Leo Liu is a private investor and currently holds the
position of Investor Relations Officer with Prophecy Coal
High economic growth driven by mining activity
Mongolia, entirely flanked to the north and south by Russia and
China, is the most sparsely populated country in the world.
However, the country has vast natural resources with more than
6,000 known mineral deposits of 80 different minerals. It has the
potential to become a major player in global commodity markets with
its rich gold, copper, zinc, uranium, coal, molybdenum and oil
Economic activity in Mongolia has traditionally been based on
agriculture and the breeding of livestock. The economy underwent
significant structural changes in the past and has since become
increasingly reliant on the mineral sector. Ever since the early
1990s Mongolia has been on a steady upward path recording real GDP
growth every year except for 2009.
Figure 1: Structure change in Economy
There are two world-class mines that hold the key to economic
success in Mongolia, namely Tavan Tolgoi, one of the world's
largest coking coal deposits, and Oyu Tolgoi, the largest
underdeveloped copper/gold project. The IMF estimated that export
proceeds from these two mines could total US$2 billion in 2013,
rising to US$7 billion by 2020, while Mongolia's GDP in 2011 was
only $8.8 billion.
With the expected $3 billion Tavan Tolgoi IPO this year and
commercial production of Oyu Tolgoi to commence in first half 2013,
it appears the Mongolia economy is poised to maintain good
momentum. Mongolia's average real GDP growth is projected to be
13.4% annually over the coming five years due to mining
initiatives, according to IMF's World Economic Outlook 2012.
Figure 2: Real GDP growth rate: Mongolia vs. BRIC countries
Source:IMF-World Economic Outlook Oct 2012
Foreign direct investment - the lifeblood of Mongolian
Driven by the mining boom, Mongolia hit another historical peak
in attracting foreign direct investments ((
)) in 2011. Total FDI to Mongolia amounted US$4.7bn, of which over
80% went to the mining sector, according to World Bank data. China,
Canada, and Netherlands, are the top three investor countries by
FDI amount in Mongolia.
Figure 3: FDI net inflows in Mongolia (US$ Billion)
Source: World Bank data Note: data are in current US
Besides its attractive mineral resource, Mongolia's very
competitive raw material prices, low operating cost, low tax rate,
favorable tax credit and cheap labour provides a favorable
investment environment for foreign businesses. Mongolia's
regulatory environment is more conducive to the starting and
operation of a local firm than its neighbors China and Russia, as
Mongolia is continuing its positive run in the World Bank's Ease of
Doing Business 2012 ranking, moving from 88 to 76 out of 185
Figure 4: Ranking of Mongolia in ease of doing business -
Compared with good practice and selected economies
Source: The World bank- Doing Business 2012 rankings
Key factors for accessing investment climate
Market confidence is turning around, as the Mongolia stock
exchange Top 20 index has increased 20 percent from the bottom
reached on December 1, 2012. It is important to review some of key
factors for investment climate to get a better understanding of the
Mongolia market performance.
Figure 5. One-year Mongolia Stock Exchange Top 20 Index
From an historical prospective, 20 years ago Mongolia made a
transition from a one party political system into a democratic
system. The United States Agency for International Development
(USAID) praised Mongolia for its contribution to stability in a
volatile part of the world, as well as its positive example in Asia
in promoting economic reform and democracy.
In recent years, Mongolia has good standing across several
governance indicators in comparison with other transitional and
developing countries. The Economist Political Stability Index
suggests that Mongolia fares above the average in the world.
Mongolia ranks 75th of 177 countries in 2013 Economic Freedom Index
The Wall Street Journal.
The Index evaluates countries in four areas of economic freedom:
rule of law, regulatory efficiency, limited government and open
markets. Mongolia improved its ranking on the list of most corrupt
countries, recently ranked 94th out of 174 countries around the
world, according to 2012 Corruption Perception Index, published by
With an expected increase in the mining sector and corresponding
GDP growth, there is a growing concern about future political
stability in Mongolia. Politically driven events in 2012, in
particular the suspension of South Gobi Sands mining licenses in
April and the request from government to renegotiate the Oyu Tolgoi
investment agreement in October, have undermined the investment
climate in Mongolia in the short term.
