Mongolia: the slow and bumpy road
Mining is a political business – and nowhere is this more evident than Mongolia. This landlocked Asian country has huge mineral wealth but, even at the peak of the commodities cycle, was singularly unable to develop its mining industry to any significant extent. Now parliamentary elections, coupled with the downturn in global commodity demand, look likely to keep Mongolia’s mining industry development in the slow lane.
A particularly apt example of how closely mining and politics entwine in Mongolia came at the end of January when the current Prime Minister, Saikhanbileg Chimed, faced a vote of no confidence. Members of parliament accused the prime minister of abusing his power when he agreed a development and financing plan for Turquoise Hill Resources’ Oyu Tolgoi (OT) underground copper mine. The MPs claimed the deal offered little benefit to Mongolian citizens.
The vote of no confidence was the latest act in the OT drama that has elements of both tragedy and farce. OT is one of the largest and purest copper deposits in the world and should be the engine for Mongolia’s economic development: if it ever reaches its full potential, it could account for a third of the country’s GDP.
Yet it is OT’s size and value that has been its downfall. Mongolia cannot develop the mine on its own. But the country has never been entirely comfortable with foreign ownership of its mineral wealth, originally falling out with Turquoise Hill’s controlling stakeholder, Rio Tinto, in 2013. Nor is OT the only instance where government interference has complicated the development of Mongolia’s mineral wealth: the same plot has been played out at the country’s largest coal project at Tavan Tolgoi (TT).
Ultimately, the prime minister survived the vote of no confidence and looks likely to remain in power until the June elections,1 leaving the hard-fought deal (it ultimately split the government and resulted in six ministers losing their jobs) over OT in place. It is hardly the resounding success that the government was aiming for, however, a success that could have heralded a new and welcoming environment for foreign investment, which fell by 85% between 2012 and 2015.2
Nor is the issue entirely settled. Resource nationalism will be hot topic in the run up to the parliamentary elections with the Mongolian People’s Party – the country’s former communists who were ejected from the ruling coalition last year over the OT deal – poling strongly. Should they perform well enough to form at least a coalition government in June, foreign investors may again face a more hostile environment.
Beyond purely local issues, Mongolia’s mining sector faces the same commodity headwinds that have buffeted the global mining sector. The slowdown in Chinese growth – to which Mongolia’s economy is indelibly linked – is of particularly concern.
“Mongolia’s macroeconomic performance continues to be tightly linked to that of China with the mainland economy accounting for approximately 90% of the demand [for] Mongolia’s exports,” BMI Research wrote in a recent research note.3 “We believe that the structural slowdown in the Chinese economy remains in place and will continue to weigh on Mongolia’s commodity exports over the coming months […] Indeed for the whole of 2015, Mongolia’s exports fell by 19.1% and this was majorly due to a collapse in commodity exports.”
That point was echoed by Stephen Duck, Senior Consultant – Steel Raw Materials at CRU: “Given the downturn in prices, most Mongolian coal miners are burdened with debt and have reported losses since 2013,” Duck told World Coal. “Production has been falling with CRU estimating coal exports to fall to 10.8 million t in 2015. Production is also unlikely to recover lost ground in 2016, given the weak outlook for demand in China.” CRU forecasts exports to fall to 7.1 million t in 2016 with recovery back to 10.8 million t only by 2020.
In early February, Mongolian coal mining company, Mongolian Mining Corp. (MMC), said it was seeking to restructure debt of US$600 million, appointing J.P. Morgan Securities (Asia Pacific) and SC Lowy Financial (HK) Ltd. In a statement, MMC blamed “changes to economic policy implemented within the group’s principal target market, China, [that have] resulted in reduced crude steel production and consequently lower coking [metallurgical] coal consumption and declining import volumes,” on its precarious financial state.
Tavan Tolgoi: still no deal
“Mongolia relaunching key mining talks later this month” ran the headline in the Wall Street Journal.4 The story focused on Tavan Tolgoi – Mongolia’s vast metallurgical coal reserve – and quoted a Mongolian official “familiar with the situation” as saying the goal was to award the contracts before the Mongolian parliamentary elections in June. The story appeared in October 2011.
Fast forward four years and not too much has changed. A government-approved US$4 billion deal had been lined up last year with a consortium comprising Japan’s Sumitomo Corp., China’s Shenhua Energy and MMC. But then came the politics. The speaker of the parliament said that deal might violate Mongolian laws; shortly after, the government agreed that the deal would need to be approved by parliament – and the deal essentially died.
“When we submitted the proposed agreement for the Tvan Tolgoi coal mine project, I said there was a 50-50 chance for approval,” one of the country’s chief negotiators, Mendsaikhan Enkhsaikhan, told Reuters in September.5 “At this moment, it’s less than 10% that it will be approved by parliament and will be implemented.”
Similar politicking has plagued Tavan Tolgoi since the government first began looking for development partners in 2010. An initial deal that included Shenhua and US mining company, Peabody Energy, was signed in July 2011 but cancelled two months later following protests from the Japanese and Korean governments whose companies had been excluded.
The project hasn’t progressed much since then – and if last year’s shenanigans are anything to go by, may remain stalled for some time yet unless Mongolia can put in place an institutional structure for mining that keeps politics at arms length.
“Taven Tolgoi is going to remain a failed case of Mongolian mining governance unless the parliamentary election of 2016 or the next commodity boom changes conditions,” wrote Jargalsaikhan Mendee of the Political Science Department at the University of British Colombia in a recent opinion piece for IndraStra.6 “It may continue to fail unless politicians unite to provide autonomy for bureaucrats and professionals to increase institutional resilience of Mongolian mining governance.”
