Committee and state-owned mining company Erdenes MGL, told local media on August 12 that Japan and South Korea had not been excluded from the bid and that a final decision on the western block could take until October. Seoul had complained it was still in negotiations with the government when the three preliminary winners were announced, and South Korean President Lee Myung-bak visited Mongolia in mid-August.

“Tavan Tolgoi’s resources are located mainly in two sites, which are the east and west of Tsankhi. The State Great Khural (parliament) assigned Erdenes MGL as the developer of east Tsankhi. At the moment, we are working on the process of choosing the developer of the west Tsankhi. During the process there have been various issues, however we’re hoping to finish it before October 2011,” Sugar told the UB Post.

Meanwhile, Erdenes MGL’s mining arm, Erdenes Tavan Tolgoi, is starting exports from the eastern Tsankhi block. “We have started exporting coking coal, and this process will continue for about 100 years,” Enebish Baasangombo, Erdenes MGL’s executive director, told local media in August. “We are now able to export coal after removing the top layer of soil from east Tsankhi of Tavan Tolgoi.” He added that the company is planning to export 1.3m tonnes of coal this year, with total capacity increasing to 3.5m tonnes in 2012 and maximum output reached in 2015.

Mongolia’s total coal exports are estimated to hit 25m tonnes this year, some 30m-35m tonnes in 2012 and 50m tonnes by 2015, officials told Reuters in June. Along with the significant reserves of coal, large deposits of copper, gold, rare earths and uranium are expected to push the country’s annual GDP growth rate to some 22.9% by 2013, according to the World Bank.

However, uncertainty over the finalisation of the Tavan Tolgoi investment agreement has thrown into doubt an estimated $10bn initial public offering (IPO) planned for the mine. BNP Paribas, Deutsche Bank, Goldman Sachs and the Macquarie Group had been selected to lead the IPO, which would be focused on the eastern block and be launched in Hong Kong or London. Initially expected as early as March, the IPO is now scheduled for “late 2011”, according to Enebish, the executive director of Erdenes MGL.

“The proceeds of the IPO will go towards developing and building the mining infrastructure,” Enebish told OBG. “With this IPO we would like to lead the pack to the international capital markets.””

The government’s decision to give each Mongolian citizen 538 shares in the Tavan Tolgoi listing is meant to ensure that the benefits of resource wealth trickle down to citizens. The plan, which would see each Mongolian earn $350 if the IPO hits $10bn, could be a significant factor in next year’s elections given that the country’s per capita income was estimated at around $3600 in 2010.

Another massive project expected to transform the economy is the $6bn Oyu Tolgoi copper mine in the Gobi desert, which was estimated in 2010 to hold 35.83m tonnes of copper and 1.28bn grams of gold. Developed by Canada-listed Ivanhoe and its major shareholder Rio Tinto, the project is 33% complete and on track to produce gold, copper and silver by the first half of 2013, The Australian reported in August. The mine is 66% owned by Ivanhoe Mines, with the government holding the remaining share.

“Mongolia is set to become the world’s fastest-growing economy with spectacular GDP growth of 35% every year,” Robert Friedland, the chief executive of Ivanhoe Mines, told the newspaper, adding that Oyu Tolgoi would be ready “ahead of schedule and under budget”. He said that some 14,200 people were working on the mine’s construction, with it set to produce 544 tonnes of copper and 18.4m grams of gold annually for the next 100 years.

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