Market wary of Mongolia's poll
IN a best-case scenario, this week's election in Mongolia will remove the uncertainty that has hurt the share prices of Australian companies working in the frontier nation.
But the reality is likely to be more complicated than that.
The market's exotic love affair with all things Mongolian has come to an abrupt end this year, with the country's looming elections and an increased aversion to risk sparking a sell-off in the Australian companies exploring there.
It is a stark contrast to a year ago, when Australian exploration companies exploring in Mongolia were flying.
As more and more promising deposits were identified, excitement continued to grow about the potential riches that could be unlocked. Mongolia's position on the doorstep of a hungry China only added to the story's appeal.
Money was raised, deals were done, new Mongolia-focused ventures were floated on the ASX and share prices rose.
It is a different story today.
The streets of Mongolia's capital, Ulan Bator, continue to swarm with the frenetic activity of a city in the middle of a gold rush, due in part to the huge investment going into the Rio Tinto-controlled $13 billion Oyu Tolgoi copper-gold mine development in the Gobi Desert.
But the smaller exploration companies that had hitched themselves to the Mongolia story face a more uncertain future.
Investors have been increasingly scared off by a perceived rise in sovereign risk in Mongolia, with the looming election and its debate about how to spread the benefits of the resources sector to the people.
This represents a compelling reason to hold back from investing in the explorers and miners working in the country.
General concerns about the state of the global economy, an increased aversion towards risk among investors and a growing realisation about major infrastructure hurdles faced by companies hoping to develop mines in Mongolia have all helped drive down the prices of Mongolian stocks.
Shares in Perth-based Mongolian explorers Aspire Mining and Modun Resources are both down about 80 per cent from a year ago, and Sydney-based Xanadu Mines is down about 65 per cent from its highs.
Mongolia-focused iron ore explorer Haranga Resources is down 46 per cent since March.
All those companies and investors with a presence in Mongolia will be keeping a close eye on this week's election that pits the Mongolian People's Party against the Democratic Party, which was until recently its coalition partner.
The campaign has reflected a national debate about the role of mining in the country's economy.
The activity boom and the construction of Oyu Tolgoi have fed expectations of an economic windfall, but so far the riches generated have not filtered down to the rest of the population.
With an election on the horizon, there have been plenty of populist votes to be won through rhetoric that promises a greater slice of the mineral wealth for the people.
Recent calls for another rework of the investment agreement governing taxes and royalties from Oyu Tolgoi were swiftly put down by Rio, but the administration of the country's resources industry remains a topic of much discussion.
In Mongolia, the debate over resources is about more than just the hip pocket.
The influx of foreign mining companies into China has also sparked a debate about how much of the country's mineral riches should fall under the control of outside interests.
Chinese involvement in particular remains a sore point, which found its outlet when Chinese state-owned Chinalco bid for control of Hong Kong-listed Mongolian coalminer South Gobi Resources.
Chinalco's bid led to Mongolian authorities suspending South Gobi licences and prompted the country's parliament to introduce legislation forcing all major foreign investments to seek government approval.
Miners active in Mongolia point out that the legislation was watered down on its passage through the parliament and is little different from the process used by Australia's Foreign Investment Review Board.
But in a twitchy investment climate, the saga was seen as an example of the risks involved in investing in Mongolia.
In the shorter term, investors, companies and Mongolians will be hoping for a peaceful resolution to the election.
The campaign has been tight and the outcome is said to be too close to call.
The last legislative election, in 2008, was also tight and the result sparked violent protests and the declaration of a four-day state of emergency.
Those in the mining industry hope a tight result will lead to the two major parties forming a coalition government that would favour the status quo.
The election has taken on added potency since former president Nambaryn Enkhbayar was arrested on corruption charges and barred from participating in the election.
It adds up to a difficult and complex outlook for the country and the companies working there.
Even fund manager Templeton Emerging Markets executive chairman Mark Mobius appears to have gone shy on Mongolia.
Speaking in Hong Kong last week, Mobius said he believed the investment situation in Mongolia would remain "challenging", even after the election.
A lack of infrastructure and the evolution of its legislation would continue to hamper the country, he said. "The problem is they're not set up in their mindset to share these resources," he said.
"There's still a lot of debates about how much they want to allow foreigners to do. I'm not saying there's no good opportunities. I'm saying you need to be a little more cautious."
Miners and explorers on the ground in Mongolia say market dynamics are working against them.
But there's also a belief that, after the election, companies and the government will get back to maintaining the status quo.
