Report: Mongolia going the way of Zimbabwe with mandatory state control of foreign miners

Mongolian elections are less than two months away.

Mongolians, some of the poorest people in the world, are enjoying the world’s fastest-growing economy.

Last year gross domestic product  in the nation  of fewer than 3 million people  expanded by 17.3%.

This year it should easily top 20% thanks to billions of dollars of foreign investment in the country's coal, copper and gold mining industry.

That was the thinking until today.

Draft legislation, a copy of which was seen by the Financial Times on Wednesday, gave "the clearest sign yet that Mongolia is uncomfortable with the large foreign investments that have so far been a mainstay of economic growth."

Changes to investment rules in  Mongolia have long been mooted, but this draft for the first time puts forward regulation to cap foreign ownership of domestic companies at 49%, rules similar to Zimbabwe's indigenization policy.

Mongolian politicians – keen to fly their patriotic colours – have made ownership of mining ventures a central campaign issue.

The latest backlash against foreign involvement in the resource industry seems to have been sparked by a takeover bid by Chalco, China's largest aluminum firm, of SouthGobi Resources, a coking coal producer.

That $925 million deal is now on ice pending a government review and the suspension of some of SouthGobi's licences. SouthGobi is majority owned by Canada's Ivanhoe Mines.

The SouthGobi fiasco is not the first time Mongolian politicians have interfered in the mining industry.

After a shambolic bidding process that stretched as far back as 2007,   Mongolia struck a deal with US giant Peabody Energy, China's Shenhua and a Russian-Mongolian consortium in July last year to develop the western block of Tavan Tolgoi, the world’s largest coking coal deposit.

Barely two months later the country's National Security Council threw out the agreement after losing bidders complained and in March stopped talks with foreign miners altogether.

West Tsankhi alone holds 1.2 billion tonnes of high-quality coal used for steelmaking and Shenhua, the world's largest coal miner with 53 operating mines, said in March it is still confident of signing a deal post elections.

Given the reaction to Chalco and calls by some politicians that Mongolia develop West Tsankhi itself, that optimism may be misplaced.

Mongolia also still hopes to privatize its Erdenes-TT  mining company which controls the remainder of the 6 billion tonne Tavan Tolgoi resource.

The government was hoping to raise as much as $3 billion through a listing in London, Ulan Bator and Hong Kong, but that process has also been thrown into disarray by the upcoming elections.

Just how tempting these massive mining investments are  for politicians look no further than Mongolia's current prime minister Sukhbaatar Batbold.

During the last election that put him in power his Mongolian People’s Party promised $750 (a cool million in the local currency, the tugrik) in cash to all of Mongolia’s adult citizens following the Erdenes-TT sale.

Tavan Tolgoi is not even the largest mining investment in Mongolia. That honour goes to Oyu Tolgoi, a $13 billion copper-gold-silver-project.

In October Ivanhoe and partner Rio Tinto dodged a bullet when the Mongolian government said it was rethinking a 2009 deal that gave Ivanhoe and Rio Tinto a 66% stake in Oyu Tolgoi and that it wanted half of the mine, already three-quarters built.

Oyu Tolgoi is forecast to contribute a third of the country’s GDP when it goes into full operation and increase the average earnings of Mongolians by 60%.  Even that may not be enough for power-hungry politicians.

Image is the Genghis Khan  statue outside the capital  which at 40 metres is the tallest in the world.