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The Sleeping Giant Awakens

World Coal,

The 150 or so investment bankers vying for position in Mongolia's capital, Ulaanbaatar, are a good indicator of the country's increasing importance and relevance. Though more famous for Genghis Khan and the warriors that terrorised Europe and Asia more than 900 years ago, today Mongolia is eyeing economic conquests as it continues its quiet climb out of poverty.

Sandwiched between the two giants of Russia and China, it has been easy to ignore the 1.56 million km2 landlocked country. Mongolia has a population of just 2.75 million people, most of whom are farmers and nomadic herdsmen. But the country holds vast, untapped resources of coal, oil, shale, gold, silver, copper and iron; and these attracted increasing attention and investment as the global demand for natural resources took off.

The resulting boom has helped the Mongolian economy expand nearly five times, lifting it from the ranks of desperately poor to lower middle income by 2010. After growing by an annual average of nearly 10% between 2003 and 2010, real per capita income reached new landmarks of US$ 1000 in 2006 and US$ 2000 in 2009.

There could be more to come as the Government plans to further open up the economy and its resource sector to foreign participation, with the coal sector set to play a key role.

State-owned coal

In 2010, the Government invited international investment banks to Ulaanbaatar to bid for a role to handle the planned equity sale and listing of the state-owned Erdenes Tavan Tolgoi (ETT), which owns one of the world’s largest untapped coal deposits of around 6.4 billion t.

The Government aims to raise anything from US$ 3 – 6 billion from an initial sale of 25 – 50% of its stake in the company, which owns some of the world’s largest high-quality coal reserves.

In February 2011, Government officials heard presentations from representatives of some 20 banks. A listing in Hong Kong or London, or both, could take place this or next year, opening the door for further international investments to help develop the country’s mining sector. At the end of February, Goldman Sachs, Deutsche Bank, BNP Paribas and Macquarie Group were reported to have been awarded joint roles to manage the IPO.

Mongolia expects this landmark deal to institutionalise and lift its long-term economic prospects as it will put in place the corporate structure and system of governance to ensure the proper management of its resource wealth. The Government plans to retain a 50% stake in the long-term, selling off 30% to foreign investors and the remaining 20% to Mongolian institutional and individual investors. Analysts say Mongolia risks being stung by the resource curse of corruption and crime if it does not put into place the political, financial and legal system to manage the large inflow of foreign capital and investments.

International bids

Separately, some 15 international mining consortia are bidding for the right to develop the 1.2 billion t Tavan Tolgoi coking coal project. The Government said it hopes to name the winner by the end of Q1 2011, but international investors are sceptical as to whether this deadline will be met.

In 2009, an initial auction for the project attracted bids from South Korea, Japan, and Russia. Some of the world’s leading miners took part, but the project was not awarded due to a lack of policy directions and bureaucratic inertia in Mongolia.

Coal riches

While it may hold as much as 100 billion t of coal reserves, Mongolia lacks the infrastructure, management expertise, technology and legal system to fully develop them. This has limited production to around 5 million tpa. This explains Prime Minister Sukhbaatar Batbold’s decision to actively court foreign investment and expertise.

Mongolia’s main Tavan Tolgoi deposit lies in the southern Gobi desert, 560 km south of Ulaanbaatar and 400 km from the nearest railway. The Baga-Nuur deposit, mined since 1978, is about 110 km east of Ulaanbaatar, and now produces around 250,000 tpa of coal. The Mongolyn Alt Corp. is developing a mine in the Alagtogoo field, which holds more than 50 million t of reserves, and another mine in Bayanjargalan soum in Middle Gobi, which holds around 190 million t of high quality coal deposits. One of Mongolia’s largest coal miners, SouthGobi, has a flagship mine in Ovoot Tolgoi in southern Mongolia, about 40 km north of the Chinese border. SouthGobi, which began mining coal in 2008, sold 1.3 million t of coal in 2009 and 2.5 million t in 2010.

Mongolia Energy Corp. Ltd, a Hong Kong-listed company, said it aims to produce 2 – 2.5 million t of raw coal in 2011 following the startup of a mine in western Mongolia last October. The company, which raised US$ 650 million in an IPO last October, has set a medium-term target of raising its production capacity to 6 – 7 million tpa of coal by 2014.

Mongolia today accounts for over 40% of China’s coal imports, up from just 11% in 2009. This could increase further if Mongolia and international miners are able to properly manage the sector’s development. At the same time, the Mongolian coal industry is looking to increase sales to Russia, Japan and South Korea to reduce its overwhelming dependence on China.


Mongolia’s economy could grow by 10% this year, but it faces overheating with inflation threatening to top 20%, according to the IMF. An IMF team led by Steven Barnett, who met representatives of Government, businesses and academia from 20 January to 1 February, expressed hope as well as concern for the resource-rich country. Barnett said Mongolia’s economy is recovering strongly as a result of a continued surge in mineral exports, strong private sector activity and a highly expansionary fiscal policy. But it is also showing signs of overheating with inflation likely to reach 20% before the end of the year.

With an eye on the explosive events in the Middle East, the IMF said Mongolia must ensure that its new found mineral wealth translates into strong, sustained and equitable growth. “High inflation, particularly given its concentration in staple food items, will have an especially hard impact on the poor. Therefore, the 2011 budget should be amended to reduce spending substantially,” said Barnett.

Rising political risks

With its status as one of the world’s fastest growing economies, Mongolia has also seen its country risk ratings increase on account of its poorly developed political and legal systems, huge reserves of natural resources, rising perception of corruption and growing wealth divide. Its people will have plenty of lessons to draw from the history of many resource-rich countries that crashed after failing to deal with the sudden arrival of wealth.

In the near term, the Government faces the challenges of maintaining political stability, attracting foreign investments, implementing the rule of law and building the infrastructure needed to sustain long-term economic growth. It is under pressure to quickly implement regulations to manage the development of the country’s resource sector, and to check fast-spreading corrupt practices.

On the international front, Mongolia has long cultivated deep ties with immediate neighbours Russia and China out of necessity, but in recent years it has started to reach out to the US, Japan and South Korea.

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