Jan. 9 (Bloomberg) -- Proposed changes to Mongolia’s mining laws threaten the viability of the nation’s biggest coal project at Tavan Tolgoi and will further deter foreign investment, the Business Council of Mongolia said.
The legislation, which will give the state the right to a free stake in many mineral projects, will take the country away from the free-market principles practiced there since the early 1990s, Mongolia’s largest business group said in a four-page letter sent to President Tsakhia Elbegdorj’s office on Jan. 7. The letter, made public by e-mail yesterday, came after the draft laws were published last month.
Overseas investment in Mongolia, which relies on minerals for more than 90 percent of its exports, has cooled since a law last year restricted state owned companies from controlling strategic assets. Lawmakers have also unsuccessfully sought twice in the past 18 months to renegotiate the development accord for Rio Tinto Group’s Oyu Tolgoi copper and gold mine, which will account for about 30 percent of the nation’s gross domestic product once in full production, in a bid to take a greater share for the state.
“The draft minerals law will hurt all investment in mining in Mongolia, local as well as foreign,” Jim Dwyer, the executive director of the business group, said in an e-mail. “This would include the government’s huge Tavan Tolgoi coal project and Mongolia’s largest publicly-owned mine, Energy Resources.”
The proposed law specifies output targets and obliges mine operators to follow them regardless of market demand, which would affect prices and profits of projects, said Dale Choi, an Ulan Bator based associate with Origo Partners MGL, a private equity investment firm.
The effect will be to make mining projects aligned with the interests of the state, said Choi, a committee member at the group. In addition, the law would allow settlements as small as a village to decide on whether to accept prospecting and exploration on land near them or not, he said.
“Nobody expected that the law would be so tough on mining,” Choi said. “There’s no way this is not correlated with the presidential elections this year. The majority of the population may favor this law, because it is not happy with mining, especially in the rural areas. The country as a whole benefits from mining, but locals feel they don’t directly benefit.”
Investments by Rio Tinto and its Turquoise Hill Resources Ltd. and SouthGobi Resources Ltd. units helped fuel Mongolia’s record economic expansion of 17 percent in 2011. That slowed after Mongolia passed the Strategic Entities Foreign Investment Law, which effectively blocked state-owned Aluminum Corp. of China Ltd. from taking control of SouthGobi.
“It is unlikely that the exploitation of Tavan Tolgoi will be an economically viable or commercially attractive if it will be regulated by the Draft Law,” the business group said in the letter.
Mongolia has delayed picking a foreign partner to develop the West Tsankhi area of the 6-billion-metric-ton Tavan Tolgoi coal deposit for more than two years as it seeks to balance domestic interests with those of investors from the U.S., Russia, China, Japan and South Korea. Companies that have sought to be involved include Peabody Energy Corp., OAO Russian Railways, and China’s Shenhua Group.
The negative impact from the draft law could spread to real estate and commercial banking among other sectors in the mining industry supply chain, Dwyer said. The law may allow for the creation of a “a few Mongolian oligarchs,” he said.
The Business Council of Mongolia, founded in 2007, has 250 members including Rio Tinto, Peabody Energy, General Electric Co. and Mitsubishi Corp. The Office of the President of Mongolia didn’t immediately respond to an e-mail seeking comment yesterday.
The current minerals law was passed in 2006 and is the basis for the Oyu Tolgoi investment agreement between Rio Tinto, the owner of 66 percent of the project and Mongolia, which has the rest, according to Mongolia International Capital Corp., an Ulan Bator-based investment bank. The proposed law is twice as long as the current legislation, MICC said in a report last month.
The draft law defines water, oil, gas, radioactive minerals and rare earth elements as of strategic importance, according to an English translation of it provided by the business group. The borders of strategic deposits will be defined by the Central State Administration.
Investors in strategic deposits will need to establish an accord with the government and set up a “special regime” for mining such minerals, according to the translation of the documents. Mongolia will take a stake in the company developing a strategic deposits free of charge, the draft says, adding that the percentage will be specified in each accord.
The draft proposes that Mongolia does not add new deposits to the strategic list apart from those already on it. There are 15 deposits on the strategic list, new agency news.mn reported last month.
The proposed legislation would need to be passed by Mongolia’s parliament for it to become law. Chimed Saikhanbileg, cabinet secretary, said the proposed law was drafted by the president’s office and declined further comment.
Mongolia’s economy grew 13.2 percent in the first half of 2012, according to the national statistics office. Expansion for the full year may have slowed to 11 percent, central bank governor Naidansuren Zoljargal said in October. The government has yet to release annual economic statistics.
The country, which had parliamentary elections last year, is due to vote on a new president in June.
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