End of election season spells stability and growth for Mongolia

July 30, 2016

By Curt StoneSri Jegarajah

First copper exports from Rio Tinto's $6.6 billion Oyu Tolgoi mine in Mongolia – believed to have been delayed due to populist pressures arising in the run-up to presidential elections this week – may start early next month after incumbent Tsakhia Elbegdorj secured a second four-year term, analysts said this week.

The country's election commission said Elbegdorj got 50.23 percent of the votes after polls closed on Thursday, beating a former wrestling champion, Bat-Erdene Badmaanyambuu of the Mongolian People's Party, and health minister Udval Natsag, of the Mongolian People's Revolutionary Party, Reuters reported.

Oyu Tolgoi, which has been at the center of a prolonged dispute over revenue sharing between the government and its private sector partners, once again became mired in the political mud when Ulan Bator requested just days before the election the delay of first copper concentrate shipments from the project, which was due to start shipping on June 21.

The stoppage appears to have been "politically motivated and requested by the government," Emily Stromquist of political risk consultancy Eurasia Group wrote in an analysis on June 27. Rio Tinto reportedly disagreed with demands by the government that all revenues from shipments stay inside the country at a Mongolian bank, the Eurasia Group said.

"Delays to shipments were a last resort leverage tactic by the government ahead of the elections," Stromquist wrote. "President Elbegdorj aimed to use the delays to prove to Mongolians ahead of the elections that he would not soften his stance in negotiations with Rio Tinto."

However, following Elbegdorj's victory, "first shipments are likely to occur in the coming week or so, and while the targeted deadline to begin shipments by the end of June is likely to be missed, which is symbolically a negative development, at least for now first shipments are anticipated to begin by the first week of July," Stromquist said.

When contacted by CNBC, Rio Tinto spokesman Bruce Tobin said the company wasn't immediately able to provide a time-frame on the start of copper concentrate exports from Oyu Tolgoi.

Adrienne Lui, a Hong Kong-based economist at Citigroup also believed President Elbegdorj's re-election would help pave the way for first copper shipments from Oyu Tolgoi and help encourage the passage of "pro-business, foreign-investor" friendly policies. "We expect the Mongolian government and Rio Tinto will come to an agreement very soon given both sides fully understand the damage to economic growth and profits the longer the delay persists," Lui wrote in a research report on June 27.

'Continuity'

Businesses operating in Mongolia were also optimistic after the election's outcome.

President Elbegdorj's re-election "provides continuity that will encourage foreign investors," said Lord Michael Howard, non-executive chairman of Toronto-listed Entrée Gold., which owns a 20 percent interest in the Heruga copper, gold and molybdenum project, the southern-most deposit of the Oyu Tolgoi complex. "We expect the president to continue to support foreign investors such as Entrée Gold and ensure that we successfully move forward with developing the game-changing Oyu Tolgoi mine."

Business representatives in Ulan Bator told CNBC that the end of the 16-month election cycle in Mongolia reduces political risk and would facilitate the passage of mining and investment laws balancing the interests of foreign investors in Mongolia with those of the country.

"The reduction of political risk should make it possible to have a fair new Minerals Law enacted in the fall parliament session," said Jim Dwyer, executive director at the Business Council of Mongolia, adding the end of the election should also smooth the way for the passage of a proposed new Investment Law "which would provide stability and a level playing field for all foreign and local investments without distinction – the larger the amount, the longer the time period of stability."

A new Investment Law would repeal the "flawed" Strategic Entities Foreign Investment Law (SEFIL) and its recent amendment which has badly hurt FDI (Foreign Direct Investment). The controversial SEFIL, passed in May 2012, was designed to restrict foreign investment in firms in sectors like mining to just 49 percent, Reuters reported on April 19.