Mongolian, UK parliament members discuss ties www.akipress.com

AKIPRESS.COM - Mongolia-UK relations and cooperation have been increasingly developing in many sectors since the establishment of diplomatic relations of two countries in 1963, Mongolian Parliament Speaker Miyegombo Enkhbold said during a meeting with British parliamentarians John Grogan and Wayne David, who arrived in Mongolia for Nov.4-10 visit.

Mongolia slowly but surely digging itself out www.crugroup.com

Mongolia, a country with abundant mineral resources but with so much unfulfilled potential, appears to be slowly digging itself out from its economic woes, and most importantly restoring investor confidence.

In this CRU Spotlight, John Johnson, CEO of CRU China who has been visiting Mongolia regularly since 2009, explains what has changed in recent times following a recent visit.1

Earlier this year, Mongolia was in danger of defaulting on debt repayments and investor confidence was extremely low. Mongolia turned to the IMF for support, and already there are encouraging signs that the country is turning a corner. The Mongolian economy has stabilised and investor confidence is slowly being restored. While Mongolia has benefited enormously from exogenous factors such as rising commodity prices and China’s supply-side cutbacks, it is also important to note that improvements have occurred as a result of changes in government policy. Not all of Mongolia’s structural problems have been solved, but CRU thinks that it may have passed a turning point.

This should be of interest to the international mining community keen to unlock Mongolia’s considerable mineral potential.

Not only does the country have some of the world’s largest undeveloped copper, gold and coal reserves, but it has many other undeveloped mineral deposits, in addition to being on the doorstep of the world’s largest commodity consuming market.

John Johnson
Chief Executive Officer, CRU China
Positive developments in 2017 
What positive changes have occurred in Mongolia recently? In 2016, Mongolia’s external debt was 218% of GDP, its fiscal deficit was 20% of GDP, foreign exchange reserves were tumbling, and the Mongolian Tugrik was one of the world’s worst performing currencies. Foreign debt payments were due, and there was a high risk of default. Furthermore, foreign direct investment (FDI) was tumbling and the mining sector was struggling, having been through a period of several years of low prices and falling export volumes.

Fast forward one year later to 2017 and the IMF implementation of a $5.5 billion Extended Concessional Loan Facility appears to have marked a new beginning. Government actions, including fiscal transparency, tax increases and monetary tightening, have started. The budget deficit has been cut, foreign exchange reserves have been replenished and the Mongolian currency has actually started rising again. Bond payments have been rolled over, a new bond offering launched and real GDP growth has recovered from almost zero in 2016 to 5.3% in H1 2017.

Increasing commodity prices and export volumes have clearly helped, since export revenues have increased significantly. In particular, the Mongolian economy has been boosted by an increase in prices for coking coal during 2017, with coal overtaking copper as the largest revenue earner, which was also aided by the collapse of North Korean coal exports to China. Mineral exports are important to the Mongolian economy, accounting for more than 30% of GDP.2 Furthermore, approximately 90% of these exports are destined for China, so Mongolia’s prosperity is unavoidably linked to China’s commodity imports.

Restoring investor confidence is a government priority 
Although the economy appears to have stabilised in the short term and the government has introduced some positive policies, more structural reform is required. At a conference in Ulaanbaatar attended by John Johnson in September of this year, the then Prime Minister, Erdenebat, indicated that the most important objective is to promote foreign direct investment, but this has yet to materially pick up. The Prime Minister also reported that the government is planning to resolve road blocks to delayed projects, most notably in mining and infrastructure.

One of the most important developments for the international investment community has been the Mongolian government’s willingness to restore investor confidence. Uncertainty concerning administration, interpretation and enforcement of existing regulations was one of the biggest obstacles for investors. In order to address this issue, one tangible government policy is the creation of the Investment Protection Council (IPC) in 2016, which is a “one-stop shop” for investors. The IPC consists of senior government officials and interested stakeholders from the international community.

The IPC’s main purpose is to protect investors with more transparent processes and time lines for settling investment disputes and improving the investment framework. Already more than 80 grievances have been heard and new proposals made to simplify mining license procedures. The IPC will join international forums on investment such as the Investor Competition Forum in Vienna in November. It is relatively early on in the lifetime of this new shift in Mongolian policy to assert the success of the IPC, but it clearly represents a move in the right direction designed to encourage FDI.

It will take time for international investor confidence to return. In the 2016 Fraser Institute Survey of Mining Companies about perceptions of investment attractiveness, Mongolia ranked 87 out of 110 mining jurisdictions. Most importantly, the international investor needs to know that projects are making money and will not be a cause of local resentment. Towards this end there is a pipeline of major projects, including the Oyo Tolgoi underground copper-gold mine, Tavan Tolgoi coal mine, new power plants and rail projects, which should provide such evidence, but these will take time to be successfully developed.

The Oyo Tolgoi copper-gold underground mine project, owned 66% by Rio Tinto and 34% by the Mongolian government, is by far the largest flagship project proceeding at the moment, with more than US$6 billion invested so far, and current investments being made at a rate of more than US$1 billion annually. This project employs more than 11,000 workers and has additional spin-off benefits for the Mongolian economy. Underground production will begin in 2020/2021, when the export revenue benefits to the Mongolian economy will be enormous.

