Mongolia: mine ownership gets political
At least none of the Kyrgyz licences are for the country’s major mining operations. The situation is different in Mongolia, which on April 16 suddenly suspended the mining licenses of SouthGobi Resources.
SouthGobi’s majority owner Ivanhoe Mines had agreed to sell a 57.6 per cent stake in the company to state-run Aluminum Corporation of China (Chalco). In response, the government is now busy rushing through parliament legislation that puts limits on foreign investment into enterprises with “strategic significance”.
According to comments attributed to Minister of Foreign Affairs G Zandanshatar on the parliament website, he told MPs that the law could be passed “within two weeks”. Zandanshatar said it is only a “coincidence” that the government is rushing through this law following the revoking of SouthGobi’s licenses and ahead of the June parliamentary elections.
Nevertheless, Chinese influence is a touchy subject for many Mongolian people, and bashing foreign investors, especially Chinese ones, goes down well with voters. “This contract should be terminated immediately,” Jargalsaikhan Dambadarjaa, an economist and popular local talk show host said on his programme, speaking for many. “If someone doesn’t disrupt the SouthGobi deal, it will become Chinese property.”
SouthGobi Resources is one of the country’s largest exporters, shipping one in every five tonnes of Mongolian coking coal to China. The company is majority owned by Ivanhoe Mines, but Chalco earlier in April agreed with Ivanhoe to buy the majority stake for $926 million, a hefty 28 per cent premium to the market. The announcement appeared to take the government by surprise and two weeks later it suddenly announced it would suspend SouthGobi’s licenses, including that for the flagship Ovoot Tolgoi coal mine, as they had not authorised the deal.
The problem is that SouthGobi is listed in Canada and has no major Mongolian shareholders (as well as Ivanhoe Mines, the Chinese sovereign wealth fund China Investment Corporation owns 13.8 per cent). Foreign investors are worried that if Mongolia finds a way to intervene in this case, it may do so in other deals in the future. Currently, there is no known legal reason for Mongolia to prohibit this deal or suspend the license, something the parliament’s website acknowledges in its report on the draft legislation. MP Bat Batjargal told reporters: “It has become an urgent issue to create legal regulation on this matter.”
Populist talk about clawing back a greater share of country’s resources is not new for Mongolia. Last year, a letter was sent by MPs to Ivanhoe Mines demanding a higher stake in Oyu Tolgoi, the country’s flagship copper-gold mine. That issue was promptly resolved when the government, Ivanhoe Mines and its project partner Rio Tinto released a joint statement honouring the original agreement. This time round, however, political reputations are on the line, so analysts worry that a deal might not be so quick in coming.
“Threatening to revoke licenses and create new laws is a dangerous game to play with the hand that feeds you, but when the economic sovereignty of Mongolia is at stake there may be changes made,” Monet Capital Investment Bank in Ulaanbaatar said in a note April 25. “We expect Chalco’s deals to go ahead, and Mongolia to swiftly create a legal environment that gives them a say in future deals of this kind. The fighting in between will most likely create some good buying opportunities for an investor outside the bubble of fear.”
For their part, both Ivanhoe and Chalco issued a statement expressing “their commitment to cooperate with and assist the [Mineral Resources Authority of Mongolia] and the government of Mongolia in any future processes that they may have.”
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