This week, the Mongolian government is expected to announce the resolution of its long running tax dispute with Rio Tinto and in doing so, pave the way for the second phase of construction of the Oyu Tolgoi (OT) mine. The return of this project should switch the flow of foreign direct investment back on, which could pave the way for a return to international markets.
Widely touted as one of Asia’s biggest growth stories in the boom years of 2011 and 2012, Mongolia looked like it had to become one of its biggest failures as a fight with Rio Tinto strangled the country's commodity-led growth.
In 2009, Turquoise Hill Resources and Rio Tinto signed an agreement with Mongolia’s government for the construction and operation of a copper-gold mining complex called Oyu Tologi. But the project ran into serious difficulties. In February 2013 the government declared financial war on Rio Tinto, freezing bank accounts and demanding unpaid taxes and on July 31 Turquoise Hill halted expansion of the development.
With the country’s biggest project in jeopardy, the knock-on effect was enormous. Foreign direct inflows fell 64% year on year in the first five months of 2014 and the country’s capital/financial account surplus was almost eliminated.
But it seems things are about to change for the better. Over the past couple of weeks, the Mongolian government has reached an agreement with Rio Tinto to end the long running tax dispute. Analysts expect that this will be made official by the end of this week and that phase two of OT will resume.
From that point, recovery ought to be rapid and investment opportunities abundant.
Analysts predict this will provide a catalyst for $6bn of investment starting with a series of Chinese infrastructure projects. The first of these is expected to be a rail project which will link Mongolia’s biggest coal mine Tavan Tolgoi to China. With funding already approved, China is already loading coal onto trucks and driving it to the border.
After the railway, an interstate highway from the Chinese border to the Russian border, and redevelopment of the capital Ulaanbaatar.
Not only does the Mongolian Stock Exchange (MSE) have plenty to offer, but analysts expect the country to tap the international capital markets as it has done so successfully in the past.
As the sovereign has reached its statutory debt limit of 40% of GDP, it is likely that the Development Bank of Mongolia will issue a bond to boost its foreign exchange reserves before returning foreign direct investment starts to pay.
With Russia off limits, emerging market funds have money to put to work. A juicy Mongolian yield backed by a growth story that is back on track is worth a look.