Mongolia Mining Report Q4 2011
Business Monitor International's Mongolia Mining Report provides industry professionals and strategists, corporate analysts, mining associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Mongolia's mining industry.
Mongolia is set for a rapid increase in production of gold, copper and coal leading to fast growth in the mining sector. BMI expect that mining sector output will grow to US$11.5bn by 2015, marking a fourfold increase from 2010 levels of US$2.6bn. Most of this rapid growth will occur in the second half of 2012 and 2013 as the Oyu Tolgoi copper/gold mine commences production.
Rapid Growth Across All Metals - BMI expect a dramatic reversal of the trend of static growth in mining output, with rapid rates of growth across the mining complex over the coming years. From 2011 to 2015, BMI forecast an annual average growth rate of 31.4% in gold output to reach 791kozpa (thousand ounces per annum), and 46.2% growth in copper production to 720ktpa (thousand tonnes per annum). The phenomenal rates of growth in copper and gold output will be largely driven by the Oyu Tolgoi mine, a joint venture (JV) between Rio Tinto and Ivanhoe Mines, which is now due to come online in August 2012, one year earlier than originally anticipated. This mine is set to be one of the largest copper and gold mines in the world and will make Mongolia a significant producer of both metals.
In terms of coal production, BMI forecast an annual average growth rate of 17.0%, reaching 27.0mntpa (million tonnes per annum) by 2015. This increase will be driven by South Gobi, a subsidiary of Ivanhoe, which is increasing production at Ovoot Tolgoi, the country’s largest coal mine, to 6.5mntpa by 2014.
This growth will reverse the decline experienced over the last three years. There are substantial upside risks to BMIs coal outlook as the Tavan Tolgoi mine, currently owned by the Mongolian government, is due to commence output by 2015. In July 2011, the Mongolian government announced that it had chosen US miner Peabody Energy, China’s Shenhua and a Russian Railway/Mongolian-led consortium to develop the western bloc at Tavan Tolgoi. However, this decision has proved controversial.
Expected annual production figures for Tavan Tolgoi have yet to be released, but the mine is believed to contain 6 billion tonnes (bnt) of reserves, making it one of the world’s largest untapped coal deposits. Aside from these developments, Mongolia has great potential for further growth in mining output across all metals as very little of the country has been mapped. Therefore, it is likely that significant deposits of minerals are yet to be discovered.
Regulatory Environment
Mongolia has made significant progress over the last decade to improve its business environment. Most importantly, the government recently rescinded the 68% windfall tax which had been a great impediment to foreign investment into the country. The repeal of the tax led to a wave of investment including the completion of the Oyu Tolgoi agreement, which will bring billions of dollars of investment into the country. Recently, however, there has been a slight deterioration in the country’s business environment as the government suspended almost half of the country’s mining licenses on environmental grounds, having previously cancelled two exploration licenses for the Canadian miner Khan Resources.
Key Players
Mongolia’s mining sector is dominated by Rio Tinto and Ivanhoe, but other smaller companies are active including Centerra Gold and Erdene Gold, both of which have substantial exploration projects. BMI expect the mining sector to become more fragmented going forward with numerous companies tempted by the country’s mineral potential. Indeed, in addition to Rio Tinto, BMI expect other large-scale miners to enter the Mongolian mining sector, such as Vale, tempted by the country’s considerable undeveloped coal reserves.
Risks to Outlook
Although BMI currently holds a positive view on the long-term outlook for Mongolian mining, based on their strong forecasts for production growth across all major minerals, it is worth flagging up some nearterm risks that may undermine investor sentiment.
In July 2011, the Mongolian government announced that it had chosen US miner Peabody Energy, China’s Shenhua and a Russian Railway/Mongolian-led consortium to develop the West Tsankhi bloc at Tavan Tolgoi. However, confusion continues to surround this decision, with the government later saying this choice of companies was not final, amid complaints from South Korean and Japanese companies – which had originally formed part of both the Russian Railway and Shenhua-led consortia – that lost out in the bidding process. West Tsankhi reportedly holds around 1.2bnt of coal (out of 6.5bnt for the wider Tavan Tolgoi deposit).
Clearly, such uncertainty around a key mining project is a clear negative for the project and BMI would hope that the authorities can soon finalise their decision on exactly which companies will be taking West Tsankhi forward over the coming years. With this in mind, parliament is expected to give final approval to the West Tsankhi deal when it resumes sitting for its autumn session.
Moreover, until there is clarity around the fate of the western bloc, state-owned miner Erdenes Tavan Tolgoi (ETT) will be unable to press ahead with a long-awaited IPO for the eastern bloc of the project. Funding from this IPO could do much to boost living standards for ordinary Mongolians, who have been increasingly angered at the way the government is selling off natural resources to powerful foreign interests. The government has already said it hopes to put US$250mn from Tavan Tolgoi into its human development fund this year, according to an August 2011 report on Bloomberg, with reports also indicating that it wants to give 10% of the shares in Tavan Tolgoi to local residents. With elections looming in 2012, populism and political rhetoric around mining is only set to increase.
