Mongolia’s mining industry has great potential. Its mineral resources are largely unexplored and unexploited. That said, the exploration that has been carried out to date has found sizable reserves of coal, copper, fluorspar and gold. Full scale extraction of these resources has occurred at a number of mines. In total, about 80 types of minerals have been discovered in Mongolia. However, the biggest drawback to foreign investment remains regulatory issues. In May 2009, the Mongolian government was forced to defend itself in the Frankfurt Court of International Arbitration, after it was sued for US$1bn by Russian mining company Altan Dornod Mongol. As reported by Mongol News, the company accuses the Mongolian authorities of taking excessive taxation from Russian investments, claiming that the 68% windfall tax is against international law as Mongolia and Russia have signed a bilateral agreement to avoid double taxation for companies operating between the territories. The Mongolian Taxation Authority claims that Altan Dornod Mongol owes MNT56bn (US$39.6mn) and has subsequently shut down the company’s bank accounts and is threatening to confiscate its mining licenses.

Meanwhile, one remains concerned about ongoing delays to the finalisation of what will be a landmark agreement over drilling rights at the Oyu Tolgoi gold and copper mine, although we expect the deal to be finalised in H109, negotiations are dragging on. When finally signed, the deal should spark a resultant surge in FDI inflows through the remainder of 2009 and 2010. Indeed, the importance which Oyu Tolgoi, and the underlying legal contract between the government and Anglo-Australian Rio Tinto and Canada’s Ivanhoe will play for Mongolia’s growth dynamics cannot be downplayed. As the biggest foreign investment project in Mongolia’s history, we expect the benchmark mining agreement to not only increase investment inflows in the short term, but also serve as the framework upon which future projects will be based.

Yet, in late April the Democratic Party, which is a partner in Mongolia’s coalition government, announced its reservations about the draft investment agreement governing the project. Though most legislators in Ulan Bator remain keen on finalising the landmark mining deal, ongoing disagreements within parliament continue to obstruct conclusion of the agreement.

Key participants in the mining sector include: Centerra Gold, Erdene Gold, Ivanhoe Mines, QGX, Solomon Resources, and South Gobi Energy Resources (a subsidiary of Ivanhoe Mines). Key export markets include China, Canada, Japan, South Korea and the US.