Mongolia’s still alright with me

Mongolia’s still alright with me

Mining at Gobi Coal & Energy’s Ovoot Tolgoi operation in the South Gobi region.

UNCERTAINTY created by Mongolia’s recent freeze on mining and exploration licences has failed to dent private equity firm Origo Partners’ enthusiasm for Mongolian mineral opportunities with the group late last month increasing its exposure through two more investments together worth almost $US9 million.

President Tsakhia Elbegdorj in April issued a stop on the issuance and transfer of exploration licenses stating on his website that many companies were not fulfilling their obligations – failing to regularly report on activities or just not doing any genuine exploration. He said the ban would remain in place until the government could come up with a stricter law to cover mineral licences. The announcement came a fortnight after the government revoked uranium exploration group Khan Resources’ licences because of a failure to address violations of Mongolian law dating back to July last year. Khan said the claim was baseless and vowed to fight the charge but the freeze on licences will make regaining its assets extremely difficult in the near-term. It is unclear if there will be a formal review of existing licences but the president’s statement said most permits held by companies and individuals were in violation of existing laws. “Public discussions” on the best path forward were due to begin in June but the president has not yet given a deadline for the completion of the new laws to the traditionally snail-paced bureaucracy.

The whole thing bears an unsettling similarity to the long-winded and highly controversial review process carried out in the Democratic Republic of Congo and, combined with the Mongolian bureaucracy’s reputation as a sluggish operator, this thought could put off some previously eager investors.

However, Origo, which adds its recent investments to $US15 million plunged into a large private coal company in November last year, is hardly concerned. Chief executive Chris Rynning was happy to acknowledge the problems associated with Mongolia including his major concern – the inability of bureaucracy to process decisions on desperately needed infrastructure – but said overall the country was moving in the right direction and the freeze on exploration licences was merely a bump in the road forward.

“I think this is a speed bump,” Rynning told HighGrade. “My qualitative observation is that Mongolia is open for business, the parliament is open for business and they want to get on with drafting better legislation. They want to make sure that exploration is done in the right way and I view that as a positive – it’s positive for the financial community and investors that there will be transparency, governance and compliance. At the end of the day, that will provide comfort and security for investors.”

Much has been made of the trailblazing stability agreement signed over the massive Oyu Tolgoi copper-gold development, which has acted as a sort of test case for Mongolia, but this latest issue is not the first time the government has spooked investors in the past 18 months. Book-ending the Oyu Tolgoi deal was a decision to enforce a free stake in uranium projects of up to 51% and more recently to cancel an auction of the world’s largest undeveloped coal resource in favour of a contract mining option overseen by state-owned miner, Erdenes.

It is in this environment of progress mixed with uncertainty that Origo has found its niche. Rynning described prominent mining destinations such as Canada and Australia as being like a “well beaten track” and said previous mineral investments in Africa and India had proven difficult to manage. The firm has therefore decided to capitalise on its heavy Chinese presence to set up an exclusively Mongolian mineral portfolio. Origo has a dedicated office in Ulaanbaatar with specialist mineral teams in place to sift through the geological records and identify opportunities in mining and the associated infrastructure development.

Rynning said larger private equity groups were unlikely to take the kind of hands-on approach adopted by Origoand would be deterred by the risks associated with the typical early stage and infrastructure poor investment prospects in Mongolia. This has provided the firm with its window.

Origo’s investigations initially led them to a 21% stake in Gobi Coal & Energy, which owns two high-grade coking and thermal coal deposits in south-west Mongolia with 322 million tonnes of JORC resources between them. The latest foray has secured an option to invest up to $US5 million in coal, iron ore, copper and gold explorer Bumbat Consolidated and up to $US3.8 million for 70% in copper and gold junior Huremtiin Hyar. Both companies’ assets are in south-west Mongolia, including a 25.8 hectare tenement owned by Bumbat which covers a possible continuation of the geological structure that hosts Gobi Coal & Energy’s resources.

Origo’s strategy is to invest a small amount in early stage exploration plays that have delivered positive results from initial drilling campaigns with an option to increase that investment should the next round of drilling continue to deliver. The focus to date has been more on near-term opportunities in coal, though the firm was also investigating iron ore possibilities and had begun to string together base metal assets with its latest investments.
Bulk commodities that can be transported directly into China are the obvious opportunities in Mongolia, made more attractive by the near-surface potential for high-value coking coal. Coal giant Peabody Energy has made clear its intention to chase Mongolia’s coal potential, with the company’s chief executive Gregory Boyce describing the country’s coal resources as “untapped” in an interview with Reuters last week. “Met (metallurgical) coal is at the surface, and mining risks are low. We see Mongolia as a place we want to be,” he said. Investments from major companies like Peabody are essential for infrastructure development.

Meanwhile, a note published by Citi recently estimated that Mongolian coal exports to China could reach 30Mt over the next five years and said progress on rail infrastructure through a Bill currently in parliament may be “imminent”.