Further structural changes required
Mongolia is a land-locked country and infrastructure remains one of the biggest challenges. Projects to pave roads are progressing, but Mongolia is still ranked relatively low in global measurements for infrastructure. In the 2016 Fraser Institute Survey, Mongolia ranked 97 out of 104 jurisdictions based on perceptions of infrastructure.3 In particular, further advances in the rail route from the Tavan Tolgoi coal mine to the Chinese border remain stalled and this creates a considerable bottleneck. Such a rail connection could potentially reduce coal transport costs by at least $10/tonne, thereby increasing Mongolia’s competitiveness, and facilitate raising coal export capacity on this route from 45 to 65 million tpy.

Meanwhile the relative weakness of Mongolia’s banks compared to the overall size of the economy and the large amounts of capital required to fund Mongolia’s growth continue to act as a constraint. Much remains to be done, since Mongolia still has a low sovereign debt rating. The IMF has expressed satisfaction with the results of its first “inspection” which took place in early August, meaning that the monies from Japan, Korea, the World Bank and the Asian Development Bank should also be forthcoming. China has rolled over swap-lines, too. Few obstacles are expected to the release of the next tranche of money from the IMF in December, pending meetings between the IMF, the new Prime Minister and the new cabinet.

Other trends may boost Mongolia further, such as China’s Belt and Road initiative and rising global commodity prices. However, Mongolia must avoid the complacency that can come with higher commodity prices. Diversification away from mining is considered a key priority by the government, but profits are likely to be required from mining activity before reinvestment in non-mining activities can succeed. Meanwhile, a number of projects to add value to minerals have been identified, such as copper smelting and coal washing plants.

Conclusion
In conclusion, Mongolia has stabilised its economy over the short term. Structural reforms and key projects are taking place over the medium term, which should lead to economic growth rates of 8-10% at the end of the decade.

For Mongolia to unlock its mineral potential, the most important issue is for investors to return, and this will depend on the consistency and continuity of policies.

John Johnson
Chief Executive Officer, CRU China
Perhaps most importantly, political stability and consistency in civil service policy need to be restored. Unfortunately, these have not been helped by the previous Prime Minister and his cabinet being forced to resign by a vote in parliament in September. Nonetheless, there are clear signs that the former government made considerable progress on a variety of issues that concern investors, such as the establishment of the Investors’ Protection Council. It is understood that the new Prime Minister, Khurelsukh Ukhnaa, and newly appointed cabinet, are even more pro-FDI than Erdenebat was. Furthermore, there appears to be broad agreement among the political parties on the importance of foreign investment to Mongolia and the measures required to attract it. Any future government is likely to adhere to the policies set out by the previous one if Mongolia is going to continue to receive the support of the IMF. Therefore, the economy is likely to continue to improve, a virtuous-circle created and investment influx should follow.

John Johnson presented at two conferences in Ulaanbaatar – Invest Mongolia and Discover Mongolia – in September 2017.
Mongolian 2016 nominal GDP was approximately US$11.2 billion.
This ranking is based on % of respondents who thought the quality of infrastructure a) encourages investment b) is not a deterrent to investment c) is a mild deterrent or d) is a strong deterrent.

Cooperation to be directed at SME production and job creation www.montsame.mn

Ulaanbaatar/MONTSAME/ Minister of Food, Agriculture and Light Industry B.Batzorig met Wednesday Yolanda Fernandez Lommen, Asian Development Bank’s (ADB) Country Director for Mongolia to discuss ADB’s partnership with the country.

Seminar on mineral sector and gender to be held www.montsame.mn

Ulaanbaatar /MONTSAME/ On occasion of the 95th anniversary of mining industry of Mongolia, a seminar themed ‘Mineral Industry and Gender’ will be held on November 17 at a conference hall of ‘Chinggis Khaan’ hotel.

Saudi Arabia could seize $800bn in assets in corruption crackdown www.rt.com

The Saudi anti-corruption push involving the arrest of princes and government ministers may lead to the confiscation of cash and other assets worth of at least $800 billion, according to people close to the issue, writes the Wall Street Journal.

“They reckon they could get around two to three trillion riyals from these people. That’s the number they are talking about,” a person close to the government told the paper.

CIC, Goldman Sachs establish China-U.S. industrial cooperation fund -U.S. State depart www.reuters.com

BEIJING (Reuters) - China Investment Corp (CIC) and Goldman Sachs have signed a strategic agreement to establish a China and United States industrial cooperation fund on the sidelines of a state visit to Beijing by U.S. President Donald Trump.

Non-banking financial institutions increase their share capital in 2017 www.mongolia.gogo.mn

Following the Financial Regulatory Committee's October 2016 order to nine non-banking financial institutions (NBFIs) to increase their shareholder value, NFBIs including National Credit, Khaan Credit, Ashig Golomt, Utpala Finance, Mongolian Financial Partners, Asia Capital Corporation, SONK, and others have raised their capital value to a minimum of 2.5 billion MNT.

