Tapping the Mongolian hoard
Inside the Grand Khaan Irish Pub, a popular downtown bar, it's common to spot Australian expats sharing a Jacob's Creek red and enjoying some wagyu beef.
Mongolia's rich and largely untapped natural resources have attracted a diverse array of Australian businesses, including miners, suppliers, construction and engineering companies and firms from the legal and financial sectors.
More than 650 Australians live in the country and more than 45 Australian businesses operate there, with many other staff working on a fly-in, fly-out basis from China and Australia.
"With strong skills and experience in the mining sector and related services industries, Australian firms have played a large role in the development of this sector," says Australian ambassador to Mongolia Sam Gerovich, who is based in Seoul.
In 2011, Mongolian GDP stood at $13.4 billion, with analysts predicting foreign investment will top $10 billion over the next five years in the minerals sector alone. And Australian investment is expected to be a significant contributor.
Rio Tinto's $6.6 billion Oyu Tolgoi project, the huge copper and gold mine in the south Gobi Desert, is predicted to increase Mongolian GDP by one third when it reaches full production.
Oyu Tolgoi has already paid $US800 million in taxes to the Mongolian government, including $US280 million in national and local taxes and other government fees last year.
However, as Rio has found out, doing business in Mongolia isn't all smooth sailing. Oyu Tolgoi operator Turquoise Hill Resources, which is controlled by Rio, is battling renewed political interference over development costs, royalties and ownership of the project, of which the government has a 34 per cent stake.
The Mongolian mining boom also cooled last year. The 2011 record GDP growth of 17.3 per cent slowed to 12.3 per cent last year. Decreasing exports to China and foreign investment concerns over a tightening of the mining regulatory regime sent shock waves through the expat business community.
The Strategic Entities Foreign Investment Law introduced last May added to the uncertainty. "Institutional shareholders have been less interested in Mongolian-related stocks because of legislative volatility," Aspire Mining managing director David Paull says.
According to Paull, Aspire (which operates Ovoot, the second largest coking coal deposit in Mongolia) experienced more than 50 per cent under performance last year as a result of parliamentary elections and changes in the foreign investment law. While the effect on Aspire was significant, Paull reckons the company got off fairly lightly. "We were the lucky ones. We didn't have to go to market and we already had our discovery. If you were a junior exploration company with a lower share price at that time, it would have been very difficult."
John Miragliotta is the environment manager at Sustainability, a Perth-based consultancy firm specialising in occupational health and safety and environmental issues and with clients including the Oyu Tolgoi and Ovoot operations. "The past six months have been challenging for us," he says. "While that has been across the board, it has been amplified in Mongolia on two fronts - the changes to the minerals law; and the uncertain stability of the Oyu Tolgoi investment agreement."
Last month, the Mongolian government changed the Strategic Entities Foreign Investment Law. Analysts have welcomed the changes, and noted that the law was originally introduced as a means to block China's state-owned Aluminum Corporation of China Limited from purchasing a controlling stake in South Gobi Resources. "The Chinese SOEs [state-owned enterprises] are so large that they could potentially take control over all the major strategic businesses in Mongolia if not prevented from doing so by an effective legal framework," says one source in Ulaanbaatar.
However, doubt about the terms and conditions of Rio's Oyu Tolgoi agreement continues to concern investors. "The investment agreement is a milestone for Mongolia and for that project," Miragliotta says. "Investors are concerned when they see moves to adjust these agreements."
Gerovich says many new laws are unclear and have created tremendous uncertainty for all businesses operating there. "The Australian government has urged the Mongolian government to continue to support the Oyu Tolgoi investment agreement, which would demonstrate that Mongolia is a good place to do business."
With first production at Oyu Tolgoi scheduled for next month, Rio Tinto and other Australian businesses are hoping that next month's presidential election won't add further complications. "The government and the people are aware they need to strike that balance between attracting foreign capital and the country gaining the right value from the involvement," Paull says.
"Australians haven't necessarily been put off by the unpredictability," Miragliotta says. "A lot of [Mongolians rely directly on mining] and are mostly pragmatic in their thinking ... they don't want to lose the gains they've made in the past 10 years."
Despite its mineral wealth, Mongolia remains a poor country. The World Bank estimates 29.9 per cent of the population lives below the poverty line.While foreign financial critics may complain about "resource nationalism", Mongolians see the right balance as one that preserves the resource wealth of their country and reaps the appropriate benefits for future generations.
The Australian government's interest in Mongolia is focused on encouraging the minerals sector, sustainable mining practices and overall economic development. According to AusAid, Australia is providing $14.2 million in development assistance in 2012-13. Part of that contributes towards the well-publicised Mongolia Australia Scholarships Program, which brings master's-level students to Australia each year. Alumni include a cadre of parliamentarians, former ministers and senior public servants.
Unurjargal Lkhanaa, one of 38 students in Australia this year, is studying international development at Murdoch University in Perth.
"I can apply the skills I get here in my home country to support growth and development," she says. "We have many challenges, including not having any real benchmarks for, or experience of, what is a fair and reasonable international investment context. I hope to take this knowledge back and help to make changes."
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