May 1, 2012
By Nisha Gopalan
For adventurous frontier investors in Asia, last year was all about Mongolia. Now Myanmar is the darling of 2012, as it slowly opens up to the outside world.
China, though, never lost its interest in Mongolia. State-owned giant Aluminum Corp. of China Ltd., also known as Chalco, has made large investments in the resource-rich country in recent weeks. But a recent deal in Mongolia has hit a stumbling block, and signs are starting to show that country may be slowly closing its doors to foreign ownership, especially from China.
Chalco is already a big player in Mongolia, taking 80% of production from Tavan Tolgoi, a giant coking-coal project that Mongolia plans to list in a $10 billion initial public offering in London, Hong Kong and Ulan Bator. Seeking to diversify from aluminum, Chalco in April spent more than $300 million for a stake in Winsway Coking Coal Holdings Ltd., a trading firm that dominates the import of Mongolian coal into China. That followed a bid of almost $1 billion for a majority stake in SouthGobi Resources, which is controlled by Canada’s Ivanhoe Mines Ltd.
But Chalco’s bid for SouthGobi—to which Ivanhoe has agreed—appears to have spooked China-wary Mongolian officials. Mongolia is suspending certain exploration and mining activities by SouthGobi at its flagship Ovoot Tolgoi mine, which produces coal used in steel and power production. SouthGobi says the deal is being reviewed by the Mongolian government on national-security grounds.
The back story is that the Mongolian parliament is looking to put in place limits on how much a foreign state body can hold in a strategic resource, a political move ahead of the country’s June elections.
Even as Mongolia is concerned about relying too much on China, its options are limited. Neighboring China is the world’s largest user of resources. Meanwhile, landlocked Mongolia faces difficulties in getting its goods to the Pacific Ocean to supply the rest of the world. Russia, to Mongolia’s north, has its own raw materials, and exporting Mongolian commodities through vast Siberia to the sea is uneconomical.
Mongolia is aware that this is all a balancing act, as it has benefited from investment by foreigners, and from exporting heavily to the outside world, mainly China. The economy, dominated by the mining sector, is forecast to grow 17.2% this year, according to the International Monetary Fund. China’s demand has been key to that success, but Mongolia is now signaling it may not want to give up much more to its powerful neighbor.
Photo Credits: The Wall Street Journal