21/07/2011 - 00:00

Taking a neighbourly approach to the exploitation of Mongolia’s minerals

21/07/2011 - 00:00

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TAKE a walk down a main street in the Mongolian capital of Ulan Bator and it’s only a matter of time until you bump into a Western Australian, according to Aspire Mining managing director David Paull.

Taking a neighbourly approach to the exploitation of Mongolia’s minerals

TAKE a walk down a main street in the Mongolian capital of Ulan Bator and it’s only a matter of time until you bump into a Western Australian, according to Aspire Mining managing director David Paull.

In recent years, Mongolia has established itself as one of the most promising frontiers anywhere in the world; and in typical fashion, WA entrepreneurs and companies are flocking there.

“Unless you book well in advance, you cannot get on a plane to Ulan Bator. Particularly around the summer period, they are just full,” Mr Paull told WA Business News.

“There’s been an enormous increase in the number of mining companies and mining services companies, and you don’t have to go far to find a Western Australian working up there.”

Among those WA companies to have flocked to Mongolia is Mr Paull’s Aspire, which has proved a very good investment for those who backed it since its ASX listing early last year. Since September 2010, the stock is up 540 per cent.

Aspire is not the only Perth-based company taking a very active interest in Mongolia.

Mining entrepreneur Matt Wood has been particularly enamoured with the country, having launched no less than three companies with assets there in the past few years – Hunnu Coal, Haranga Resources and Voyager Resources.

Among the more recent arrivals from WA is Blina Minerals, which has secured a copper-gold prospect, while C @ has reinvented itself on the back of some Mongolian coal exploration leases. (Early drilling success at C @’s project has helped drive the stock from 2.9 cents in January to as high as 15.5 cents.)

Andrew Forrest’s Fortescue Metals Group was looking closely at a major coal project in the country before being squeezed out by even larger rivals.

The reason for the rush from WA companies is obvious. Mongolia, with its position on the doorstep of China and a rich mineral endowment that has gone largely untapped through quirks of history, has rapidly emerged as one of the world’s most exciting destinations for mineral exploration.

AME Mineral Economics estimates that Mongolia has total coal resources of about 125 billion tonnes, the equivalent of 10 per cent of global coal resources. That figure compares to the 76bt of coal in Australia and the 4bt of coal in Indonesia, which are the world’s two largest coal exporters.

According to Southern Cross Equities, Mongolia currently only produces about 10 million tonnes of coal a year with exports of only 4mt. Australia exports around 300mt of coal annually and Indonesia exports around 255mt. The scope for growth in Mongolia is huge, arguably unparalleled right now.

“Australia’s coal industry took 50 years to get to where it is today. Mongolia is only five years in, but they’re growing very quickly,” Mr Paull said.

The looming listing of one of the world’s biggest undeveloped coal deposits, Tavan Tolgoi, on the fledgling Mongolian stock exchange has further helped put the country on the map.

Tavan Tolgoi is estimated to host over 6bt of coking and thermal coal, and the listing of the parent company is expected to singlehandedly double the size of the Mongolian exchange.

The world’s major investment banks have all scrambled to try to get on the ticket for the Tavan Tolgoi listing, with BNP Paribas, Deutsche Bank, Goldman Sachs and Macquarie Bank all joining the mandate.

Many WA miners would have got their first taste of Mongolia’s mineral potential through the exuberant Diggers & Dealers presentations from billionaire Canadian mining entrepreneur Robert Friedland, who has arguably done more to promote Mongolia’s resources sector to the world than anyone else.

Mr Friedland’s Ivanhoe Mines is behind the massive Oyu Tolgoi copper-gold deposit, owning 66 per cent. The Mongolian government owns the remaining 34 per cent.

The world’s largest known undeveloped copper project, the resource at Oyu Tolgoi contains an incredible 37mt of copper and 42 million ounces of gold.

Rio Tinto owns a controlling 46.5 per cent stake in Ivanhoe and is managing the development, which will begin ramping up in late 2012. When in production it will produce around 550,000t of copper and 650,000oz of gold annually, making it one of the largest mines of its kind in the world.

Of course, Mongolia’s growth into a major mining centre is not without its challenges.

Renaissance Capital analyst Matthew Whittall, who has studied Mongolia’s coal industry in great detail and who prepared Renaissance’s exhaustive recent research report Moncoalia, has identified a number of legislative and infrastructure challenges facing the county.

“The risks of operating in a frontier province are not insignificant,” Mr Whittall said.

“Mongolia has taken major steps in recent years to update and improve its minerals, environmental and concessions law, however areas of concern remain.”

Mr Whittall notes that Mongolia’s mining law is still under review, while a ban on issuing new exploration licences remains in place. The legislation that has been put in place, including the ‘Deposits of Strategic Importance’ law that effectively handed the government its 34 per cent stake in Oyu Tolgoi, remains open to interpretation and inflation is a problem.

The mining industry is set to be at the heart of the political debate during Mongolia’s next elections.

“Mongolia’s next State Great Hural parliamentary elections will be held in June 2012 and a focus of any future election is likely to be on the mining industry and particularly the distribution, or redistribution, of wealth,” Mr Whittall said.

Ivanhoe and the Oyu Tolgoi project was seen as the key testing ground for Mongolia’s fledgling mining legislation, with the country eager to ensure its people enjoy the spoils of the industry without deterring foreign investment.

