by PETER LEE
Mongolia IMAGE/Google
In Mongolia today, hunger for coal, copper, gold and uranium wealth is at odds with democracy as the demands of international resource giants collide with a stubborn political culture of resource nationalism.
In time for the June 2012 parliamentary elections, Mongolia’s grand khural passed a law subjecting the purchase by “state-owned entities” of controlling interest in strategic Mongolian mining enterprises to government approval (as well as a host of other key industries).
The immediate provocation for the legislation was the sale by a Canadian company, Ivanhoe Resources, of its controlling interest in SouthGobi, an operator of coal mines in Mongolia, to a Chinese resource giant, the Aluminum Company of China, known as Chalco.
The legislation overtly targeted China. Vice Finance Minister Ganhuyag Chuluun Hutagt told Bloomberg that the country needed new investment laws to diversity its exports to countries other than China, which consumes a lion’s share of Mongolia’s coal and copper:
We don’t want to be faced with one sovereign … Our struggle to gain political freedom was a long one and we cherish that. We will not let foreign government-owned entities control strategic assets in Mongolia.
This is not an unambiguous win for non-Chinese international resource companies.
After all, there are two ways to make money from ownership of a mining concession. One is to engage in the arduous, expensive, long-term and risky enterprise of operating the mine. Another is to sell it. And the people who are willing to pay top dollar for a mine are the people who are already buying the product and have a powerful economic incentive for making a go of it … like the Chinese. So the Mongolian government’s involvement in strategic industries can be looked at in two different ways. On the one hand, it might hobble a deep-pocketed, overweening competitor to the benefit of other, grateful players; on the other hand, it might be seen as increasing the risk and diminishing the liquidity of investments in the so-called strategic industries, shaving precious points off the value of the assets, be they hard rock or financial paper. Unsurprisingly, the investment community, which is politely slavering at the prospect of profitable deal flows from Mongolian mining initial public offerings (IPOs) and mergers and acquisitions, is not amused by the strategic industry law. Dale Choi, of the pre-eminent Mongolia resource investment firm Frontier Securities, told Bloomberg:
Investors don’t like it when the rules of the game are changed after the game has started, and changed often at that … It would be in the interests of Mongolian people to make a decision based on commercial factors, rather than geopolitical factors. 1
The uncertain progress of the Tavan Tolgoi project illustrates the headaches facing Mongolia as it tries to reap its resource bonanza on behalf of its citizens even as the remorseless economic logic of globalization demands marginalization of their interests. Tavan Tolgoi, in the Gobi Desert less than 300 kilometers from the Chinese border, contains over six billion tons of coal reserves, including 1.8 billion tons of coking coal, a premium and profitable item used in the iron and steel industry.
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