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2 Mongolian coal's long road to
market By Peter Lee
Mongolia's national transition from a
communist regime to a democratic, free market
state has been a rocky one.
The loss of
Soviet support following the collapse of the
Soviet Union was an economic and demographic
catastrophe for Mongolia.
As recently as
2008, a third of Mongolians lived below the
poverty line. Mongolian democracy is a violent,
murky business even today and dominated by
successors to the Mongolian Communist Party.
Recently, the ex-president of Mongolia,
Nambaryn Enkhbayar, was arrested on corruption
charges and freed on bail after he
embarked on a hunger
strike that attracted the concern of Western
governments and activists.
His arrest was
widely viewed as part of a political vendetta by
current President Tsakhia Elbegdorj, who himself
faces accusations that he vaulted into the
presidency by orchestrating a riot protesting
Enkhbayar's alleged vote fraud in 2008.
Despite democracy, despite free markets,
what has kept Mongolia from recapitulating the
experience of Kosovo as a failure for Western
nation-building, indeed what is setting the nation
on a pace to become the fastest-growing economy in
the world, is the fortuitous existence of a
trillion dollars' worth of minerals beneath the
under-populated surface of the country, and the
insatiable appetite of a gigantic, capital-rich
authoritarian neighbor, China, for these
treasures.
In Mongolia today, hunger for
coal, copper, gold and uranium wealth is at odds
with democracy as the demands of international
resource giants collide with a stubborn political
culture of resource nationalism.
In time
for the June 2012 parliamentary elections,
Mongolia's grand khural is expected to pass
a law subjecting the purchase by "state-owned
entities" of controlling interest in strategic
Mongolian mining enterprises to government
approval (as well as a host of other key
industries).
The immediate provocation for
the legislation was the sale by a Canadian
company, Ivanhoe Resources, of its controlling
interest in SouthGobi, an operator of coal mines
in Mongolia, to a Chinese resource giant, the
Aluminum Company of China, known as Chalco.
The legislation overtly targets China.
Vice Finance Minister Ganhuyag Chuluun Hutagt told
Bloomberg that the country needed new investment
laws to diversity its exports to countries other
than China, which consumes a lion's share of
Mongolia's coal and copper:
We don't want to be faced with one
sovereign ... Our struggle to get political
freedom was a long one and we cherish that. We
will not let foreign government-owned entities
control strategic assets in
Mongolia.
This is not an unambiguous
win for non-Chinese international resource
companies.
After all, there are two ways
to make money from ownership of a mining
concession. One is to engage in the arduous,
expensive, long-term and risky enterprise of
operating the mine. Another is to sell it.
And the people who are willing to pay top
dollar for a mine are the people who are already
buying the product and have a powerful economic
incentive for making a go of it ... like the
Chinese.
So the Mongolian government's
involvement in strategic industries can be looked
at in two different ways.
On the one hand,
it might hobble a deep-pocketed, overweening
competitor to the benefit of other, grateful
players; on the other hand, it might be seen as
increasing the risk and diminishing the liquidity
of investments in the so-called strategic
industries, shaving precious points off the value
of the assets, be they hard rock or financial
paper.
Unsurprisingly, the investment
community, which is politely slavering at the
prospect of profitable deal flows from Mongolian
mining initial public offerings (IPOs) and mergers
and acquisitions, is not amused by the strategic
industry law.
Dale Choi, of the
pre-eminent Mongolia resource play investment firm
Frontier Securities, told Bloomberg:
Investors don't like it when the
rules of the game are changed after the game has
started, and changed often at that ... It would
be in the interests of Mongolian people to make
a decision based on commercial factors, rather
than geopolitical factors. [1]
The
uncertain progress of the Tavan Tolgoi project
illustrates the headaches facing Mongolia as it
tries to reap its resource bonanza on behalf of
its citizens even as the remorseless economic
logic of globalization demands marginalization of
their interests.
Tavan Tolgoi, in the Gobi
Desert less than 300 kilometers from the Chinese
border, contains over six billion tons of coal
reserves, including 1.8 billion tons of coking
coal, a premium and profitable item used in the
iron and steel industry.
Nothing about
Tavan Tolgoi is simple, except perhaps the
physical process of digging the coal out of the
ground (albeit with the usual environmental and
cultural trauma).
Chalco is already buying
all the coking coal that Tavan Tolgoi produces.
But it has to truck the coal to China since the
Mongolian government can't bring itself to approve
the 300-kilometer railway that would connect to
the Chinese rail system, thereby making China the
only feasible buyer.
Mongolia's current
anxiety about Chinese domination of its
international trade channels (China accounts for
perhaps 80% of Mongolia's export and import trade)
is buttressed by a significant element of
historical xenophobia.
The Mongolian
republic's foundation myth dates back to the
eviction of a detested Manchu viceroy in 1911 and
China's political and ethnic domination of the
parts of Mongolia it did hang on to - now the
Inner Mongolia Autonomous Region - is an affront
and warning to Mongolian nationalists.
Standing up to Chinese economic
penetration is, therefore, good politics and
probably smart geopolitics. Economics, however, is
another matter.
Instead of simply linking
Tavan Tolgai to the Chinese railway system,
Mongolia is trying to cobble together a coalition
of Chinese, Russian, South Korean and Japanese
concerns that will develop part of the mine
jointly with Mongolia and, most importantly, build
an integrated transport network 5,000 kilometers
from Tavan Tolgoi to the Russian export facility
at the port of Vanino.
The objective is
for Tavan Tolgoi to will find a home in Japanese
and South Korean steel mills, and to get to those
mills through Russia without being captive to the
necessity of moving the product overseas through
the shortest and most economical route-through
Chinese railroads and ports.
Total
projected cost: US$5.2 billion. Additional
transport cost per ton: perhaps $100.
To
bootstrap this diversification extravaganza, the
Mongolian government already requires that Chalco
resell 30% of its current Tavan Tolgoi purchases
to three Japanese and South Korean trading
companies. Reportedly, this portion is delivered
to Chinese ports for export. Somebody is enjoying
a windfall, as Mongolian coking coal is apparently
selling for a third of the price of the Australian
product currently fueling Japanese and South
Korean steel mills.
Tavan Tolgoi itself is
divided into east and west zones, East Tsankhi and
West Tsankhi, each with its own challenges.
West Tsankhi is the joint development mega
project based on foreign operators investing in
and operating the mine and paying royalties to the
mine owner, state-run Erdennes Tavan Tolgoi.
This is the piece wrapped up in the
multi-national/railroad to Russia consortium idea
which, it appears, only the Mongolian government
loves.
The Mongolian government announced
a jumbled up award to an unwieldy collection of
companies but has been unable to work out the deal
it is trying to impose - which probably requires a
hefty up-front payment that somehow has to be
divvied up between the disparate partners, each of
whom has different roles, profit expectations, and
willingness and capacity to pay.
In a
recent display of bravado, the Mongolian
government stated it might go it alone on West
Tsankhi, while failing to address the question of
how it would come up with billions of dollars
needed to fund development.
East Tsankhi
is the part of the mine that is already selling
its output to China under the ownership and
operation of state-owned Erdennes Tavan Tolgoi.
Per government plan, Erdennes TT will go public in
a multi-billion dollar global IPO that will sell a
30% share to fund the further development and
exploitation of East Tsankhi by some combination
of foreign and domestic construction, equipment,
and service vendors.
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