Mongolia was to be the “ultimate resource play”. But playtime can quickly turn ugly. Chalco, China’s biggest aluminium producer, has abandoned its attempt to take a controlling stake in SouthGobi Resources, the owner of Mongolia’s Ovoot Tolgoi coking coal mine. Since Mongolia rushed to pass a new law on foreign investment after the deal was announced in April that would have capped foreign ownership at less than 50 per cent, Chalco did not really stand a chance. Its retreat is a Pyrrhic victory for Mongolia.
The problem for Mongolia is its existential angst about its giant neighbour. The landlocked republic is home to a 10th of global coal reserves, and the world’s largest under-developed copper mine. With a budget deficit after heavy spending in the run-up to June elections, Ulan Bator could do with the foreign investment to develop those reserves. China is clearly willing, yet it also buys more than 80 per cent of them. For Mongolia, the idea of ceding control of its resources to its biggest customer is unpalatable.
That leaves mining companies operating in Mongolia in a bit of a bind. The collapse of resource prices as a result of the fall in global demand is hurting all miners. Shares in resource giants such as BHP Billitonand Rio Tintohave lost between 3 and 13 per cent this year. But the uncertainty about investments in Mongolia, meanwhile, has also undermined the share prices of mining companies operating there. Shares in SouthGobi have lost 60 per cent, as have those in Winsway, also a target of Chalco. Aspire Mining, the Australian group developing the Ovoot coal project in Mongolia, has lost three quarters.