Foreign investors, whose dollars make up a big component of Mongolia’s $11.7 billion economy, have been recently put off by a combination of falling commodities prices and the hectic views of the its policy makers.
Expansion of Rio Tinto’s Oyu Tolgoi mine — which was under review for over two years — is a clear example of the rollercoaster some miners must ride if they choose to do business in Mongolia.
Then, there is the case of Canada’s Khan Resources (TSX:KRI), whose license for the Dornod uranium deposit it was developing was expropriated in 2010, and given to Russian producer ARMZ. The Toronto-based company is still waiting to get a $104 million arbitration payment awarded by an international court in March.
However, ever since Rio and the country’s government reached an agreement in May, things are looking up.
“To see Oyu Tolgoi finally moving forward is nothing but good news for smaller companies operating in Mongolia,” Erdene Resource’s (TSX:ERD) vice president and CFO Ken MacDonald said in a recent presentation at the 128th Annual Meeting of The Nova Scotia Mining Society.
For the Halifax-based company the road hasn’t presented too many bumps. For about three years the firm has been developing its wholly owned Altan Nar gold-polymetallic project in the Tien Shan Gold Belt of southwest Mongolia, discovered in late 2011.
He noted that Mongolia has recently taken a number of steps to demonstrate its commitment towards developing its resources, including the introduction of a new Foreign investment law, a reduction of gold royalties to 2.5%, and an end to a moratorium on giving out new licenses.
His view are backed up by a recent report from BMI Research, which says the Rio Tinto deal could herald a new phase of mining investment in the country.
“It is difficult to understate the importance of Oyu Tolgoi in determining Mongolia’s long-term economic fortunes,” said BMI Research. “The development […] suggests that the government is likely to adopt a more benevolent stance towards foreign mining investment over the coming years, following a significant drop-off in foreign direct investment over 2013 and 2014.”
The second phase of construction at the mine will begin later this year, Prime Minister Chimed Saikhanbileg told Reuters last week. The long-stalled $5 billion mine that is expected to boost Mongolia’s economy by a third when it reaches full capacity in 2021.
Erdene’s executive didn’t seem too surprised about the agreement. He said he sees such move as being consistent with the promises of 47- year-old Prime Minister Saikhanbileg Chimed. After taking office in November, he vowed to put an end to several high profile disputes with overseas companies in order to regain investors’ confidence, MacDonald said.
“We believe the discovery at Altan Nar, with its high-grade zones, size potential and location, provides an opportunity with the flexibility to move rapidly towards a small-scale start-up and ultimately towards a very large gold, silver, zinc and lead development on the border with China,” MacDonald noted.
With an initial NI 43-101 compliant mineral resource established, the company’s current work plan at Altan Nar includes process test work, as well as evaluations of the mining, engineering, transportation, and marketing options. This work is expected to consider options for expedited development including evaluating the concept of producing a potentially high value gold, silver, lead and zinc concentrate to be sold into China, and transported via rail to the south of Altan Nar for final processing.
Mongolia’s mineral wealth attracted several firms in the past two decades as it opened up to investment. The main attraction has always been the country’s riches — vast deposits of copper, coal and iron ore— as well as its proximity to China, the world’s biggest buyer of the minerals.
The enthusiasm peaked in 2011 when land-locked Mongolia’s economy grew 17% or the fastest pace on the planet. It’s been downhill since.