Mongolia is set for a rapid increase in production of gold, copper and coal leading to fast growth in the mining sector. BMI expect that mining sector output will grow to US$11.5bn by 2015, marking a fourfold increase from 2010 levels of US$2.6bn. Most of this rapid growth will occur in the second half of 2012 and 2013 as the Oyu Tolgoi copper/gold mine commences production.
Rapid Growth Across All Metals - BMI expect a dramatic reversal of the trend of static growth in mining output, with rapid rates of growth across the mining complex over the coming years. From 2011 to 2015, BMI forecast an annual average growth rate of 31.4% in gold output to reach 791kozpa (thousand ounces per annum), and 46.2% growth in copper production to 720ktpa (thousand tonnes per annum). The phenomenal rates of growth in copper and gold output will be largely driven by the Oyu Tolgoi mine, a joint venture (JV) between Rio Tinto and Ivanhoe Mines, which is now due to come online in August 2012, one year earlier than originally anticipated. This mine is set to be one of the largest copper and gold mines in the world and will make Mongolia a significant producer of both metals.
In terms of coal production, BMI forecast an annual average growth rate of 17.0%, reaching 27.0mntpa (million tonnes per annum) by 2015. This increase will be driven by South Gobi, a subsidiary of Ivanhoe, which is increasing production at Ovoot Tolgoi, the country’s largest coal mine, to 6.5mntpa by 2014.
This growth will reverse the decline experienced over the last three years. There are substantial upside risks to BMIs coal outlook as the Tavan Tolgoi mine, currently owned by the Mongolian government, is due to commence output by 2015. In July 2011, the Mongolian government announced that it had chosen US miner Peabody Energy, China’s Shenhua and a Russian Railway/Mongolian-led consortium to develop the western bloc at Tavan Tolgoi. However, this decision has proved controversial.
Expected annual production figures for Tavan Tolgoi have yet to be released, but the mine is believed to contain 6 billion tonnes (bnt) of reserves, making it one of the world’s largest untapped coal deposits. Aside from these developments, Mongolia has great potential for further growth in mining output across all metals as very little of the country has been mapped. Therefore, it is likely that significant deposits of minerals are yet to be discovered.
Regulatory Environment
Mongolia has made significant progress over the last decade to improve its business environment. Most importantly, the government recently rescinded the 68% windfall tax which had been a great impediment to foreign investment into the country. The repeal of the tax led to a wave of investment including the completion of the Oyu Tolgoi agreement, which will bring billions of dollars of investment into the country. Recently, however, there has been a slight deterioration in the country’s business environment as the government suspended almost half of the country’s mining licenses on environmental grounds, having previously cancelled two exploration licenses for the Canadian miner Khan Resources.
Key Players
Mongolia’s mining sector is dominated by Rio Tinto and Ivanhoe, but other smaller companies are active including Centerra Gold and Erdene Gold, both of which have substantial exploration projects. BMI expect the mining sector to become more fragmented going forward with numerous companies tempted by the country’s mineral potential. Indeed, in addition to Rio Tinto, BMI expect other large-scale miners to enter the Mongolian mining sector, such as Vale, tempted by the country’s considerable undeveloped coal reserves.
Risks to Outlook
Although BMI currently holds a positive view on the long-term outlook for Mongolian mining, based on their strong forecasts for production growth across all major minerals, it is worth flagging up some nearterm risks that may undermine investor sentiment.
In July 2011, the Mongolian government announced that it had chosen US miner Peabody Energy, China’s Shenhua and a Russian Railway/Mongolian-led consortium to develop the West Tsankhi bloc at Tavan Tolgoi. However, confusion continues to surround this decision, with the government later saying this choice of companies was not final, amid complaints from South Korean and Japanese companies – which had originally formed part of both the Russian Railway and Shenhua-led consortia – that lost out in the bidding process. West Tsankhi reportedly holds around 1.2bnt of coal (out of 6.5bnt for the wider Tavan Tolgoi deposit).
Clearly, such uncertainty around a key mining project is a clear negative for the project and BMI would hope that the authorities can soon finalise their decision on exactly which companies will be taking West Tsankhi forward over the coming years. With this in mind, parliament is expected to give final approval to the West Tsankhi deal when it resumes sitting for its autumn session.
Moreover, until there is clarity around the fate of the western bloc, state-owned miner Erdenes Tavan Tolgoi (ETT) will be unable to press ahead with a long-awaited IPO for the eastern bloc of the project. Funding from this IPO could do much to boost living standards for ordinary Mongolians, who have been increasingly angered at the way the government is selling off natural resources to powerful foreign interests. The government has already said it hopes to put US$250mn from Tavan Tolgoi into its human development fund this year, according to an August 2011 report on Bloomberg, with reports also indicating that it wants to give 10% of the shares in Tavan Tolgoi to local residents. With elections looming in 2012, populism and political rhetoric around mining is only set to increase.
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