Mongolian Mining at a Crossroads

In a prior post, Mongolia’s Mining Boom-Location Location Location, we highlighted how Mongolia’s proximity to China along with China’s demand for raw materials had led to a boom in mining projects and the need for process automation expertise. Emerson’s Douglas Morris, a member of the alternative energy and metals and mining industry teams, provides an update on this part of the world.

Emerson's Douglas MorrisI recently had the opportunity to visit Ulaanbaatar, Mongolia for a business meeting and one thing is abundantly clear; mining is the driving force behind the country’s GDP growth. Mongolia has the fastest growing economy in the world, as seen in the chart below, but its $8B output pales in comparison to others.

Let’s start with coal, which is the most abundant resource in the country. There are several southern coal mines, including Tavan Tolgoi (TT), which are active. What makes Mongolian coal so different is that most is a higher grade coking coal, a key ingredient to the Chinese steel making industry. Secondly, these coal bodies are found very close to the surface, giving them very low stripping ratios. In fact, the stripping ratio for TT is less than 3, which gives it a price advantage over Australian mines of about 5 times.


Should be a slam-dunk business, right? Well, unfortunately, there are a couple of hurdles in the path. Water is at a premium in Mongolia, which makes it expensive and scarce. Also, there is no easy way to transport this coal to its destination because the rail infrastructure in the country requires an influx of billions of US dollars for improvement. Several entities are investing in this build out, though, and once constructed, Mongolian mining companies will be afforded a great competitive advantage. As it currently stands, 90 percent of Mongolian coal is used in China, but a better rail infrastructure will lessen this reliance and improve the country’s ability to access China’s coastal cities for export.

There have been a lot of positives written about the Oyu Tolgoi (OT) gold and copper mine, but unfortunately, it too suffers from logistical issues. As with TT, OT has to plan accordingly for access to scarce water resources. It’s run into a political issue, though, in that it can’t get ready access to the power it needs to run the mine. Until it constructs its own power plant (about 300 MW will be required), it must rely on imported power from China, and until the two governments can come to a firm resolution about a power purchase agreement, uncertainty abounds for OT. On a positive note, it looks like the power issue in on the cusp of being resolved.

A final matter that needs resolution for the Mongolian economy is the uncertainty surrounding resource nationalization. The recent request by the Mongolian government to renegotiate the OT investment agreement is sending ripples through the economy. Foreign Direct Investment (FDI) has been the lifeblood of the economy and is responsible for much of the country’s GDP growth. With its desire to get more revenue from OT, the government is unknowingly causing FDI to slow down dramatically. Where this lands, no one knows, but it may be wise for the leaders of the country to take a bit of a longer-term view.

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