Outside, it’s minus 30ºC as a February wind blasts across the Central Asian steppe and through the Mongolian capital, Ulaanbaatar. Inside Government House, President Tsakhiagiin Elbegdorj delivers a televised speech that warms his people and chills foreign investors.
The country’s 76 legislators have convened to debate the future of one of the planet’s richest copper and gold mines, Oyu Tolgoi, which is 66 percent owned by Rio Tinto Group and 34 percent owned by the state. Elbegdorj said Rio Tinto had let the project’s total cost balloon by $10 billion (R89bn). The higher expenses, which Rio Tinto disputes, would diminish and delay profits the government shares in.
“The time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands,” Elbegdorj said to cheers from the lawmakers. His demands include giving Mongolian employees more management positions on the project, which is scheduled to begin exporting copper concentrate by June.
Few things matter more today in the political and economic life of this landlocked country of 2.8 million people than foreign investment to develop its mineral wealth. Mining money has spawned gleaming office towers, pricey gated communities and luxury-car dealerships in the capital. And yet, half of Mongolians still live like their nomadic ancestors in circular felt yurts that can be dismantled and moved.
Minegolia, to use a nickname that’s become more common during the mining boom, remains a poor country. About 30 percent of the population lived in poverty in 2011, according to the government, although that was an improvement from 40 percent in 2010, before the start of payouts funded by mine proceeds.
Puntsag Tsagaan, the president’s chief of staff, said he didn’t want to see his country turned into Minegolia. Mineral wealth should be exploited cautiously and benefit the people, he said. “It does not have to be unlocked in a generation.”
Mongolia’s gross domestic product expanded 12.3 percent last year to $10bn. Economists expect 15 percent growth this year. Oyu Tolgoi, which means Turquoise Hill, will be the largest contributor to the economy once it’s fully operational. With fees, royalties and the government stake, as much as 71 percent of profits will go to Mongolians, the International Monetary Fund (IMF) estimates.
“There is scope for Mongolia to vastly develop if it gets everything right,” said Vidur Jain, a strategist at Monet Capital, an investment bank based in Ulaanbaatar.
Government complaints
At the moment, much appears to be going wrong. Instead of basking in new mineral riches, Elbegdorj is sparring with Rio Tinto. In addition to the complaint about a cost blow-out, the government says the company should have paid taxes last year and needs greater financial transparency.
In his speech to parliament on February 1, Elbegdorj wasn’t just bluffing. A few days later, his government briefly froze Rio Tinto’s bank accounts, according to three people familiar with the situation who asked not to be named because they weren’t authorised to speak publicly.
“I’m concerned by recent political signals within Mongolia calling into question some aspects of the investment agreement,” Sam Walsh, Rio Tinto’s chief executive, said in a webcast on February 14. “This undermines the partnership we’ve built and the stability on which a project of this size and scale depends.”
Rio Tinto, through its Oyu Tolgoi unit, says it has pre-paid taxes and wasn’t obligated to make payments in 2012. The company says phase-one construction costs are on budget, at $6.2bn, and in line with estimates it gave the government in December 2010. “We have always been fully transparent with all our shareholders regarding our project finances, costs and operations,” Oyu Tolgoi chief executive Cameron McRae said in a February 7 statement.
Until recently, Oyu Tolgoi had billboards in the capital that touted the IMF estimate that most of the mine’s profits will benefit Mongolians.
After two decades of laissez-faire, the government last year introduced regulations and laws to rein in foreign investors. These include insisting that a foreign company acquiring more than a 33 percent stake in a mine or other strategic industry get approval from a government agency. Investments above 49 percent must be approved by parliament. The government has more than Rio Tinto in its sights. Peabody Energy Corporation, Anglo American and several smaller mining companies also operate in the country.
“There’s a real doubt in the minds of Mongolians about foreign investment,” Mark Mobius, the executive chairman of Templeton Emerging Markets Group, said. His fund has only 1 percent of its money in Mongolia. “It’s very low on the totem pole.”