Newly established NBFIs are no required to hold a minimum of 2.5 billion MNT in capital, and veteran institutions have been gradually raising their shareholder value over the past year. Exponential Fund Management LLC’s shareholder value increased by 110 million MNT in the past 12 months, reaching 214 million MNT.

Copper, iron ore prices up despite plunge in Chinese imports www.mining.com

Copper and iron ore prices bounced back on Wednesday despite customs data showing a sharp drop in imports by China as the country's winter anti-pollution program cuts down refinery and blast furnace production.

120 billion MNT allocated for Ipotek loans in 2018 www.mongolia.gogo.mn

Under the proposed 2018 state budget, 120 billion MNT will be allocated for Ipotek loans.

The allocation for the 2017 state budget was 111 billion MNT. Since the implementation of the International Monetary Fund’s Extended Fund Facility program, the Bank of Mongolia (BoM) has been financing Ipotek loans with bond financing.
The government has been responsible for financing in the form of coupon payments and 9 billion MNT distributed to commercial banks from the state budget each month. The BoM is financing 16 billion MNT in Ipotek-backed bonds and 25 to 35 billion MNT in loan financing is being allocated to commercial banks.
The government is expected to be in full control of the Ipotek loan program in 2018, as discussed with the IMF. The balance of Ipotek loans currently stands at 4.2 trillion MNT, with 77 percent of loans having a 5 and 8 percent interest rate and the remaining 23 percent of loans having bank financing.
In September 2017, 49.6 billion MNT in loan financing was granted to 808 borrowers, which brings the total number of Ipotek borrowers to 92,600. Ipotek loan approvals fell by two percent compared to September 2016.

Rio Tinto joins race for stake in world’s largest lithium miner www.mining.com

Rio Tinto (ASX, LON:RIO) is said to be weighing an investment in Chile’s Chemical and Mining Society (SQM), the world's largest lithium producer, becoming the latest in a long line of companies interested in grabbing a stake in the Santiago-based miner.

According to Chilean news site El Mostrador (in Spanish), the Anglo-Australian giant is eying the 32% interest in SQM that Canada’s Potash Corp. of Saskatchewan (TSX, NYSE:POT), the world’s largest producer of the fertilizer by capacity, has to sale to be allowed to merge with smaller rival Agrium (TSX, NYSE:AGU).

The Saskatoon-based potash miner is working with Goldman Sachs and BofA Merrill Lynch to sell its stake in SQM (worth about $4.5 billion at current market values), and so fulfill some of the conditions imposed by regulators in China and India to approve the company’s friendly merger with Agrium.

El Mostrador suggested Tinto Rio had already made a bid, potentially trumping Chinese companies Sinochem, Tianqi and GSR Capital, all of which had also expressed interest in SQM.

The news came on the heels of PotashCorp and Agrium announcing Tuesday that China’s ministry of commerce had approved the merger, but required the sale of PotashCorp’s minority holdings in Arab Potash Company and SQM within 18 months of closing, and Israel Chemicals Ltd. within nine months.

SQM, which has a market value at just over $15 billion, produced roughly 44 million tonnes of lithium carbonate last year and is developing new projects in Chile and Australia.

Rio's current incursion in the lithium market is mostly limited to its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

While the company’s chief executive Jean-Sebastien Jacques has not ruled out acquisitions in recent comments to the market, he has also noted the company would only consider opportunities that make a "smart buy"
That’s why purchasing a stake in SQM would not be inconsistent with Rio's current strategy, said Investec in a note to clients, adding that such move would only provide a foothold in a sector where the company has some exposure, but with Jadar still many years away, "if it is developed at all".

Sources familiar with PotashCorp’s stake sale said in September that US chemical company Albenarle Corporation (NYSE:ALB) had already expressed its interest in acquiring a piece of SQM.

If successful, such deal would give the Charlotte, North Carolina-based firm a leading position in Chile’s lithium sector, something the country’s government would try blocking at all costs.

Laws enacted in the 1970s and 1980s classify lithium as a “strategic” commodity for Chile on the grounds it can be used in nuclear-fusion power plants. While the South American nation is very unlikely to build one of those facilities any time soon, controls on lithium production remain and only two companies — SQM and Albemarle — are currently allowed to mine the white metal used in electric car batteries.

PotashCorp-Agrium merger to close by year-end

Meanwhile, the PotashCorp-Agrium merger is moving forward with the companies saying Tuesday they expect the deal close by year-end. To expedite the process, Agrium has agreed to sell its Idaho phosphate production facility for $100-million to fertilizer company Itafos. The move aims to address concerns of US regulators about the tie-up.

The companies said that the new company, to be called Nutrien, would create the world’s largest potash miner worth about $36 billion, including debt.

The merged firm is expected to achieve $500 million of annual operating synergies.

Nutrien will also be the second biggest producer of nitrogen fertilizer with operations in 18 countries and more than 20,000 employees worldwide.