July 11, 2012 / 9:00 PM / 7 years ago

Miners fear anti-foreigner voices in new Mongolia government

ULAN BATOR, July 12 (Reuters) - 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 compensation.

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.”


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 SouthGobi Resources.

“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 U.S.-based Peabody.

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,” he said.

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.

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