Beyond Tavan Tolgoi
Although Tavan Tolgoi remains stalled, a number of smaller mine expansions and exploration projects from smaller players are making better progress and will help to boost Mongolia’s coal production in coming years.
These projects include the expansion of Naryn Sukhait by Mongolian Alt Group, the 460 million t Khushuut coal project by Mongolian Energy Corp. and the 175 million t Ulaan Ovoo project by Prophecy Coal. Meanwhile, TerraCom (formerly Guildford Coal) announced in February 2015 that its Baruun Noyon Uul (BNU) metallurgical coal mine had begun production.
According to the company’s quarterly report to the end of December 2015, BNU produced 179 140 t ROM coal and shipped 164 839 t to China over that three month period, compared to production of 154 374 t ROM and shipments of 64 618 t in the previous quarter.
Despite the success in bringing BNU to production, TerraCom said it was facing financial pressures as a result of “continuing weak global market conditions” and was seeking to restructure its existing financial facilities as well as generating new funding. The restructuring of its balance sheet was due to be completed in 1Q16.
ASX-listed Aspire Mining is also actively developing projects in the country with stakes in both coal mining and railroad projects in the north of the country. Aspire’s projects include the Ovoot metallurgical coal project and the Ekhgoviin-Chuluu joint venture with Noble Group (which owns a 90% stake in the Nuurstei metallurgical coal project).
The ASX-listed company also owns Northern Railways, which aims to connect Ovoot to the country’s national rail network and then onto Russia’s Trans-Siberian Railway. Upon completion, the line will be able to transport 100 million tpy of coal and will increase Mongolia’s access to Russian, Chinese and seaborne metallurgical coal markets.7
Moving the mountain
Aspire’s development of a railway to its Ovoot coal projects highlights another challenge facing the Mongolian coal industry: infrastructure. As Russell Taylor, a mining executive with experience of working in Mongolia, pithily put it to World Coal: “Without suitable transport and export infrastructure, the coal is just as landlocked as Mongolia itself. China and Russia both have large reserves, so Mongolia can’t rely on those two nations as a complete market.” Despite this, “Mongolia has not implemented a suitable railway network to transport coal out of Mongolia [nor does it have] access or agreement to a port in either China or Russia.” If it is ever to restart its coal sector, this lack of infrastructure needs to be resolved, Russell concluded. Moving coal by truck to China – as TerraCom does with its BNU coal – is hardly a long-term solution.
CRU’s Stephen Duck takes up this theme: “Due to a lack of transport infrastructure, Mongolian coal miners have been losing competitiveness against other exporters due to the high transport cost of trucking,” Duck told World Coal. “For Mongolian metallurgical coal to be more competitive, transportation costs must fall significantly. In April 2014, a JV was established to construct 18 km of railroad connecting the Gashuun Suhait/Grants Mod board crossing by the end of 2014. This development would reduce the transportation cost for this route from US$7 – 8/t to US$2/t. However, development of the project is behind schedule.”
Yet where mining projects go, so too go their associated infrastructure: “There is a scheduled parliamentarian election in the summer of 2016,” continued Duck. “We do not expect that any big decisions on rail infrastructure will be made before the election in June 2016. The new government will only likely form a cabinet by the Autumn 2016 and no major decisions will be taken before then.”
This means that – even in a best-case scenario – a new railway is unlikely to be commissioned before 2019, according to Duck. “With this assessment in mind, we are pessimistic on the development of the Tavan Tolgoi railway project and other infrastructure projects in Mongolia in the medium-term. We believe that transportation bottlenecks and weak market conditions will prevent Mongolian producers from ramping up exports; we forecast 2019 metallurgical coal export volumes of around 11 million t.”
Where’s the good news?
Despite the political, economic and infrastructure challenges, there remains great potential on Mongolia’s steppes driven by its geographical location and the quality of Mongolia’s coal.
“We believe proximity [to China] and the high-quality grade of Mongolia’s coal make the country ideally placed to cement its position [as] one of the leading suppliers of coking [metallurgical] coal to the Chinese market over the next few years,” said BMI Research in a research note.7 “The high-grade of Mongolian metallurgical coal means suppliers are able to circumvent the ban on ‘dirty’ coal introduced by China’s government. A number of independent studies have confirmed that the blend, with its medium ash, low sulfur and high G value, to be better than primary coking coal imported from Australia.”
Duck concurs: “We believe Mongolia will have an important role to play in the Chinese metallurgical coal market in the longer-term.” Given the sector’s tortuous recent history, exactly how long Mongolia’s coal industry will have to wait, is anybody’s guess – but when it does come it will bring further significant challenges for the country’s governance.
“The Mongolian government will face major domestic challenges over the coming decade as the country’s mining boom takes off and it seeks to strike a balance between distributing the revenues in a way that is acceptable to the population, while avoiding stoking inflation,” wrote BMI Research in a recent report on the long-term politics of the country.8 And that is not to mention social challenges, including immigration and a growing wealth gap, and foreign policy issues, as the country seeks to avoid falling under too much influence from its giant neighbours.
Those sorts of challenges would be hard enough to face in the best governed of countries – and Mongolia is hardly that. It seems then that mining development will continue to face a bumpy ride with more than a passing chance that it will end in another ugly crash.