"There's lack of interest from investors in the Australian market at the moment and that's affecting all of us," Xanadu Mines executive chairman Brian Thornton says.
But the reality is likely to be more complicated than that.
The market's exotic love affair with all things Mongolian has come to an abrupt end this year, with the country's looming elections and an increased aversion to risk sparking a sell-off in the Australian companies exploring there.
It is a stark contrast to a year ago, when Australian exploration companies exploring in Mongolia were flying.
As more and more promising deposits were identified, excitement continued to grow about the potential riches that could be unlocked. Mongolia's position on the doorstep of a hungry China only added to the story's appeal.
Money was raised, deals were done, new Mongolia-focused ventures were floated on the ASX and share prices rose.
It is a different story today.
The streets of Mongolia's capital, Ulan Bator, continue to swarm with the frenetic activity of a city in the middle of a gold rush, due in part to the huge investment going into the Rio Tinto-controlled $13 billion Oyu Tolgoi copper-gold mine development in the Gobi Desert.
But the smaller exploration companies that had hitched themselves to the Mongolia story face a more uncertain future.
Investors have been increasingly scared off by a perceived rise in sovereign risk in Mongolia, with the looming election and its debate about how to spread the benefits of the resources sector to the people.
This represents a compelling reason to hold back from investing in the explorers and miners working in the country.
General concerns about the state of the global economy, an increased aversion towards risk among investors and a growing realisation about major infrastructure hurdles faced by companies hoping to develop mines in Mongolia have all helped drive down the prices of Mongolian stocks.
Shares in Perth-based Mongolian explorers Aspire Mining and Modun Resources are both down about 80 per cent from a year ago, and Sydney-based Xanadu Mines is down about 65 per cent from its highs.
Mongolia-focused iron ore explorer Haranga Resources is down 46 per cent since March.
All those companies and investors with a presence in Mongolia will be keeping a close eye on this week's election that pits the Mongolian People's Party against the Democratic Party, which was until recently its coalition partner.
The campaign has reflected a national debate about the role of mining in the country's economy.
The activity boom and the construction of Oyu Tolgoi have fed expectations of an economic windfall, but so far the riches generated have not filtered down to the rest of the population.
With an election on the horizon, there have been plenty of populist votes to be won through rhetoric that promises a greater slice of the mineral wealth for the people.
Recent calls for another rework of the investment agreement governing taxes and royalties from Oyu Tolgoi were swiftly put down by Rio, but the administration of the country's resources industry remains a topic of much discussion.
In Mongolia, the debate over resources is about more than just the hip pocket.
The influx of foreign mining companies into China has also sparked a debate about how much of the country's mineral riches should fall under the control of outside interests.
Chinese involvement in particular remains a sore point, which found its outlet when Chinese state-owned Chinalco bid for control of Hong Kong-listed Mongolian coalminer South Gobi Resources.
Chinalco's bid led to Mongolian authorities suspending South Gobi licences and prompted the country's parliament to introduce legislation forcing all major foreign investments to seek government approval.
Miners active in Mongolia point out that the legislation was watered down on its passage through the parliament and is little different from the process used by Australia's Foreign Investment Review Board.
But in a twitchy investment climate, the saga was seen as an example of the risks involved in investing in Mongolia.
In the shorter term, investors, companies and Mongolians will be hoping for a peaceful resolution to the election.
The campaign has been tight and the outcome is said to be too close to call.
The last legislative election, in 2008, was also tight and the result sparked violent protests and the declaration of a four-day state of emergency.
Those in the mining industry hope a tight result will lead to the two major parties forming a coalition government that would favour the status quo.
The election has taken on added potency since former president Nambaryn Enkhbayar was arrested on corruption charges and barred from participating in the election.
It adds up to a difficult and complex outlook for the country and the companies working there.
Even fund manager Templeton Emerging Markets executive chairman Mark Mobius appears to have gone shy on Mongolia.
Speaking in Hong Kong last week, Mobius said he believed the investment situation in Mongolia would remain "challenging", even after the election.
A lack of infrastructure and the evolution of its legislation would continue to hamper the country, he said. "The problem is they're not set up in their mindset to share these resources," he said.
"There's still a lot of debates about how much they want to allow foreigners to do. I'm not saying there's no good opportunities. I'm saying you need to be a little more cautious."
Miners and explorers on the ground in Mongolia say market dynamics are working against them.
But there's also a belief that, after the election, companies and the government will get back to maintaining the status quo.
"There's lack of interest from investors in the Australian market at the moment and that's affecting all of us," Xanadu Mines executive chairman Brian Thornton says.
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