Monday, August 4, 2014

Mongolia foreign investment craters 70%

The Asian nation which is dependent on the mining sector to fuel growth late last year rewrote rules on foreign investment, but new data on Friday shows another steep fall-off in FDI during the first half of 2014.

Mongolia's central bank said on Friday fresh capital entering the country fell 70% for a total of $873.2 million from January to June against a year earlier. This year's dismal numbers follows a 47% drop during 2013.

The steep falloff translated into a drop in the capital and financial accounts surplus to a meagre $2.6 million which is a decrease of 97% or $884.9 million from 2013.

Mongolia's earnings from coal exports dipped 17% during the first half of the year, but copper exports surged 144% thanks to Rio Tinto's massive copper-gold-silver Oyu Tolgoi mine ramping up to full production. Copper has now overtaken coal as the country's number one export commodity.

The $6 billion Oyu Tolgoi mine is 34% owned by the Mongolian government with Rio Tinto-controlled Turquoise Hill (TSE:TRQ) owning the rest.

Changes to Mongolia's 2012 foreign investment law (SEFIL) approved by the country's cabinet in November provided more certainty surrounding mining taxes and royalties and scraps the distinction between private foreign and domestic investors, but seem to have had little impact.

While the new law has been universally hailed as a positive step the number one issue that has to be resolved before investor confidence will return to the country is the future of Oyu Tolgoi.

Vancouver-based Turquoise Hill suspended work on the $5.1 billion underground expansion of Oyu Tolgoi where 80% of the resources are located at the same time the new law was enacted leading to 2,000 workers being let go. In May another 300 positions at the mine in the South Gobi desert near the Chinese border were closed.

Talks over Oyu Tolgoi's expansion and the reworking of the initial 2009 deal which first unleashed the Mongolian investment boom, have dragged on for more than a year.

Financing arrangements with the Mongolian government including a World Bank-led $4.5 billion debt package – the largest in the history of mining – have also been placed on ice. Funding commitments needed to build the underground mine are set to expire Sept. 30.

For 2014, Oyu Tolgoi is targeting production of 150,000 to 175,000 tonnes of copper in concentrates and 700,000 to 750,000 ounces of gold in concentrates.

But after phase 2 the mine in the southern Gobi desert could produce more than 1.2 billion pounds of copper, 650,000 ounces of gold and 3 million ounces of silver each year.

Oyu Tolgoi will account for 30% of the economy of the nation of just over 3 million people.

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