Frontier securities points out that political shock cast a
shadow of negative sentiment on the Mongolia market, that manifest
itself in the significant drop in Mongolian share prices, but the
real economic engine is not much hindered. The rising political
risk premium is not meant to discourage FDI; but investors should
be cautious about the investment timing.
Country credit rating
Constrained by the country's susceptibility by virtue of an
undiversified economy and inflationary monetary and fiscal policy,
Mongolia's sovereign credit rating is in Speculative Grade, rated
B1 by Moody's , BB by Standard & Poor's, and 6/9 by SINOSURE,
an Chinese state-funded policy-oriented insurance company.
But with a dearth of sovereign paper in Asia, Mongolian bonds
offer a chance for investors to diversify into one of the most
attractive among emerging-market countries' bonds. In November
2012, Mongolia sold $1.5 billion in debt in its first government
bond offering, after raking in $15 billion of orders. The sale was
equal to nearly one-fifth of the size of Mongolia's economy and
orders were roughly twice the size of the economy.
According to the 2010/2011 Fraser Institute Annual Survey,
Mongolia ranks 54th out of 79 districts in the world regarding the
government mining policy index, higher than Russia (69/79), China
(62/79), and is the second highest in Asia.
Figure 6: Mongolia's mining index ranking compared with other
Source: Fraser Institute 2010/2011 Survey of Mining Policy
Mongolia is collecting comments on draft revised minerals Law
proposed in December 2012, which deviates from its 2006 Minerals
Law in many areas and seeks to introduce a new regulatory regime
- The draft law defines water, oil, gas, radioactive minerals
and rare earth elements as strategic minerals. Investors in its
defined 15 strategically important deposits will need to
establish an accord with the government and set up a "special
regime" for mining such minerals.
- The Draft Law does impose requirements for local equity
participation of mining license holders.
- There are extensive regulations on environmental protection,
mine closures, public consultations, agreements with local
authorities, local content requirements, mandatory insurance
policies, prohibitions on high-grading and feasibility
The draft law, under fire from a number of sources and on a
number of fronts, will likely undergo some significant amendments
before it will be passed into law by Mongolia's parliament.
The Strategic Entities Foreign Investment Law passed in May 2012
specifically limits the amount of FDI in the resource, media, and
financial sectors respectively; and subjects these investments to
government and parliamentary scrutiny. It undeniably prompted
concerns among foreign investors about a more nationalistic
approach to mining policy. The U.S. embassy warned in its July
Mongolia Investment Climate Statement that "investors can and
should expect that investments, particularly in the resource
sector, will be subject to volatile legal and regulatory regimes."
While The Economist Intelligence Unit points out the new government
is unlikely to be able to alter the substance of recent resource
Canada is the second largest foreign investor in Mongolia, with
companies like Turquoise Hill Resource (
), South Gobi (SGQRF.PK) and Centerra Gold (CAGDF.PK) contributing
heavily to the local economy. Unlike Canada, stability in the
regulatory regime has not been a strong suit of the Mongolian
On the way to developing into a country with a stable and fast
growing economy and stable political and environmental conditions,
Mongolia has been undergoing drastic socio-economic changes. It is
important for the government to revise and update its policy stance
to provide better protection to investors, the economy and its
citizens. It is equally important for investors to review the
investment climate in their decision-making before getting involved
in the mining boom in Mongolia, while keeping in mind the idea that
there is seldom reward without risk.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
The views expressed in this article are those of the author
and may not reflect those of Prophecy Coal Corp. Neither Prophecy
Coal Corp. nor the author can guarantee accuracy of all
information provided. This article is strictly for informational
purposes only. It is not a solicitation to make any exchange in
precious metal products, commodities, securities or other
financial instruments. Prophecy Coal Corp. and the author of this
article do not accept culpability for losses and/ or damages
arising from the use of this publication
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