Mongolia's Mining Boom

The estimated value of Mongolia’s resource wealth is approximately US$1.3trillion.

According to ResCap, a Mongolia-focused investment bank, there are approximately 6,000 known deposits of over 80 different minerals in the country, including gold, copper, coal, uranium, molybdenum, tin and iron. However as just 27% of the country has been surveyed to a scale of 1:50,000. The country’s exploration potential is vast.

Of the many operations currently in the country, two deserve a specific mention:

The first of these, the internationally renowned ‘Oyu Tolgoi’ (OT) representing the largest undeveloped copper deposit worldwide, situated 80km from the Chinese border. The project is managed through a joint venture between Ivanhoe Mines and Rio Tinto, who have a 66% stake, whilst the Mongolian government controls the remainder.

Research by Ivanhoe Mines estimates that the deposit contains around 37 million tons of copper and 1,431 tons of gold and is considered to be worth USD$350 billion (around 50x the value of Mongolia’s current GDP).

Commercial production at OT is set to commence in Q1 2013 at the Southern Oyu open pit mine, whilst the Hugo North division (a black rock cave mine) is on track to extract its first ore in 2015.

Despite deposits of copper and gold playing a crucial part in Mongolia’s economic development, coal looks to be the country’s most important resource over the coming years, possessing an estimated 163.2 billion tons of the mineral as opposed to just 77.3 million of copper.

The largest operation is the ‘Tavan Tolgoi’ (TT) project, located just 200 km from the Sino-Mongolian border. The site is believed to be the second largest untapped reserve in the world and is made up of over 6.4 billion tons of coking coal.

Extraction began as far back as 1960, but until recently, the mine has been functioning subject to severe inefficiencies and output constraints. To unleash the coalfield’s true potential, the government has decided to split the project in two; one half it will develop alone, the other being opened up to foreign investment.

The public sector operation is to be financed through a three way international equity IPO that will list shares in London, Hong Kong and Ulaanbaatar in Q1 2013, whilst international players are currently being courted to fund the development of the private ‘West Tsankhi’ venture.

Located between Russia and China, Mongolia has the potential to supply two of the world’s largest growth economies with the raw materials needed to sustain development. The Chinese are dominate the consumption of Mongolia’s resources, receiving more than 90% of its exports.

The currently dyadic Mongolian current account is cause for concern, with resource revenues perceived to be at the mercy of protectionism, infrastructural bottlenecks and imperfectly competitive price setting regimes.

A project of rail network renewal is currently underway in order to ease some of these concerns and it will expand the service links to both China and the Trans-Siberian Railway, which will logistically connect OT and TT to the ports’ of Russia’s Pacific Coast.

Access to naval trade through both of Mongolia’s neighbors is expected to ensure a fair price is met for the country’s extracted minerals. Avoiding the potential threat of Chinese monopsonistic abuse is thus greatly reduced, as the goods are allowed to face internationally competitive commodity prices.