All Sorts of Things

Random posts on all sorts of things designed to inform and provoke.

Mongolia: Domestic Politics May Strip Rio Tinto of Share of Mine

indexMongolia, the sparsely populated landlocked Asian country, is one of the world’s fastest growing economies; according to the International Monetary Fund, its inflation-adjusted gross domestic product (GDP) grew by 12.7 percent in 2012 and is projected to expand by 15.7 percent in 2013.

Despite this growth rate, over 20 percent of the country’s three million residents live on less than $1.25 per day and make their living from a number of industries, the two biggest of which are mining – 21.8 percent of GDP – and agriculture – 16 percent of GDP.

The mining industry is expected to anchor Mongolia’s future growth as the country has extensive deposits of copper, coal, molybdenum, tin, tungsten, and gold. Mongolia also borders Russia to the north and China to the south, east and west – giving it easy access to two growing consumer markets.

In addition to resources and access, Mongolia’s improving friendliness to businesses – it has steadily risen on the International Finance Corporation’s “Doing Business” report – makes it an attractive target for mining companies.

These reasons and the potential of the Oyu Togoi copper and gold mine – 25 million metric tons and a life of 50 years – make it an attractive prospect, and, after an intense bidding process, this project – at $6.6 billion, the single biggest foreign investment in Mongolia – was won by the Rio Tinto Group (RTG) and Ivanhoe Mines in 2009.

RTG, by the way, is one of the world’s biggest commodity companies with operations on six continents and assets valued at around $81 billion. It, therefore, knows how to do business in uncertain and challenging environments.

Regardless of this experience, RTG finds itself locked in a battle with the Mongolian government who wants more management control of, and a bigger share of profits from, the Oyu Togoi mine. Mongolian lawmakers have criticized RTG for making decisions without consulting the ministry and higher costs – the government claims an increase of $10 billion.

Predictably, the company has refused to rewrite the signed agreement.

RTG needs this matter to be resolved quickly, though, because this mine represents a significant investment for the company and these issues could delay the mine’s production start date – scheduled for July of this year.

However, simply giving in to the government’s demands would set up a negative precedence for other existing agreements and future negotiations. This is particularly important since these issues aren’t exclusive to Mongolia as resource nationalism is a major concern of mining executives, according to Ernst & Young’s August 2012 risk survey.

The one likely driving factor behind Mongolian President Tsakhia Elbegdorj’s demands is the June 2013 elections since, in general, politicians who stand-up to foreign investors – especially in low income countries – are most likely to win public support.

The Mongolian government, however, also has a number of practical reasons to resolve this agreement: It has a substantial investment in the Oyu Tolgoi mine, minerals represent a vast majority of the country’s exports and any negative attention could hurt foreign investment in the country.

Given these factors, it would make sense for both parties to resolve this matter. At first glance, it may seem the Mongolian government has the upper hand in these negotiations. However, given the size of the Oyu Tolgoi mine and the investment that it requires, the balance is pretty even since it will be difficult for the government to develop this resource by itself or attract other private investment.

The only viable option, if it reneges on the agreement with RTG would be to work with a Chinese company and that would not be a positive direction.

Mongolia should learn from the experience in Venezuela whose government kicked out private sector companies and saw its output, productivity and economy decline. The private sector also needs to understand the value of spreading the wealth by developing social projects and ensuring open communication with the government.

The Mongolian mining sector has immense potential to benefit everyone but this potential could be lost if both parties do not come meet in the middle – and that would be a loss for not just Mongolia but for the world as well.

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This entry was posted on February 22, 2013 by in Global Economy and tagged , , , , , .
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