Mongolia May Drop Foreign Owners' Cap in Mining: Sources

The Mongolian government is set to soften a proposed foreign investment law, which seeks to impose a 49 percent cap on foreign ownership in 'strategic' assets including the country's booming mining sector, industry executives told CNBC.

"Cooler heads prevailed this week," said Jim Dwyer, Executive Director of the Business Council of Mongolia (BCM) in a telephone interview from the capital Ulan Bator on Wednesday.

A working group headed by the Deputy Speaker of Parliament informed the BCM earlier this week that it had revised the initial draft of the law to remove the most controversial aspect of the proposal, a requirement of 51 percent Mongolian government ownership.

"It's out," said Dwyer, a former global head of M&A for UBS, referring to the ownership limits. "We were thrilled when we heard what the Working Group came up with. The initial draft was draconian but it's been reworked very nicely."

The draft legislation is expected to be considered by the country's Parliament this Friday during its first reading and it could be passed “within two weeks," Dwyer said.

Investors have been questioning governance, transparency, contractual certainty and legal structures amid claims that the government is playing the national interest card by making it tougher for foreign companies to do business in the country.

Mining industry executives warned the legislation still needs to be ratified by Parliament in what has been a tense run-up to legislative elections on June 28 with pre-poll rhetoric taking on an anti-Chinese tone.

"This is just the first reading," said one Singapore-based executive with deal-making experience in Mongolia, adding that another big risk is if the post-election political landscape changes, leading to the "pro-business bureaucracy getting kicked out."

Anti-China Rhetoric

Nationalist rhetoric is taking on a heightened anti-China tone in the run-up to the polls, presenting an additional risk for the investment outlook, political analysts said.

The draft foreign investment law "would subject all foreign investors to a new layer of scrutiny, even as Chinese investments are likely to be disproportionately targeted," wrote Damien Ma, analyst at Eurasia Group on May 4. "Given China's outsized importance to the country's economic prospects, however, Mongolia is not turning away from China. But it clearly wants to counter the perception that the future of the country's mining resources is being decided in Beijing rather than in Ulaanbaatar."

Still, miners active in Mongolia are optimistic. "I imagine the law may change and there's a chance that clause is removed before it becomes actual law," said a source close toIvanhoe Mines, one of the largest investors in Mongolia's mining sector, referring to the ownership restrictions.

The source added that in its unamended form, the required 51 percent Mongolian ownership in the draft law would "scuttle" the deal by China aluminum giant Chalco [2600.HK 3.35 -0.01 (-0.3%) ] to acquire Ivanhoe's stake in SouthGobi Resources [1878.HK 47.10 -1.60 (-3.29%) ].

Toronto and NYSE-listed Ivanhoe [IVN 9.82 -0.06 (-0.61%) ] is the majority owner of the Oyu Tolgoi mine in Mongolia. Oyu Tolgoi, which means 'Turquoise Hill', is the world's largest undeveloped gold and copper project and enters full commercial production in the first-half of 2013.

Rio Tinto [RIO.L 3127.00 --- UNCH ], which co-develops and manages Oyu Tolgoi, has invested more than $4 billion in Ivanhoe over the past six years to position itself to take over the company founded by billionaire Robert Friedland and get its hands on the Canadian miner's 66 percent stake in the giant Mongolian mine, Reuters has reported.

Metal extracted from Oyu Tolgoi is being used to produce the 4,700 gold, silver and bronze medals that will be awarded during the London 2012 Olympic and Paralympic Games, said Rio -- the official supplier of the awards -- on its website. The metal is also coming from Rio's Kennecott Utah Copper project in the U.S.

© 2012 CNBC.com