Mongolia a cornucopia of untouched natural resources

The hill that runs along the side of Ulaanbaatar is still covered with gers, the nomadic tent houses that have been used for millennia by the peoples of the steppe, says Business News Europe. Some stand in the lee of the power station on the hill and the wires overhead crackle with electricity. The number of tents has actually increased this year following a "dzud" winter in 2009, the Mongolian term for an extremely snowy winter where the livestock can"t find food. Many of the new arrivals lost up to a third of their animals, slaughtered the rest and moved to UB - as the locals call the capital - to look for work.

Mongolia started this millennium as one of the poorest countries in the world, but since work started on the Oyu Tolgoi (OT) copper-gold mine earlier this year everything has changed. The prospects for the herders in the yurts has improved dramatically in just the last year as the investment from just this one project already lifted the economy by a fifth and will drive growth for the next three years. But when the mine comes online in 2013, the economy should explode.


Mongolia is a cornucopia of untouched natural resources. The OT mine is the investment that has primed the pump, but the catalyst that pushed the government into action has been the global economic crisis, and the phenomenal growth in next-door China will provide the fuel for what should become the success story of the decade.


The foreign partners own 66% of the mine, while the Mongolian government holds the rest. This year the partners will invest about USD750 million into building the facility in the southern Mongolian desert close to the Chinese border and the investment will only climb from there. "The first pound of copper is not due to be produced until 2013, but by then more than USD3 billion will have been invested into the mine in an economy which creates USD5 billion of wealth a year. It"s a massive injection of cash for Mongolia and foreign exchange inflows this year are already up an order of magnitude over last year," says N. Zoljargal, deputy governor of the country’s Central Bank.


Work on constructing the OT mine is already well in hand. The exploratory Shaft 1 has been completed, which is being used to better define the size of the deposit. Work on shaft 2 has already started, which will be able to carry over 1,000 workers to the mine face and enable the extraction to start in about two years.The rising tide of money is already being felt on the foreign exchange markets, where the national currency has already started to appreciate strongly against the dollar. As the money keeps coming, the main challenge for the government is how to deal with all the cash flooding into its coffers.


But the real boom will arrive when the mine is expected to go on line and the shipping of copper and gold starts. At full capacity, OT is expected to generate some USD3 billion a year of revenues (at current prices), single-handedly increasing the size of the economy by half; the government is forecasting between 7.5% and 8.2% GDP growth for the next two years, but growth will leap by 20.8% in 2013 after OT starts functioning before settling down to around 14% a year thereafter, according to Mongolia"s National Development and Innovation Committee.


And OT is not the only mining project. China"s push to develop its northeast regions is sucking in every raw material Mongolia has to offer – and that is a lot. The country"s vast copper, gold, PGM group metals and coal resources remained largely untouched in the Soviet era, as Russia produced all it needed for both internal consumption and export from its own territory. The one exception was the huge Erdenet copper mine built by the Russians in 1975 to exploit Asia"s largest deposit of copper ore and the fourth largest copper mine in the world, which has been Mongolia"s main source of hard currency earnings for the last four decades.


OT is a big political deal that will kick start the economy, but now the country is rapidly opening up, spurred by China"s rapid renaissance, and the first resource to be developed on a more commercial basis is coal.


Coal as a fuel has made a dramatic revival in recent years in a world worried about energy security. And the fact that 80% of the fuel burnt in Chinese power stations is coal helps. Even the domestic demand for power is going to spike. In the last 30 years, Mongolia has not added a single power plant to its 800 megawatts (MW) of capacity today, but demand is already at 700 MW and the average consumption of power is rising fast from an extremely low base of 0.6 kilowatt (kW) per person against the averages of 1.6 kW in China and 6 kW in Germany.


Prophecy Resource Group is developing the Ulaan Ovoo coal deposit in central Mongolia, among others, which contains about 209 million tons of coal close to the Russian border that is covered by only a few inches of dirt. The coal is of such high quality it doesn"t need to be washed and can be shipped out to customers immediately. CEO John Lee literally doesn"t have to do anything more than go to the site and start shovelling coal into a wheelbarrow to work toward the first 50,000 tons his firm will produce in November. Ultimately, the mine hopes to produce 5 million tons a year and go from an operating cash flow of USD1 million this year to USD172 million by 2014. "There are coal deposits all over Mongolia, most of which are now being developed by a slew of companies," says Lee. "Yes, coal has a dirty reputation, but with today"s technology it can be made clean."


Copper produced at the OT mine will reboot the Mongolian economy, but coal should ultimately overtake it as the main economic driver: The 2009 production of coal was 7 million tons, but that is expected to increase 10-fold over the next few years, worth at least another USD7 billion a year in revenues for Mongolia, at today"s prices. "Copper is going to be the main forex earner for the next few years, but a little further down the road, coal will become the most important export," says Steve Feldman, head of IR at South Gobi Energy Resource. "We have closed deals to develop a large area and China is hungry for coal. It is a captive market."


Investors are still playing catch-up with Mongolia"s coal developments. SouthGobi listed on the Hong Kong Stock Exchange in January, raising USD400 million, which values its coal at USD5.70 per ton against an average marketing price of about USD100 per ton. However, Prophecy is also listed on Toronto"s exchange, but enjoys little coverage by analysts, which is reflected in its share price, which values its coal reserves at a mere USD0.04 per ton of coal, says Mr. Lee.


Mongolia is still right at the beginning of developing these resources and most of the coal projects won"t start coming online until next year at the earliest, but together they will add to the money flowing into the economy from the OT mine. The few paying attention to the story say the growing affluence will quickly spill over into the rest of the economy as it has done elsewhere in resource-rich economies. "Billions of dollars will be pouring into the country in the coming years as all these projects get going. It is going to spill over to the banks and the real estate sector and the whole economy will be lifted," reckons H. Ganhuyag from the TenGer Financial group, who is also an economic advisor to the Prime Minister. "The biggest challenges we face going forward is building up the infrastructure and how to handle all this money that is on its way so we don"t succumb to things like the Dutch disease. Still, these are not bad problems to have."