Mining Reforms To Aid Exploration Drive

BMI View: Recent changes to Mongolia's Minerals Law will encourage more mining exploration in the resource-rich country. Despite disruption to the underground development of the Oyu Tolgoi mine, our core view remains that the project will eventually be pushed through over 2014-2015.

We expect more miners to undertake exploration projects in Mongolia over the coming quarters. The recent changes to the country's mining code will become increasingly receptive to mining investment. In a bid to revive investor interest in the country's mining sector, the Mongolian Parliament approved a wave of positive reforms to the country's 2006 Minerals Law in July 2014.

Key Regulatory Changes

  • Ready To Rock
    Mongolia - Copper & Gold Mine Output

BMI View: Recent changes to Mongolia's Minerals Law will encourage more mining exploration in the resource-rich country. Despite disruption to the underground development of the Oyu Tolgoi mine, our core view remains that the project will eventually be pushed through over 2014-2015.

We expect more miners to undertake exploration projects in Mongolia over the coming quarters. The recent changes to the country's mining code will become increasingly receptive to mining investment. In a bid to revive investor interest in the country's mining sector, the Mongolian Parliament approved a wave of positive reforms to the country's 2006 Minerals Law in July 2014.

Key Regulatory Changes

  • The proportion of Mongolia's land available to mining and exploration will increase from 8% to 20% with the scrapping of a moratorium on new mining licences since 2010.

  • The period of exploration will also increase from nine years to 12 years.

  • Mongolia's cancellation of 106 mining licences in 2013 could be reversed.

  • Mongolia seeks to attract USD1.0bn of resource investment by the end of 2014. In particular, it aims to heighten exploration efforts in coal, shale gas and oil in order to end the country's dependence on energy imports by the end of 2020.

The amendments were made as part of Prime Minister Altankhuyag Norov's 100-day push to jump start the economy following more than two years of slowing growth and flagging foreign investment. According to Bloomberg, foreign direct investment (FDI) in Mongolia plunged by 52% in 2013 and 64% in the first five months of 2014. Indeed, many investors have stayed on the sidelines in the face of weak commodity prices and disruption to the underground development of the USD6.2bn Oyu Tolgoi (OT) mine. Our Country Risk team forecast Mongolian real GDP growth to slow from 11.7% in 2013 to 9.8% in 2014 and 8.0% in 2015 ( see 'Oyu Tolgoi Delays Fuel 2015 Growth Downgrade', June 26).

OT On Hold...For Now

While the underground development of OT remains stuck in an ongoing dispute between Rio Tinto (Rio) and the Mongolian government, we believe the project will eventually be pushed through over 2014-2015. Viewed as a litmus test for foreign investment, a protracted delay to the OT mine will have significant implications on Mongolia's macroeconomic prospects.

OT promises to account for around one-third of the country's annual economic output once fully operational, with mined output of copper and gold projected to hit close to 450 thousand tonnes (kt) and 650 thousand ounces (koz) per annum, respectively. This will see an unprecedented surge in Mongolia's copper and gold output over our forecast period to 2018, and we forecast stellar growth of 27.4% and 23.0% year-on-year (y-o-y), respectively.

Ready To Rock
Mongolia - Copper & Gold Mine Output

For Rio, the OT project is also of critical importance. Given the company's overarching reliance on Chinese iron ore demand, the world-class copper and gold deposits of OT will allow Rio to diversify its earnings away from iron ore. The miner derived 85% of its net income from iron ore in FY2013.

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Related sectors of this article: Mining, Copper - Mining, Gold - Mining
Geography: Mongolia
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