Mongolia’s Oyu Tolgoi mine is one of the largest copper mines in the world and central to the Mongolian economy (Purchase the full asset report here). According to an interview with Turquoise Hill’s Chief Executive Officer on 16 May 2019, the facility made a strong start to 2019 with copper production increasing by 18% over 2018 Q1.
However, a recent decision by Mongolia’s parliamentary working group (PWG) has cast a shadow over the mine’s expansion plans. In April, the PWG recommended a revision of Oyu Tolgoi’s 2009 and 2015 investment contracts that underpin the future operation and development of the mine.
Why has the Oyu Tolgoi project been delayed?
Although the Mongolian government considers further investment in mining projects as the key driver of economic growth in 2019, the long-planned expansion of the Oyu Tolgoi mine has been very slow due to resource nationalism, corruption and policy inconsistency in Mongolia. The PWG’s recent recommendation to revise the Oyu Tolgoi contracts is just the latest indicator suggesting that the above three challenges are still gaining momentum in the country.
The PWG’s report is partly motivated by nationalistic politicians from the government who consider Mongolia’s minority stake of 34% in the mine as exploitative and want to see greater government involvement in the project. Mongolia is categorized as medium risk in our Resource Nationalism Index in 2019 Q2 (see figure below). Although Mongolia performs well on this index relative to countries like China and Russia, foreign investments are still exposed to risks like fiscal pressures and changing contractual terms.
Another reason behind the PWG’s decision is the transparency of the expansion agreement which has long been questioned in Mongolia. Due to corruption concerns over Oyu Tolgoi contracts, senior figures involved have been under investigation by the Independent Authority against corruption since January 2019.
Frequent political turmoil can undermine a consistent mining policy in Mongolia
Mongolia is no stranger to political turmoil, with 13 prime ministers in 26 years. Frequent changes in the balance of power in parliament further complicate the investment environment in the country, especially for mining companies which have learned that politicians do not always commit to prior agreements. For example, in February 2018, the government cancelled a long term power supply agreement for the Oyu Tolgoi mine signed by the previous government in 2014, delaying the expansion of the mine. Mongolia is accordingly categorized as high risk in our Efficacy of the Regulatory System Index in 2019 Q2 (see figure below).
What is the impact on Mongolia's copper exports to China?
According to our sister company, Wood Mackenzie, the peak copper production of the Oyu Tolgoi mine can reach 600.6 kt per year. However, we believe the mine’s expansion is unlikely to be completed by 2023 as planned, pushing this production peak well into the late 2020s.
Amid political uncertainty, Mongolia’s relations with China, its largest metal importer, continue to remain positive. Given that Mongolia is a key part of one of the economic corridors of China's Belt and Road Initiative, both sides are intent on maintaining close political and economic ties to facilitate energy and metal trade.
Both governments also agreed to expand key ports of trade in 2019 to address increasing transport of commodities like copper and coal. However, a protracted slowdown of the Chinese economy amid a lasting trade war would lead to a decline in commodity prices, presenting a key downside risk to Mongolia’s exports.