* Mongolia foreign direct investment down 17 pct in 2012
* Government moves to ease uncertainty on strategic
* Minerals law debate deferred to after election
* Cautious optimism around Oyu Tolgoi dispute
By Sonali Paul
MELBOURNE, March 27 Mongolia is starting to take
steps aimed at arresting a slide in investment in its crucial
mining sector, looking to curb uncertainty over regulations that
has been blamed for stalling copper and coal projects. Even so,
miners remain cautious.
Regulatory concerns peaked last month when Rio Tinto
threatened to delay the start-up of the $6.2 billion
Oyu Tolgoi copper and gold mine, until it resolves a dispute
with the government over their investment agreement.
The mine is due to start selling copper in June and could
make up a third of Mongolia's economy by 2020, producing 425,000
tonnes of copper and 460,000 ounces of gold a year.
"At the higher echelons...there's at least the recognition
that something's wrong and needs to be fixed," said Elisabeth
Ellis, Ulan Bator-based partner at law firm Minter Ellison,
which advises mining and mining services firms.
Foreign direct investment dropped 17 percent to $3.9 billion
in 2012, according to the Bank of Mongolia's balance of
payments, coinciding with a string of moves by the government
that deterred investments in copper and coal.
Spokesmen for the prime minister and mining minister did not
respond to requests for comment on investor sentiment.
But in a move that should help calm some concerns, the
government last week approved regulations to carry out a foreign
investment law in strategic sectors which had been in limbo
since last year. It has clarified that the main target of the
law is foreign state-owned investors, not private companies.
It also decided to defer debate on a proposed Minerals Law
until after presidential elections in June, giving more time for
talks with industry and reducing the risk of the issue being
embroiled in nationalist sentiment surrounding the election.
The law is contentious as it seeks to give the state a free
right to shares in strategic minerals deposits, authority to
change tax rates on mine leases, and to make it easy for the
state to take back leases with limited compensation.
MINING SHARES SLIDE
Regulatory uncertainty started with the suspension of
SouthGobi Resources' mining licences last year when
China's Chalco bid to buy a majority stake in the
coal miner, followed by legislation looking to cap foreign
ownership at 49 percent in strategic sectors, including mining.
Then in December Mongolia proposed changes to its Minerals
Law, and in January it stopped exporting coal to aluminium firm
Chalco from the country's giant Tavan Tolgoi mine and sought to
renegotiate what it says is a loss-making contract.
The proposals aimed to redress the balance after a period of
light-handed regulation when Mongolia was desperate to win
investment, and also came amid widespread belief that the nation
was short-changed by the Oyu Tolgoi investment deal in 2009.
The stream of regulatory changes has rattled companies
looking to explore and build mines in Mongolia and knocked their
share prices, even as the country managed to raise $1.5 billion
last November with its first sovereign bond issue.
"Why would you increase exposure in a country where you
don't know what's going to happen next week? We're treading
water until we see these key uncertainties being resolved," said
Sam Spring, vice president of corporate development for Kincora
Copper, which owns the Bronze Fox copper-gold deposit,
northeast of Oyu Tolgoi.
Shares in Rio Tinto unit Turquoise Hill, the 66
percent owner of Oyu Tolgoi, have plunged 60 percent over the
past year, SouthGobi shares are down 69 percent, and Kincora's
shares have lost 91 percent.
The Chinggis 10-year bond value has suffered, too, with
investor jittery over the government's moves on the mining
sector, analyst Eric Zurrin at Ulan Bator-based broker Resource
Investment Capital said in a note last week.
In a further sign of Mongolia's desire to back investment,
Turquoise Hill executives said on Tuesday they were making
progress on resolving disputes over Oyu Tolgoi royalties, costs,
management fees, and project financing before the end of June.
"I am optimistic that matters being discussed with the
Mongolian government will be resolved. We are all committed to
the success of Oyu Tolgoi," Turquoise Hill CEO Kay Priestly
told analysts on a conference call.
Rio Tinto has already deferred to 2014 a feasibility study
on the project's second stage, which Turquoise Hill said on
Tuesday could cost about $5.1 billion, which in turn will delay
the full benefit of the project for Mongolia.
"Because of the economic significance of this project to the
Mongolian economy and the fact that Rio Tinto is really best
placed to take this project forward, economic reality would
dictate that it would get into production," said Jonathan Li, a
partner at law firm Clayton Utz, who has clients in Mongolia.