China pushes for Chalco's
purchase of Ovoot Tolgoi By Alicia Campi
On August 22-25, Dai
Bingguo, Chinese State Councilor and top national
security adviser to President Hu Jintao, will go
to Ulan Bator to meet newly installed Mongolian
government and parliamentary leaders.
This
visit may be a reaction to US Secretary of State
Hillary Clinton's July 9 trip and the 7th annual
Khaan Quest joint exercise of the Mongolian Armed
forces in partnership with the Alaska National
Guard for the US Army Pacific Command (USARPAC),
occurring on August 11-23. However, more likely
Dai's timing is
governed by a growing
crisis in Sino-Mongolian mineral trade and
investment.
Propelled by a mining boom
particularly in the coal sector, Mongolia now is
one of the world's fastest developing economies
with a 17% growth rate in 2011 that has continued
into 2012.
China is Mongolia's number one
trade partner, accounting for 93% of its exports -
mainly in minerals. Mongolia has enjoyed soaring
Chinese investment of some US$3.7 billion and
bilateral trade turnover of $3.3 billion in the
first six months of 2012 - a full 21-fold increase
over the same period in 2011.
However, the
Mongolian government and people increasingly view
the Sino-Mongolian relationship as threatening to
their national sovereignty and are searching for a
more balanced foreign and economic development
policy.
As a result, the Mongols have
taken a number of controversial steps to curtail
Chinese investment in mineral deposits and
diversify Mongolia's trade partners, which impact
on the overall foreign investment climate.
Dai's visit was announced in Ulan Bator by
the Chinese Ambassador to Mongolia Wang Xiaolong.
He enumerated the official objectives for the
discussions to be building trust by jointly
determining cooperation initiatives, identifying
sectors for collaboration, holding extensive talks
on specific mining and industrial development
projects, and agreeing on a further strengthening
of humanitarian and cultural relations.
It
is certain that Dai will make a last-ditch effort
to influence Mongolian authorities to approve the
$926 million bid of China's state-controlled
Aluminum Corporation of China (Chalco), which is
investing increasingly in coal and iron projects
worldwide, to take a 58% controlling stake of the
Ovoot Tolgoi coal mine, at present owned by
SouthGobi Resources Ltd.
SouthGobi's
majority stockholder is the Canadian company
Ivanhoe Mines, which in early August was renamed
Turquoise Hill Resources. Turquoise Hill needs the
money from the stock sale to fulfill the
contractual terms of its partnership with
multinational mining giant Rio Tinto to develop
Mongolia's large copper-gold deposit known as Oyu
Tolgoi, located 80 kilometers north of the
Sino-Mongolian border.
Turquoise Hill
claims Oyu Tolgoi holds 41 billion pounds of
copper and 21 million ounces of gold in measured
resources and an equal amount in inferred
resources. Rio Tinto, which controls 51% of Oyu
Tolgoi, expects to invest $6.2 billion to begin
commercial production in 2013, with long-term
copper contracts signed with Chinese customers.
When Turquoise Hill announced in April
that it would raise funds for its Oyu Tolgoi
investment share by selling stock in the Ovoot
Tolgoi coal mine to Chalco, the Mongolian
government in response to parliamentarian
criticism across the political spectrum decided to
revoke its license for coal production and
insisted it must review the legality of the
potential sale.
A political climate of
anti-Chinese sentiment overcame the election
season leading up to the June 29 parliamentary
elections. Thus, in mid-May, spurred by "resource
nationalism" advocated in the name of national
security, the Mongolian Parliament passed
amendments to the Foreign Investment Law that
require a government panel to approve all foreign
investment in the mining, finance, media and
telecommunications sectors by a state-owned
foreign investor or organization regardless of
level of ownership.
Mongolia also delayed
settling the short list of foreign investors in
the country's huge 7.5-billion-ton Tavan Tolgoi
coking coal-uranium deposit, and the government
has increasingly suggested the project could be
handled, albeit more slowly, by a Mongolian
state-owned enterprise.
Furthermore, a
cabinet decision approved by parliament in August
created a master plan for a Mongolian industrial
development complex in the Gobi Desert steppe city
of Sainshand to manufacture value-added refined
mineral products under the guidance of Bektel
Corporation.
Chalco originally had given
itself until July 4 to complete the Ovoot Tolgoi
stock purchase, but has been forced to extend the
finalization period twice for negotiations with
Mongolian authorities. It is expected that Dai
will offer incentives to Mongolia to permit the
deal to go forward, but SouthGobi chief executive
Alex Molyneux was quoted as believing the Mongols
had made any Chalco acquisition impossible.
However, a further card that Dai will
carry into his discussions in Ulan Bator is that
Rio Tinto and Turquoise Hill must conclude a deal
to import power from China at least for a few
years in order for the big Oyu Tolgoi copper-gold
project to begin operations. Although talks have
been ongoing for a year, there has been no
agreement.
The Mongolian government
possesses a penchant for spending "advanced tax
revenues" from mining operations and has promised
to distribute shares and profits from its big
state-controlled mineral deposits such as Oyu
Tolgoi to its populace. But, together with slowing
Chinese coking coal demand, the Mongols' national
security fears regarding China will now have to be
reconciled with the potential for very real losses
in revenue from foreign investors and mineral
exports.
Dr Alicia Campi has a
PhD in Mongolian Studies, was involved in the
preliminary negotiations to establish bilateral
relations in the 1980s, and served as a diplomat
in Ulan Bator. She has a Mongolian consultancy
company (US-Mongolia Advisory Group), and writes
and speaks extensively on Mongolian issues.
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