In the case of Oyu Tolgoi and similarly sized projects deemed to be ‘strategic’, the Mongolian government can take a 34 per cent stake. The smaller deposits pursued by the Perth-based companies are unlikely to wind up on the government’s radar, and will instead be subject to taxes and royalties.

David Hanbury, an Ulan Bator-based analyst with specialist fund Resource Capital, said inflation and diesel shortages had been real problems in recent months, with the lack of diesel forcing work to halt at some exploration and drilling camps.

Companies are eager to set up downstream fuel networks that would ease the strain, but in an example of the sorts of legislative wrinkles being exposed by the country’s growth, old legislation prohibiting major domestic oil producers from selling directly into the domestic market has stifled that plan.

“For a delicate economy in its infancy, Mongolia is searching for stability that cooperates with all of its neighbours in a path of least resistance,” Mr Hanbury said.

Inflation is also a problem. The usual levers available to a developed country, such as increasing taxes, cutting government jobs and executing labour market reforms, simply are not available in Mongolia. Instead, Mr Hanbury said, authorities had taken to stockpiling meat as a means of countering inflation.

Food prices are the main constituent of inflation in Mongolia, so by strategically releasing meat stockpiles into the market the Mongolian government can help take some heat out of prices.

Arguably the most pressing issue for the would-be miners in the country is infrastructure.

Much of the country’s immediate mining opportunities are in coal, but Mongolia’s undeveloped infrastructure is hindering the ability of companies to maximise value from the material they mine.

Many of the coal deposits identified to date are clustered along the south of Mongolia, straddling the border with China. Being located so close to the economy that is driving the mining boom should be a positive, but to date it has led to Mongolian coal being sold well below its full value.

Buyers on the Chinese side of the border have maximised their leverage, using their sole-buyer status to secure much lower prices.

Not helping Mongolia’s miners is the fact that the Chinese side of the border is also well endowed with coal, leaving Mongolia to sell into a well-supplied province where coal prices are much lower than in China’s coastal regions.

Further compounding the pricing issue is a shortage of water in the South Gobi, which means much of the coal is being further discounted, as it is being sold unwashed.

Canadian-listed SouthGobi Resources trucks its coal production 40 kilometres south to the border with China.

In 2010, SouthGobi sold its coal into China at an average price of around $US31 a tonne – significantly below average seaborne coking coal benchmark prices of $US140/t. To turn around that situation, Mongolia must open up new export avenues.

The key plank in that strategy is a new 1,100-kilometre rail line planned to link Tavan Tolgoi with the Russian market. From there, Mongolian coal will be railed across to the Russian port of Vladivostok for export into markets such as Japan, South Korea, and China’s coastal cities.

That, it is hoped, will end the Mongolian coal-pricing discount.

Renaissance’s Mr Whittall said Mongolia’s three-stage plan to build more than 5,600km of railway over the next decade should improve market access.

Those coal miners who can switch from road haulage to rail stand to halve their transport costs, he said, while acknowledging that numerous challenges remained.

“The biggest hurdle for coal producers selling coal into China is the logistics and delays in clearing customs at Mongolia’s inadequately staffed border crossings,” Mr Whittall said.

“Trial shipments of coal have been made through the Russian far eastern ports, but volumes are still anaemic and costs excessive.”

Back in WA, Mr Paull acknowledges that for now at least the discounting is “quite real”. He expects the position of Aspire’s project, near Mongolia’s northern border, as well as the higher quality of its coal will help its cause when mining begins.

Aspire is wrapping up a scoping study into an initial stage one development, with the results due this month. The company will initially use trucks to ship up to 1mt a year of coal more than 500km to the northern Mongolian city of Erdenet, from which point it can be sent by rail either north into Russia or south into China. Mr Paull intends to spread Aspire’s coal “far and wide” to as many customers as possible in an attempt to win support for an eventual expansion up to 10mt a year.

C @ managing director Mark Earley told WA Business News the company had been attracted to Mongolia by the low entry cost and a number of key advantages over Australia, such as the ability to comparatively accelerate development and the lack of any new mining or carbon taxes.

Mr Earley said Mongolia was no different to any other expanding market in needing to ensure its infrastructure kept up with its rapid pace of development.

“Critical focus needs to be given to its lack of reliable geological data due in part to the limited surface definition,” he said.

There is also very limited infrastructure, particularly sealed roads, a rail system to support commodity exports, electricity, water and most recently diesel supply. Other issues that need to be overcome are the skilled labour shortages, extreme climate conditions, limited heavy mobile mining equipment and other technology restraints.

Mr Paull, meanwhile, said the attitude in Mongolia towards the industry was changing as more and more mines came into production.

“As it’s coming closer to hand, they [the locals] can start to see the benefits of it,” he said.

“Every time I walk past Ivanhoe’s office in Ulan Bator, there’s normally 20 to 30 people there filling out employment application forms.”

For much of its history, Mongolia has been playing itself off its two giant neighbours Russia and China. Today, Mr Paull said, there was a lot of talk in Mongolia about the country’s ‘third neighbour’ – the collection of nations such as Australia, Canada, the US, Japan and South Korea – all of which can play a role in evolving Mongolia into a strong modern economy.

Challenges in delivering that vision remain, but the Mongolia story appears to have real momentum.

WA, with its crop of junior companies, can also stake a claim to being Mongolia’s third neighbour.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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