Business Council of Mongolia: New Mineral Law threatens foreign investment

By B.KHASH-ERDENE

Mongolia’s vast deposits of mineral resource could soon be governed by a resource nationalist regulatory framework, if a new draft of the country’s Minerals Law is passed in its current form, says Mongolia’s largest business group.
The new draft was published by the Mongolian government in December, and makes far-reaching changes to the way mining and exploration licenses are awarded and maintained. It mandates that Mongolian citizens must hold a 34 per cent equity stake in all mining projects, and gives state-owned companies a pre-emptive right to any mining or exploration licenses transferred from one entity to the other, according to a summary from law firm Hogan Lovells reports Financial Times.
The Business Council of Mongolia (BCM) said in a four-page letter sent to President Tsakhia Elbegdorj’s office on January 7 that the law “threatens to shut down the entire minerals industry of Mongolia.”
Mineral product exports account for more than 90 percent of the country’s exports.
“The impact of the draft law on the minerals industry will be to halt current mineral exploration and development in Mongolia and greatly discourage any future foreign investment. Collateral damage is likely to include all other sectors of supply, including but not limited to the; construction and real estate sectors, imposition of a significant chain-reaction burden on the banking and financial institutions which may not be able to withstand. All this would lead to a deepening of a potential crisis,” said the BCM’s letter.
The Business Council of Mongolia, founded in 2007, has 250 members including Rio Tinto, Peabody Energy, General Electric Co. (GE) 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, which owns 66 percent of the project and Mongolia which owns the rest. The proposed law is twice as long as the current legislation, Mongolia International Capital Corp said in a report last month.
“Nobody expected that the law would be so tough on mining…There’s no way this is not correlated with the presidential elections this year. The majority of the population may favour 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,”said Dale Choi, an Ulaanbaatar based associate with Origo Partners MGL to Bloomberg.
The proposed legislation would need to be passed by the parliament for it to become law and at this stage it is more than likely that significant changes will be made to it.
The draft Mineral Law wasdrafted by the president’s office and business groups suspect that this is an early move by the president’s campaign to bolster support in the upcoming presidential election this year.
Last fall, parliament members who promised to get tougher on foreign miners sought to renegotiate the investment agreement of Oyu Tolgoi Project with Rio Tinto, to gain a bigger stake in the project. The Oyu Tolgoi project is expected to account for about 30 percent of the Mongolia’s gross domestic product once in full production.
Foreign investment flow in Mongolia has decreased substantially since a law last year restricted state owned companies from controlling strategic assets. It effectively stopped Chinese state-owned CHALCO from taking control of SouthGobi.
The parliament will have to find the fine line of balancing domestic interests with those of investors.
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.