Some investors who had made Mongolia a priority might be heading for the exits, said Travis Hamilton, the managing director of Singapore-based Khan Investment Management. “Without legislative clarity, clear leadership and a welcoming environment for investment, the government risks a flight of capital.”
Even the US ambassador to Mongolia has joined the fray, chiding both the government and investors for their hostility to one another.
“The lack of respect is killing projects,” Piper Campbell said at a mining conference in Ulaanbaatar in February. “I have been in meetings with the government and businesses where both sides accuse the other of violating laws, acting corruptly and other lapses – without thought of the impact of those kind of attacks. Both sides leave the room angry, the disputes fester, and when disaster inevitably comes, everybody acts surprised.”
Market drop
Mongolia may already be paying a price for its toughening stand. After jumping 139 percent in 2010 and 47 percent in 2011, the tiny Mongolian stock exchange’s Top20 index tumbled 19 percent last year. It has fallen 15 percent this year, shrinking its market capitalisation to 768 billion tugrik (R5bn) as of April 8.
For Alisher Ali, the founder of Silk Road Finance, an investor in frontier markets, that’s a buying opportunity. He said he was increasing his stakes in companies such as Apu, a beverage maker based in Mongolia and the largest non-resource company listed on the exchange.
“This period of underperformance is short-term,” said Ali, who also invests in Myanmar and Mozambique. “Ultimately, the Oyu Tolgoi issue will be resolved because it is in the long-term interests of both Rio Tinto and the government.”
For many Mongolians, national pride may count for more than investment dollars. Eight centuries ago, Mongol rulers were the world’s most powerful men. Genghis Khan’s empire stretched from the Mediterranean to Korea. His grandson Kublai Khan declared himself emperor of China. Elbegdorj, 50, a former nomad whose travels took him to Harvard University, heads a fragment of that once-mighty realm. Surrounded by China and Russia, Mongolia has been dominated by one or the other of its giant neighbours for most of the past 300 years.
The country was an impoverished satellite of the former Soviet Union during much of the last century. It still retains the Cyrillic alphabet, and many of Ulaanbaatar’s 1.3 million inhabitants live in crumbling concrete apartment buildings from the Soviet era. Others live just outside the city’s centre in yurts without sewers, running water or, in most cases, electricity. Smoke from their coal fires has turned the capital into one of the most polluted cities, according to a 2011 World Bank report.
With the Soviet empire crumbling in 1990, Mongolia emerged as a turbulent democracy with revolving-door governments. Because the country is a minerals exporter, its proximity to China has been a coveted asset. Oyu Tolgoi is 100km from the Chinese border. To best exploit that geographic advantage, though, Mongolia still must upgrade its mostly dirt roads, threadbare rail network and overloaded power grid.
Last year, it issued $1.5bn of so-called Chinggis bonds, named for the local spelling of Genghis, and the government plans to sell an additional $3.5bn.
Rather than simply letting investors mine ore and ship it across the border, the government plans facilities such as a copper smelter, coal coking plant, oil refinery and iron pellet plant that will add value.
For now, though, Elbegdorj is consumed by domestic politics. A presidential election is due in June, and he’s betting that playing hardball with mining companies will be a vote winner. He may be right. Out in the Gobi Desert, 20km from where Rio Tinto’s miners are digging for copper, Aimtan Ulam-Badrakh, 54, stands beside his isolated yurt watching his 300 sheep and 10 camels.
At first glance, it’s a way of life unchanged since the days of Genghis Khan. Step inside the yurt, however, and a different story unfolds. These days, the herdsman can afford a leather couch, a TV and a computer. An iPhone 4 lies on a bed – one of three mobile devices his family shares. His wife works part time at the airport built for the miners. His daughter teaches English at a local school, having learned the language while on a scholarship in Malaysia sponsored by Rio Tinto’s local unit.
Ulam-Badrakh said he was glad Oyu Tolgoi was being developed – but also had reservations. “Foreigners cannot just dig up the land, take away our wealth and leave us with a big hole in the ground,” he said. “It has to be beneficial for foreigners and the Mongolian people.” – Bloomberg