Mongolia’s future as commodities exporter
“Mongolia is going to be a major future supplier of commodities from coal through gold to copper – and maybe even crude oil. But how soon will this landlocked country with a population of 3m really begin delivering these resources to the world in a significant, market-moving way?
Although Mongolia is located right next to its biggest customer, China, their history of rivalry makes Mongolia suspicious of its southern neighbour. And capricious politics – parliament has tried to oust Dashdorj Zorigt, minister for mineral resources and energy, twice this year – mean that economic logic is sometimes subordinate to politics or nationalism.
Take the development of Tavan Tolgoi, by some calculations the world’s second-largest coal deposit. The government recently scrapped plans to build a railway directly to the border, less than 300km away, even after feasibility studies and initial permits for the line had been granted. Instead a new line will go east, connecting the mines to the Trans Mongolian Railway that leads to both Russia and China, albeit by a longer route. …
There are some exceptions to this pattern: the Oyu Tolgoi mine, which is co-owned by Rio Tinto, Ivanhoe and the Mongolian government, is ahead of schedule and will come online next year. The copper and gold produced there will be shipped out by truck, posing fewer logistical difficulties than the bulky coal. But still, the investment agreement governing the mine took more than five years to negotiate and remains a source of intense political debate.”
- Tavan Tolgoi holds estimated coking and thermal coal reserves of 6.4bln tons. Indian ICVL has expressed interest in buying into the project, which the Mongolian government wants to bring to the stock exchange.
- Rio Tinto’s development of copper and gold deposit Oyu Tolgoi with/through Ivanhoe is the first major foreign investment project in the country, which appears to go smoothly so far. Rio Tinto’s shareholder Chinalco has repeatedly indicated it would like to take part in the project, but has been kept out by Rio Tinto to date.
- In October last year Ivanhoe was still hoping to export the products from Oyu Tolgoi by rail. In current plans the transport to the Chinese border (80 kilometers) will initially take place using trucks.
- Western companies will try to tease the Mongolian government into collaborating in the construction of direct rail links to the Chinese rail network in the south. The government’s objective in linking the producing region to the Trans-Mongolian Railway mainly is to stimulate domestic processing industry and to gain political leeway in the relationship with China by having the option to supply to Russia. Most likely the corporates and the government will come to a compromise in which the costs of infrastructure development is shared in some way.
- The elections in Mongolia next year could create a complicated situation for the western miners in the country, as any new government will try to review and/or renegotiate development and royalty deals currently in place.
©2011 | Wilfred Visser | thebusinessofmining.com