Editorial: Mongolian government betrays Western miners

Mid-May saw the executives of the West’s mining and mineral exploration companies mentally move Mongolia from the “promising underdog” column over to the “Third World basket-case” column — so joining other new entrants Zimbabwe, Bolivia, Venezuela and Ecuador.

With all the subtlety of an axe blow to the head, a vote in the Mongolian parliament on May 12 set the country’s economic development back a decade or more with a devastating attack on foreigners investing in the Mongolian minerals sector. The Mongolian parliament passed a profits tax of 68% on gold and copper mining when gold and copper prices exceed US$500 per oz. and US$1.18 per lb., respectively.

At presstime, gold and copper traded well above these lower cutoffs, at US$666 per oz. and US$3.75 per lb., respectively, and it’s debatable whether gold and copper will ever trade below the Mongolian “windfall” threshold again.

Thus, this legislation is a raw power play to chase foreign mining companies out of the country or effectively turn them into contract miners for the Mongolian government.

Put forward by the Democratic Party, the vote was carried out after little debate late on a Friday evening, with no advance notice given to foreign miners and mineral explorers active in the country.

Only 45 of the 76 parliamentarians attended the vote, with 35 of the 45 passing the motion. The 31 absent members were reportedly mostly from the ex-Communist Mongolian Peoples Revolutionary Party (MPRP), which is ruling the country in a coalition government with the Motherland Democratic Coalition.

Details on how the new tax will be implemented are vague, but are due to be firmed up by the country’s bureaucracy soon.

The vote came after weeks of vocal, nationalist protests in Ulaanbaatar’s Sukhbaatar Square by groups demanding the state gain a greater share of the country’s natural resources. Protesters have engaged in hunger strikes and burned Ivanhoe Mines (IVN-T, IVN-N) chairman Robert Friedland in effigy.

At presstime, Western miners were clinging to the faint hope that Mongolian President Nambaryn Enkhbayar will veto the new law.

If the 68% profits tax stands, new foreign investment from the West in Mongolia’s mining sector will screech to a halt, and even if Enkhbayar vetoes the law, foreign investment will still drop substantially. The damage has been done — trust takes years to build but hours to destroy.

Clearly this new law, which targets only gold and copper mining, is foremost a direct attack on an increasingly locally resented Ivanhoe Mines, which has worked so hard and has invested $370 million discovering and developing the gargantuan Oyu Tolgoi copper-gold deposit in Mongolia’s southern Gobi Desert.

What a terrible and foolish betrayal by the Mongolian government of uber-promoter Friedland, who, far more than anyone else, has travelled the world whipping up enthusiasm for Mongolia and convincing scores of skeptics that Mongolia was the indeed best place to seek out mineral opportunities.

Friedland was also pivotal in helping Mongolia at long last set aside its outstanding Soviet-era debt to Russia by taking the unusual step of having Ivanhoe buy a US$50-million Mongolian treasury note, copies of which are prominently displayed around Ivanhoe’s Vancouver office. (As payback, the Mongolian government destroyed $744 million of Ivanhoe’s market capitalization on May 15, the first trading day after the new tax was passed. What gratitude.)

Another immediate casualty of the new tax will be the operating Erdenet copper mine, owned 51% and 49%, respectively, by the Mongolian and Russian governments. Not a bright move by Mongolia’s statesmen: the Russians supply a large portion of Mongolia’s electrical needs, and could flick the “off” switch any time to show their displeasure.

Another injured party is Canada’s Centerra Gold (CG-T) which, with its new Boroo gold mine in northern Mongolia, perhaps thought it was setting up shop in a better jurisdiction than turbulent Kyrgyzstan, where it operates its flagship Kumtor gold mine.

At a geopolitical level, the desire of the Mongolian elites to firmly shove Western and Russian mining interests out of their country means the Mongolian government will become ever more dependent on Chinese mining capital and know-how to develop the country’s mines.

Be careful what you wish for, folks: We’ve seen the Chinese miners in action in Mongolia and it ain’t pretty. Environmental degradation, frightening safety standards, minimal training, low wages, little investment in local services, and undue political influence: these are the hallmarks of recent Chinese investments in Mongolia’s minerals sector.

And you can be sure the Chinese miners, being non-publicly traded, will be adept at the fine art of hiding profits — putting a significant dent in any scheme by the Mongolian government ramp up revenue using mining profits, and thus imperiling Mongolia’s sovereign credit rating.

The rest of the vacuum left by the departing Westerners will be filled by Mongolia’s artisanal “ninja” miners, who are even more skilled than the Chinese at squandering mineral potential and tax evasion.

Mongolia’s new mining tax is a strong signal to all of us that the political risk profile of impoverished Mongolia much more closely resembles the backward ‘stans of Central Asia than it does the more settled countries of East and Southeast Asia.

The Mongolian government can’t be trusted as a business partner. So be it; now we know.