ANALYSIS-A giant leap for Mongolia, but where to?
The World Bank estimates that by 2015, mines in southern Mongolia could be exporting enough coking coal to satisfy Chinese demand of about 20 million tonnes a year, with overall coal exports of 45 million tonnes, up from about 5 million tonnes now.
08.26.09, 11:19 AM ET
Mongolia -
* Mongolian parliament uncorks foreign investment bottleneck
* Copper, gold, coal, uranium seen ripe for development
* Third of population likely to remain in poverty for years
* Govt could use revenue to set up budget stabilisation fund
By Tom Miles and Danielle Mario
ULAN BATOR/BEIJING, Aug 26 (Reuters) - Investors in Mongolia are jubilant after parliament put an end to years of debate on Tuesday, passing a package of laws that could turn the poor agrarian country into a powerhouse of mining and resources.
To some, the vote has unlocked the door to economic growth that will turn Mongolia into Dubai within a decade. To others, the task of turning a rich land into a rich population is one that is fraught with pitfalls, and the journey has only begun.
"Predicated on this decision, Mongolia will generate the highest rate of growth of GDP of any country in the world over the next 10 years, surpassing that of Qatar, which had fulfilled that role over the past decade and a half," said John Finigan, CEO of Mongolia's Golomt Bank. "This is transformational."
Mongolia's potential as an Asian tiger is not immediately apparent from its broken down and dusty capital, ringed by a city of tents, or its endless grasslands and deserts. But on paper at least, the path out of poverty is clear, now that parliament has unblocked foreign mining investment with a landmark agreement on Oyu Tolgoi, Ivanhoe Mines' huge copper and gold project.
Ivanhoe and its partner Rio Tinto waited for years to win acceptable terms, while Mongolia's hopeful horde of prospectors and mine developers looked on, fingers crossed.
The agreement, which still needs presidential approval, widely seen as a formality, unlocks $5 billion in investment from the two firms in the next five years, a huge boost to Mongolia's gross domestic product, which is running at $5 billion a year.
"Mongolia has 100 percent of its GDP available for a stimulus programme, and it doesn't even have to come up with the money," said Peter Marrow, chief executive of Khan Bank.
STAMPEDE
As well as copper and gold, Mongolia has huge potential in uranium and coking coal, a high grade fuel that is in short supply in neighbouring China, where demand from steelmakers has sent volumes of shipments from Australia rocketing this year.
The World Bank estimates that by 2015, mines in southern Mongolia could be exporting enough coking coal to satisfy Chinese demand of about 20 million tonnes a year, with overall coal exports of 45 million tonnes, up from about 5 million tonnes now.
Coking coal could bring in revenues of $2 billion and thermal coal another $1 billion, on top of the $2.3 billion a year from Oyu Tolgoi's output of 2 million tonnes of 30 percent copper concentrate, the bank estimates. Government revenues could swell further from gold, uranium and even oil.
"There is potential for oil production to ramp up. It will more than cover Mongolia's domestic needs, but there is no refining capacity here and the production is too small to hold up refining capacity," said the bank's senior mining specialist Graeme Hancock. "Once they find enough, it would justify pipeline development into China."
Oyu Tolgoi is also expected to trigger a building boom.
"With more companies coming, there will be improvement in commercial real estate, the building of apartments, and that will mean overall more jobs and activity for the people that are supplying for this mine," said Khan Bank CEO Marrow.
NOT SO FAST
Not so fast, say some Mongolians -- and some foreigners. The country needs to learn to walk before it can run.
Arshad Sayed, the World Bank's country manager in Mongolia, said Mongolia is just emerging from its own credit crunch, in which the government spent foreign reserves to prop up a see-sawing currency and the banks reined in lending.
"The economy had almost gone into cardiac arrest by the beginning of this year," he said. "Now this agreement has revived it but you can't expect it to start running immediately. It's too early to call victory right now."
He said the "best guess" for economic growth was still only 2-3 percent this year, rising to 5-7 percent or more next year.
Yuji Iwasaki, chief operating officer of Frontier Securities, which advises Japanese private equity in Mongolia, said several years of "double digit billion USD investment" were needed.
Expectations needed to be kept in check, said Sayed, not least among the 900,000 Mongolians in poverty -- a third of the population -- who are unlikely to see much change for years.
Much of the delay in agreeing terms for Oyu Tolgoi was down to wariness about releasing a genie that could unleash a "curse" of mineral wealth -- corruption, inequality and inefficiency.
To plan for the future, Mongolia could set up a budget stabilisation fund similar to those run by Chile and Russia. Sayed said the deputy prime minister was travelling to Chile to study such a fund and other "fiscal responsibility measures".
"History has not been kind to countries with natural resources," Sayed said. "They don't want to make the same mistakes that other countries have done."
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