| ULAN BATOR, July 12
ULAN BATOR, July 12 Anti-foreigner campaigners
have emerged as the big winners in Mongolia's June election, a
bloc whose increasing power is bad news for the international
mining corporations which have been trying for years to get
potentially huge projects going there.
Politicians are jockeying to decide which parties form the
coalition that will manage the money flowing into Asia's
fastest-growing economy, but whatever the government's lineup
after the inconclusive poll, some of its members will stridently
oppose overseas ownership of Mongolian natural resources.
Mongolia is home to some of the world's biggest unexploited
mineral deposits and has become one of the hottest destinations
for billions of dollars of mining investment, a scale which has
already transformed the economy.
"The fact that several resource nationalists won increases
the uncertainty for investors," said Oscar Mendoza, the Mongolia
manager for Canada's Prophecy Coal, which controls two
coal deposits in the north Asian country. "Resource nationalism
in Mongolia is not new but it is growing."
More than a quarter of the 76-seat parliament is now held by
politicians who advocate local control of mines.
The Democratic Party, which won the most seats, is broadly
in favour of the free market, but at least nine of its 31
parliamentarians have reputations as resource nationalists, and
could press for a deal with the Justice Coalition, a group whose
central doctrine is greater national ownership of mines.
Its leader Nambar Enkhbayar - who was president between 2005
and 2009 - wants deposits discovered by foreign companies to be
returned to the state after a fixed period.
"For an initial period of 20 years it can be privately
owned, because it was privately discovered. (Foreign companies)
can invest in it, get their money back and make a profit but
starting from the 21st year they should give it back to the
Mongolian side," Enkhbayar told Reuters as votes were counted.
Were it to become law, this could mean investors have only
two decades to recoup their huge capital outlay. Rio Tinto
says the cost of building its Oyu Tolgoi copper
and gold mine, due to start production this year, will be around
$13 billion, a project it would then have to hand over without
Enkhbayar's minority group would need the support of other
lawmakers to get the law passed, but just by pushing the issue
they are inflaming the debate about foreign investment.
"I think the politicians in Mongolia need to know that what
they say in public gets reported, and if things get said often
enough and in a certain way, people do pay attention," said
Cameron McRae, chief executive of Oyu Tolgoi LLC and Rio Tinto's
country manager in Mongolia. "But this is a normal part of the
political process and common sense usually wins out in the end."
APPEARANCE OF HOSTILITY
Some in the industry fear the risk of the government
demanding contracts with mining firms are renegotiated has
risen, meaning they will have more hurdles to jump before they
even start digging the minerals out.
Along with Oyu Tolgoi, other high profile projects that
could be at stake are Tavan Tolgoi - potentially one of the
world's biggest coal suppliers - and Chinese firm Chalco's
attempted $926 million acquisition of coal miner
"In terms of Tavan Tolgoi, (resource nationalist
politicians) want to keep it 100 percent in Mongolian hands.
They want to distribute all shares to the public," said Dale
Choi, chief investment strategist at Frontier Securities, a
Mongolian investment bank.
Talks to develop Tavan Tolgoi have been frozen since last
July, when the government reversed a decision to sell mining
rights to a consortium involving China's Shenhua and
Choi suggested emboldened nationalist lawmakers may try to
make the government rework Rio's deal for Oyu Tolgoi, currently
34 percent owned by Mongolia. "They want more than 50 percent,"
Mongolia's economy, driven largely by mining development,
grew at a roaring 16.7 percent year-on-year in the first quarter
of 2012, according to the World Bank, more than double the pace
of its neighbour China.
In the runup to the election, nationalist politicians
introduced a law to cap foreign investment. The law was later
relaxed to allow overseas firms to own a greater than 49 percent
stake in Mongolian deposits, but only with parliamentary
approval, and foreign state-owned companies need parliamentary
permission to invest at all. That could be much tougher given
the makeup of the new parliament.
"We want to have small government in this country," said
Dambadarjaa Jargalsaikhan, an influential political commentator,
"so why would we want a big foreign government doing business in
Mongolia? Never. It will not happen."
As pressure builds from grassroots voters to assert domestic
control of these engines of growth, the appearance of hostility
to foreigners - especially Chinese - is often a vote-winning
public stance that masks a more pragmatic approach.
" Some politicians said the contract with Oyu Tolgoi needs to
be redressed, but the government is still in dire need of
investment in infrastructure, power, technology, key areas that
the government cannot provide any funding or financing for, so
they do need foreign investment," said Prophecy's Mendoza.