#mongoliamining

Amidst fears that China's economy is bottoming out and recent growth projections of approximately 8%, the lowest in years, the Chinese government is beginning to consider loosening fiscal policy. This easing of the Chinese Yuan is a welcome shift in policy for foreign investors and governments around the world. The Shanghai Stock Exchange has seen stock prices rise in anticipation and some are predicting an interest rate cut later this month. So how will the expected Chinese slowdown impact mining across the border in Mongolia? 

Given that China's economic policy greatly affects Mongolia's industry, the consequences of policy change is yet to be seen. However, what has played out in the Mongolian mining industry has been a US$926 million deal for Ivanhoe Resources to sell off its majority share in SouthGobi Resources, a Toronto-traded Mongolia-operated coal company, to Chinese aluminum giant Chalco.  The largest Chinese investment in Mongolia to date, the deal will give Chalco (subsidiary of the state owned metals and mining group Chinalco) inroads to the neighboring coal market. 

Even as it has started decelerating coal consumption, China has been a net importer of coal for years, relying on its Central Asian neighbors for readily transported resources. SouthGobi Resources mines in Ovoot Tolgoi are the closest to China and already has hundreds of trucks driving from the site to the border daily. Chalco's renewed focus on coal and rare metals have helped its stock price rise to above $12 a share last week as traded by American Depository Receipts. 

While coal is not regularly regarded as the capstone of Mongolian mining, Ivanhoe unloading its coal investments is significant in regards to Oyu Tolgoi project, the main driver of the Mongolian economy right now. Famed Robert Friedland's Ivanhoe Resources head has seen the company give way to majority stakeholder Rio Tinto, and this most recent deal is reported to raise capital for the construction of the Oyu Tolgoi project. Originally expected to be completed by 2013, Oyu Tologi could be producing as soon as Winter 2012 provided that more capital is made available. Also of note to the deal is that Chinalco is also the largest shareholder in Rio Tinto, a well diversified mining house, owning a 12.9% stake. 

Chalco has listed BNP Paribus as its advisor and the deal is expected to be completed by July 5th. 

Update: 

Buying SouthGobi Resources is proving to be more difficult than initially expected. After the announcement of  Chinese aluminum giant Chalco's bid to buy SouthGobi from Ivanhoe Mines, mining licenses for the mines were revoked by the Mongolian government late Monday, April 16th. SouthGobi shares dropped to C$6.25 a share the same day and, at the time of this writing, have yet to return to $7 stock prices. 

According to this Bloomberg article, the Mongolian government and central bank will revisit the offering of global bonds in a year from now. Initially the central bank was searching for $500 million USD to help finance the rapid expansion of the country's mining industry. Global banks have offered to manage as much as four times that amount but with coal revenues fueling as much as 20% GDP growth, the government has decided to hold bank on selling its debt in the dollar or yuan currency. 

Mongolia currently has securities in the local Tugrik currency and has sold $150 million USD in the past months. Selling these funds has been easy as value for the country's stock exchange has been rising and the GDP per capita could reach as high as $5000 USD this next year. Raising these funds will help Mongolia realize its full growth potential as capital is now needed to address infrastructure and inflation limitations. 

According to this Reuter's article, Mongolian government will work on a new deal for the Western block of the Tavan Tolgoi coal reserves.

Initially the reserves were going to be split among a Chinese group, a Russian/Mongolian consortium and an American group. The deal caused outcries from the Japanese and Korean governments, and was rejected by the Mongolian Security Council as "unfair". The current deal has Japanese and South Korean firms under a Peabody Energy led-consortium and with a larger share. 

The investment agreement for the Western block has an crucial effect on the IPO being planed in the Eastern block. The government short listed BNP Paribas, Deutsche Bank, Goldman Sachs and Macquarie as advisors months ago and are awaiting the go ahead for an tri-exchange IPO listing.  The IPO's timing is imperative as it is expected to be approved within the next 3 months so as to not interfere with the upcoming June elections. The investment agreement for the Western block will affect the valuation of the Eastern block IPO. 

A week after news broke in late September that the Mongolian government was seeking to renegotiate their contract with Rio Tinto and Ivanhoe mines over the Oyu Tolgoi project, the standoff between the government and the companies has ended. 

The two parties released a joint statement reaffirming their commitment to the project. In the statement, they reaffirm certain principles of the Investment Agreement and assure that:

Mongolia's economy has become one of the fastest growing economies in the world.  The people of Mongolia are reaping great benefit from the construction of Oyu Tolgoi project and stand to benefit even more when project becomes operational.