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

Mongolian Sandwich

Being a landlocked country between Russia and China is a huge disadvantage for Mongolia.  Chinese and Russian influences are growing, sparking concerns among investors and the Mongolian people.  The Chinese already dominate Mongolia's exports, having bought 90 percent of Mongolia's exports in the first half of 2012.  According to Mine Web, Mongolia needs to expand its trade with China in order to ease its long-term dependence.

Dependence on Russia and China also poses a risk to the mining sector.  Mongolian mines rely on Russian and Chinese fuel, power and transportation to operate.  If a major disruption occurs in Russia or China, then Mongolian mines could shut down.  Furthermore, if Mongolia wants to export to other countries like South Korea or Japan it must rely on Chinese and Russian transportation.  In theory, Russia and China could coordinate their policies by limiting Mongolia's access to their railway networks in order to keep the Mongolian extraction economy under Russian and Chinese control.

Corruption is also a major issue.  Chinese and Russian businesses are viewed as some of the most corrupt in the world.  With their increasingly overbearing influence in Mongolia, it is not unlikely that corruption could spill across the boarder and into the Mongolian economy.

For these reasons, the Mongolian government has pursued a third neighbor policy, trying to build strong relationships with Japan, South Korea and the US.  In July, the government rejected a proposal that gave the development rights of the Tavan Tolgoi coal project over to Shenhua of China, Peabody of the United States and a Russian-Mongolian consortium.  The government is now trying to devise new deal that would include Japanese and South Korean partners.  This move, though disruptive to the launch schedule of TT, will probably pay off in the long term by promoting economic relationships with fellow democratic market economies in the region.

Dutch Disease in Mongolia?

How does a country like Mongolia convert its natural resource wealth into sustainable economic growth and prosperity?  In economics, Dutch Disease refers to the decline in manufacturing that tends to occur when natural resource extraction increases.  The increase in revenue from natural resources will make a nation's currency appreciate in value relative to foreign currencies, thus making it more expensive for other countries to buy the nation's exports.  This makes the manufacturing sector less competitive in the global market.  This phenomenon was first documented in the Netherlands after a large natural gas field was discovered there in 1959, thus the name Dutch Disease.

So how can Mongolia develop its manufacturing sector while its mining sector grows exponentially?  I don't think it should be difficult to manipulate the value of Mongolia's currency because Mongolia has only a few major export markets, namely China and Russia.  The Mongolian central bank could control the value of the Mongolian currency by deploying the same method that China uses to manipulate its own currency with its major trading partners.

Mongolian example:  China pays a Mongolian mining company 1m RMB (Chinese currency) for some amount of coal.  The mining company will go to the Bank of Mongolia and exchange the 1m RMB for however many Mongolian Tughriks.  The Bank of Mongolia could then use a healthy portion of that 1m RMB to purchase Chinese bonds, essentially injecting the RMB back into the Chinese economy.  This way the Bank of Mongolia will not accumulate an excess reserve of Chinese y, keeping the exchange rate between the Chinese and Mongolian currencies relatively stable.  This will keep Mongolian manufacturing competitive relative to Chinese competitors.  With Chinese consumption growing, Mongolian manufacturing should seek to export its finished goods to China.  This would allow Mongolia to develop a modern industrial economy as opposed to a undiversified extraction economy.

Mongolia's coal and copper resources are highly desired by Chinese companies.  This gives Mongolia a considerable amount of leverage when dealing with China.  For this reason, I think it is not unreasonable to think that this monetary policy would be tolerated by China.  Currently, Mongolian people are very weary of Chinese influence in their country.  In fact, in a poll asking who is the best partner for Mongolia, Mongolians put China last behind the United States, Russia, Japan and Korea.  But still, I think China remains the most promising partner for Mongolia, namely because of its proximity, its hunger for Mongolian exports and its increasing influence in World affairs.  What Mongolia needs is a trade agreement with China that acknowledges Mongolia's desire to develop its own domestic manufacturing, intended for sale in China.  Only then will both sides be equally served by the relationship and Mongolians can sleep soundly at night knowing that the big brother of Asia is not taking advantage of them.