Cashmere or Alpaca? Mongolia's Vying with the Andes for Copper Dollars
Is Mongolia outdoing the Andes in copper exploration? Rio Tinto's upping its land position, the World Bank has bumped-up its growth figures and the country's winning new investment
After a bitterly cold winter, a power station dispute and a bribery probe that led to the arrest of two former prime ministers, Mongolia is once again one of the world's fastest-growing economies, according to new figures released by the World Bank.
Mongolia's vast, desolate steppe expanded by more than 5 per cent last year in economic terms, accelerating to 6.1 per cent in the first quarter of 2018, thanks to rising foreign investment and a boom in two of the country's leading exports: copper and cashmere.
Copper output has more than doubled to over $2bn in the last five years, as mining giant Rio Tinto has built its vast Oyu Tolgoi mine near the Chinese border. Cashmere exports are also up, topping $200m, as Mongolia's government and lenders try to limit its dependence on mining.
Mongolia has been on a bumpy ride, turning to both China and the IMF for over $7bn in bailout loans in recent years, after government spending grew out of control. In the capital, Ulaanbaatar, which was once an outpost for buddhist monks, a Louis Vuitton boutique and a Hilton hotel both opened only to close as the economy has gone up and down. But Mongolia's exports have risen joltily throughout, from $15m per month in 1998 to $760m in May.
The country can now compete with “the Alpaca economies” of the Andes, copper investors say. Peru, Bolivia, Ecuador and Chile (the Alpaca's grazing ground) have dominated the international copper market ever since discoveries in the 1980s turned Chile into the world's top producer. But Mongolia is now winning an ever-bigger share of the world's copper-dollar.
Rio Tinto has opened an office with 80 staff in Ulaanbaatar, it announced in January, and has pegged at least seven new licenses in Mongolia, according to sources in the country. It is also investing $5.3bn in an underground expansion of Oyu Tolgoi,
more than tripling output to 700,000 tonnes per annum, overtaking many of the largest copper mines in the Andes and closing-in on Escondida in Chile as the world's biggest.
Unresolved tax and bribery disputes, plus questions over the country's electric power capacity, have given Mongolia “a bad rap”, one mining executive says, “but it's the land of opportunity. The government there I wouldn't yet describe as completely commercially-savvy, but they'll get there.”
Companies including Xanadu Mines and Kincora Copper have raised over $150m in the last two years to fund exploration in Mongolia, picking out deposits that typically extend from surface to depths of over 1,000 metres. Large investors, including private equity group RCF and Wood Capital Partners, a vehicle backed by two former Citigroup bankers, are also lining-up to place bets on the country, hoping to uncover the next Oyu Tolgoi.
“Most of these copper porphyries, when you find one, you're going to find others,” says Sam Spring, a former Goldman Sachs analyst who is now chief executive of Kincora, which has 1,437 sq km of land in Mongolia's desert. “There may be two or three discoveries within this belt.”
Chile's state-owned copper giant Codelco is also scouting-out investments in the country, sending a trade delegation to Mongolia last year. Billions of dollars of copper were discovered in Chile in the '80s as the country opened-up to foreign investment, a trick Mongolia is now hoping to repeat. “We’re learning to milk camels,” Codelco's chief executive Nelson Pizarro has said. “Mongolia has the opportunity to do things better than Chile 40 years ago.”
9.6 per cent of Mongolia is currently tendered out under exploration licenses, which the government wants to double, its mining minister has said. But lenders including the World Bank are trying to
encourage other industries, to soften Mongolia's exposure to the next mining downturn. That process is “intellectually easy but politically difficult,” according to World Bank economist Jean-Pascal Nganou, especially when mining money comes easy.
President Khaltmaa Battulga, a former judo champion, is working with Vietnam to boost beef exports, with Russia to boost tourism and with India to build a $1bn oil refinery, widening Mongolia's horizon. Foreign direct investment in everything from cattle to yurt holidays hit $1.4bn in 2017, according to World Bank figures.
Rio Tinto is meanwhile co-funding a project to formalise the country's coveted cashmere trade, working with herders and space agency NASA, which monitors goats and snow leopards by satellite. Other so-called “cashmere countries”, including Pakistan, Iran and the Kyrgyz Republic, also have large copper endowments, but have failed to convert them into sizeable copper exports.
Mongolia was always previously viewed as a Russian “fiefdom” that had never fully evaded its past as part of the former Soviet Bloc, says a Moscow-based lender for the European Bank for Reconstruction and Development. The EBRD, which was founded in the 1990s to lend to former Soviet countries, is now one of Mongolia's largest investors, pumping equity and debt into Rio's Oyu Tolgoi mine, giving it “soft power” in the country, making it easier for private capital to co-invest.
“When we raised money it was done in a 12-hour period,” says Andrew Stewart, CEO of Xanadu Mines, which is drilling-out a 1.5 billion lb copper resource on Mongolia's steppe. “We did it in five phone calls. It's had a few ups and downs, but there's no question about the prospectivity of Mongolia.”
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