Problems for Land-Locked Countries

Mongolia is one of the 48 countries in the world that are land-locked. About one quarter of the world's 205 countries are land-locked and these countries tend to have lower human development statistics compared to the rest of the world. Being land-locked is regarded as a disadvantageous because it can severely limit a country's access to global markets and global trade.  In general, coastal regions tended to be wealthier and more heavily populated than inland ones. Paul Collier in his book The Bottom Billion wrote, "If you are coastal, you serve the world; if you are landlocked, you serve your neighbors." Mongolia is no exception to these difficulties. The country has only two neighbors in China and Russia, and both countries have a very strong influence over Mongolia's economy. China for instance, controls the price of Mongolia's copper and coal exports and competitive pricing is restricted by Mongolia's limited access to international ports. China's recent growth has spilled across the border and is the main driver in Mongolia's mining driven development. 

With regards to the cross-boarder transit, there are international regulations that have been established in order to protect the rights of land-locked countries' to access global markets. In 1965 there was a 'UN Convention on Transit Trade of Land-locked States,' which granted special protections to land-locked countries with regards to access to sea ports and world trade. In 1982, there was a United Nations Convention on the Laws of the Sea, which protects the freedom of transit for land-locked states. Unfortunately both conventions are subject to bilateral, sub-regional or regional agreements. In other words, the rights of transit must be agreed upon with the transit neighbor in a formal trade agreement. In practice the protections granted in the UN conventions are not always honored by the transit country. The rights of transit of land-locked developing countries (LLDCs) remains an unresolved issue in international economic policy. Mongolia held a conference for LLDCs to discuss these trade issues in 2007. 

Mongolia is currently looking for ways to gain access to Korea and Japanese markets to sell its coal exports. The most direct route to these markets is through China and the port city of Tianjin, which has a free trade area. There is also the possibility of going through Russia, through Vladivostok, but it is not certain that Russia's rail network can support the quantity of coal that Mongolia is expected to export from its Tavan Tolgoi mine. Also, going through Russia will have significantly higher transit costs given the distance that needs to be traveled. Vladivostok can be reached from Mongolia by either going directly north to Russia and then circling around Manchuria, or by going Northeast and cutting through Northern Manchuria. Either way the distance that needs to be traveled by rail is significantly higher than the route through China to Tianjin. 

Mongolia will need to negotiate with China or Russia to set up some kind of transit agreement. China has no incentive to grant free transit because it already enjoys control over Mongolia's  coal exports. However, if Russia is approached first, it might be possible to pressure China into a more favorable agreement (Plan A). If China does not budge then plan B would be to secure a deal with Russia and accept the higher transit fees. The UN conventions will most likely help Mongolia's case at the bargaining table, but once again they hold little clout because they are not often followed and have no history of enforcement. Mongolia might also be helped by the World Trade Organization, of which Russia, China and Mongolia are members. However, it would be important to isolate Russia and China in negotiations in order to reduce the chance that they might collaborate to restrict Mongolia's export markets. 

DBM is currently raising funds for a railroad project that will run directly from Tavan Tolgoi to a Chinese border station. A later phase in the National Rail Project will connect TT with to the Russian boarder station.

Mongolia's Exploration Potential

Mongolia's discovered mineral wealth is greater than USD 1.5 trillion with less than 20% of the country explored. Mongolia's potential for future discoveries and its close proximity to China makes it one of the most attractive exploration frontiers in the world. The exploration market is currently red hot with many significant discoveries being made in the last month. The following are examples of some of the most recent discoveries:

The Mongolian Resource Corporation explores for gold at its Blue Eyes and Sujigtei sites in Northern Mongolia. Proactive Investors reports that the MRC discovered high-grade gold in its first nine holes drilled at the Sujigtei gold mine. This mine first opened in 1980 and had mined 180 meters before shutting down abruptly in 1991 after the Russians left the Mongolia. After reopening the mine, MRC discovered 5.6 grams of gold per ton. This winter a second underground drill rig capable of 500 meters of diamond drilling will be used, while surface contact drilling will be suspended due to weather conditions and water constraints.

Proactive investors also reports this month that Modun Resources has established a coal resource of 489 million tons at its Nuurst Project site. The quantity exceeds initial expectations and offers the potential for a large scale thermal mine. Modun is the sole owner of the Nuurst Project and now has one of the largest supplies of coal resources at the Australian-Securities-Exchange (ASX) of listed companies operating in Mongolia. The company plans to implement a scoping study and apply for a mining license as soon as possible. Its 2012 exploration program will target more coal resources, with 84 percent of its license still left unexplored. Nuurst is is a 34.5 square-kilometer license area located 120 kilometers south of Ulaanbaatar and only 6 kilometers from an existing railway line. Modun reports a significant coal seam thickness and a low stripping ratio for the project, which suggests a well positioned large scale, low cost operation.

Xanadu Mines reported a 51% increase in its JORC coal resource, bringing its total coal resource inventory to 497 million tons. They also made a discovery of over 327 million tons of sub-bituminous coal resources at their Khar Tarvaga site. They have identified three coal streams there that are well situated for supply to the domestic coal market.

Haranga Resources recently reported a high grade iron discovery, finding high grade iron mineralization in 29 of its 33 drill holes at the Bayantsogt site. They have identified five major iron lodes in the Bayantsogt hill and are now beginning metallurgical tests. Haranga has also made a new discovery near Dun Bulag, uncovering magnetite iron mineralization. Haranga is an Australian-listed company focused on developing high quality iron ore projects in Mongolia.

