* Oyu Tolgoi to be one of world's biggest copper mines
* Row with operator Rio Tinto over repatriation of profits
delays first shipments
* Investors unnerved by Mongolia's regulatory and political
* Country holds elections on Wednesday
By Terrence Edwards and Sonali Paul
ULAN BATOR/MELBOURNE, June 26 Mongolia's efforts
to protect its mineral wealth have scared investors so much that
not even the first exports from its biggest mine and the
expected re-election this week of a president who wants foreign
capital will turn sentiment around.
With the country's economic growth heavily tied to its vast
copper and coal resources, Mongolia should have been celebrating
the first copper sales to China from the $6.2 billion Oyu Tolgoi
Instead, the government twice this month told mine operator
Rio Tinto to delay the first shipment, partly
due to a dispute over the repatriation of profits. Some analysts
said the holdup was also aimed at keeping a lid on nationalism
ahead of the presidential vote on Wednesday.
Industry experts believe exports will start soon, but the
delays follow a year in which Mongolia introduced draft
legislation to tighten control over mining activity and limit
"Whilst the country has lots of resource potential and holds
Oyu Tolgoi, a world-scale mine, there's too much headline risk,"
said Darko Kuzmanovic, a portfolio manager at Caledonia
Investments, which holds global mining stocks but has steered
clear of Mongolia-focused miners.
President Tsakhia Elbegdorj said he would seek to ease legal
uncertainty after the election. The results are expected on
"I think we have to combine our national interest with the
interests of our investors and have more favourable conditions
for investors," he told Reuters after his final campaign rally
Mongolia's government has been under public pressure to
ensure the country gets a fair share of its resources, but the
timing of the draft legislation, just as the global mining boom
peaked, was poor, said mining experts.
"It has overplayed its hand," added Kuzmanovic.
HOPES ON PRESIDENT
Foreign direct investment slumped 17 percent to $3.9 billion
in 2012 and fell 12 percent in the first quarter of 2013 from
the same period a year earlier, according to Mongolia's National
Mining executives hope that if Elbegdorj is re-elected as
expected, he will be under less pressure to push a resource
nationalism agenda since he will no longer be in campaign mode.
That should ease policy confusion and help revive foreign
"Certainty on who the president will be - and the incumbent
appears to be clear favourite - I think is critical," said David
Paull, managing director of Australian-listed Aspire Mining
. "That will create a period of political stability and
that's the key thing people look for."
Aspire, backed by Hong Kong-based commodities trader Noble
Group, is working on a coal project in northern
Mongolia. Its stock has dived 73 percent over the past year on
worries about regulatory uncertainty and sliding coal prices.
While making promising noises about consulting the industry
over the new mining law and amendments to the strategic foreign
investment law, the government put off debate on the legislation
until after the election.
Some of the proposed measures foreign investors are
uncomfortable with include giving the state the right to free
shares in strategic mineral deposits, giving it authority to
change tax rates on mine leases and making it easy for the state
to take back leases with limited compensation.
"I think the underlying problems that give rise to investor
uncertainty are not going to go away, irrespective of who is
going to be president," said Agost Benard, the primary credit
analyst on Mongolia at ratings agency Standard & Poor's.
Mongolia is hurting, with coal export revenue, the biggest
contributor to the country's trade receipts, down 42 percent in
the first four months of the year.
Standard & Poor's has already warned it could downgrade
Mongolia's BB- sovereign bond rating in the next six to 18
months, as the economy grows increasingly dependent on commodity
prices, which are dropping.
The World Bank, too, is worried.
Mongolia's economic growth slowed to 12 percent in 2012 from
nearly 18 percent in 2011. The World Bank expects growth of
around 13 percent this year, still one of the fastest rates in
the world. In April, it said significant uncertainty over key
growth factors - especially mining - made the economic outlook
MINE TO BOOST ECONOMY BY A THIRD
Mongolia is a landlocked country of 2.8 million people,
sandwiched between its giant neighbours China and Russia. Nearly
40 percent of the population live below the poverty line.
Which is why a lot is riding on Oyu Tolgoi, a mine that is
expected to boost the economy by a third by 2020.
While Mongolia has issued all permits needed for Rio Tinto
to start exporting, the government is pressing the company to
keep all revenue in the country, vice minister of economic
development Ochirbat Chuluunbat told Reuters.
However, that was not holding up exports, he said, declining
to give further details. Rio Tinto has declined to comment on
what was behind the delays.
The agreement that governs Oyu Tolgoi gives Rio Tinto the
freedom to put export revenue anywhere it wants, sources
familiar with the situation have said.
Oyu Tolgoi is the biggest project in the country and the
government needs the royalties. The mine will have average
annual output of 330,000 tonnes of copper and 495,000 ounces of
gold in the first 10 years, putting it among the world's five
largest copper mines.
It is the most advanced of Mongolia's two biggest mining
projects. The other is the giant state-owned Tavan Tolgoi coal
mine, whose development has been stalled by a slump in the coal
market, which has dented revenue and forced the government to
put plans for a public listing of the asset on ice for at least
Both are perfectly located near China, which needs huge
amounts of copper, coal and iron ore even though its economic
growth has slowed.
With coal prices having dropped about 30 percent over the
past 18 months, some analysts think it will be a long time
before Tavan Tolgoi is fully developed.
"The world doesn't need another coal mine," said Kuzmanovic.
Mining executives, bankers and lawyers are cautiously
optimistic the start of sales from Oyu Tolgoi will give some
momentum to investment in Mongolia, but they don't expect a
"Acquiring financing is difficult now. It'll take a lot of
change," Jim Dwyer, executive director of the Business Council
of Mongolia, said at a recent conference in Ulan Bator.