Mining template not ideal for Mongolia, investors

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) and Rio Tinto (RIO.L)(RIO.AX) 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.