(information gathered from BCM Newswire 197)

Mongolia's two largest mining sites, Tavan Tolgoi and Oyu Tolgoi, are expected to make IPOs next year on the Mongolian Stock Exchange (MSE), which will be the largest offerings in MSE history. Currently Mongolian mining companies Ivanhoe, Mongolian Mining and Hannu Coal are listed on the US, Hong Kong and Australian stock exchanges respectively. Investments in these companies can offer investors access to Mongolia as it emerges on the world market.  

Shuren Hydro-Electric Station

Development Project

Mongolia is expected to enjoy high levels of sustained economic growth over the coming decade due to its rapidly developing mining sector. The rising demand for new sources of energy heavily outweighs current supply, creating the need for a reliable and sustainable domestic energy supply. Mongolia has a hydropower potential of 56000 GWh per year but has only harnessed one percent (75 GWh) of this potential. This obvious void has created the possibility for a high impact investment with considerable growth potential.

After the recent success of a hydroelectric pilot project, the Mongolian Government has given highest priority status to the development of a large-scale hydropower facility on Mongolia's largest river, the Selenge. The proposed project will provide solutions to a long list of socioeconomic and environmental issues by satisfying long-term peak load demand, reducing hazardous pollution levels, reducing dependence on high cost Russian energy imports and creating energy security and independence.

The ongoing development of large scale mining projects over the next decade will create enormous demand for electricity, which cannot be met by existing supply. Mongolia currently imports high cost energy from Russia to cover its peak capacity consumption, a dependence that will only increase with the growth in mining. Currently, Mongolia's energy sector consists almost exclusively of coal-fired thermal power plants, which have contributed to high levels of air pollution in the capital city of Ulaanbaatar and created a potential health risk for over 1 million people, effectively one third of Mongolia's population. Desertification due to climate change poses another considerable risk, with local warming reaching 2.0 degrees, 3 times the global average. It is therefore imperative that Mongolia develop a secure and sustainable mix of domestic energy sources to cover rising demand, reduce air pollution and carbon emissions and reduce dependence on Russia.

The Shuren Hydropower project represents a near perfect solution to Mongolia's energy needs and will be a major step towards sustainable socieconomic development. The project will reduce greenhouse gas emissions by 700,000 tons per year and generate energy that is infinitely renewable, clean and domestically supplied. In addition, the the facility will provide water storage, energy storage and flood and drought mitigation. DBM has been entrusted with the responsibility of financing the project and is currently reaching out to investors.

devonalec@gmail.com

USD 600 million Euro Medium Term Note Program

Press Release

Development Bank of Mongolia has successfully issued its bonds and on good terms

The Development Bank of Mongolia has opened a new page of history in Mongolia’s banking and financial sector with its US$ 600 million Euro Medium Term Note Program, in coordination with its internationally recognized partners in ING, Deutsche Bank and HSBC.

International rating agencies, Moody’s and Standard&Poor’s have rated the Development Bank of Mongolia’s bonds similarly to the Government of Mongolia, Moody’s - (B1),  S&P - (BB-).

The Development Bank of Mongolia’s bonds are the first sovereign bonds issued with the guarantee of the Government of Mongolia. Although the world capital market situation is not favorable at present, the Development Bank of Mongolia managed to issue the bonds in the best terms and at a low interest compared with countries in a similar situation.

The five-party agreement to establish this program will be signed by S. Bayartogt, Finance Minister on behalf of the Government of Mongolia as the Guarantor and Kim, Jang Jin, CEO of the Development Bank of Mongolia. At this moment the representatives of the investment banks are also signing the agreement in their respective countries.

DBM aims to provide financing for large scale projects in priority and strategically important sectors to support economic growth and the production of value-added goods. It shall provide the funds to the following priority sector projects and programs, approved by the Parliament:

·         New Development medium term target program;

·         State policy on Railway transport program;

·         Sainshand Industrial Park; and

·         Projects and Programs included in the List of auto roads and energy facilities to be built using DBM’s own funds with a condition of to be paid later.

The EMTN Program established by the Development Bank of Mongolia provides an opportunity to start financing these strategically important projects and programs and within this program the bonds worth US$ 600 billion are planned to be sold in several stages through the Singapore Stock Exchange this December and into 2012.

We are pleased to inform you that the initial takedown of US$ 20 million will be transacted shortly. The program which we have established today represents the foundation upon which DBM will expedite the construction work that is so eagerly anticipated and through which DBM will make its valuable contribution to Mongolia’s successful development.

            We are cooperating with ING, Deutsche bank and HSBC, all of which are internationally reputable and experienced investment banks, to implement the Euro Medium Term Note Program.

            Global investment bank ING, headquartered in the Netherlands, has been carrying out investment activities in Mongolia for the last three years. It cooperates with domestic banks, such as Khan bank and Trade and Development Bank and has profound experience and knowledge about the economy and business sector of Mongolia.

            Deutsche bank, a global investment bank with a history of 141 years, provides its services in over 70 countries worldwide. In the third quarter of 2011 it was named the top bank in the Euro bond markets according to Bloomberg reports.

            HSBC, with its history of 146 years, is considered a reputable and leading bank in international stock markets. It is headquartered in London and operates in 87 countries around the world. According to Bloomberg reports it is ranked closely behind Deutsche bank in the Euro bond markets.

DEVELOPMENT BANK OF MONGOLIA