Industry Trend Analysis - Ouster Of Prime Minister Will Not Deter Mining Sector Growth - OCT 2017

BMI View: Mongolia ' s strong mining sector growth will remain undeterred by the recent ouster of Prime Minister Jargaltulga Erdenebat, as improving commodity prices and existing projects underpin our positive outlook. Nevertheless, downside risks to production forecasts persist, mostly attributed to the high levels of country risk in Mongolia that could temper new investor appetite.

The recent ouster of Mongolian Prime Minister Jargaltulga Erdenebat will have limited effects on the country's mining sector in the coming months. Erdenebat was removed from office despite belonging to the Mongolian People's Party that has a majority in parliament. His downfall was ostensibly tied to his awarding of public contracts to companies owned by cabinet members and ministers, which reflects the high levels of political risk of doing business in the country. Mongolia has a short-term political risk score of 39.3, second lowest in Asia, and an overall country risk score of 40.2, third lowest in Asia, in our Mining Risk/Reward Index. Following the ousting, the International Monetary Fund (IMF) announced that it will delay disbursing bailout funds to Mongolia until a new administration is formed. Cash-strapped and debt-ridden Mongolia was granted a USD5.5bn rescue package from the IMF and other partners in May after Erdenebat's cabinet negotiated the deal. While the removal of Erdenebat from office introduces a degree of political turmoil that will likely cause a slight and temporary dent in new investor interest, existing mining projects will roll on and growth in the mining sector will remain steady. We believe the new cabinet will remain committed to attracting foreign investment to the mining sector, thus having no impact on our long term outlook for Mongolia's mining industry.

New Cabinet To Remain In Support Of Mining
Mining Industry - Share Of GDP (%)
e/f = BMI estimate/forecast. Source: BMI, UN Data

Mining Growth To Power Ahead

Mongolia's mining sector will see strong growth over the coming years despite any temporary hiccups in the political environment of the country. In March 2017, the minister of mining and heavy industry, Dashdorj Tsedev, announced that Mongolia plans to double the amount of land available for exploration. Mongolia will increase the land available to 20.9% of the country from 9.6% currently. Additionally, Mongolia's total coal earnings rose fourfold to USD1.28bn over the first half of 2017 due to China's ban on North Korean imports and higher coal prices. In August 2017, Mongolia's largest coal producer, the state-owned Erdenes Tavan Tolgoi, reported production of 5.9mnt of coal over the first seven months of the year, or 4.6 times more than the same period of 2016. In the copper sector, Chilean state miner Codelco, the world's second largest producer of copper, announced in August 2017 an interest to invest in Mongolia as the copper market improves. Solid improvements in infrastructure will also bolster the country's mining sector growth and increase foreign investment into the sector ( see ' Diversification To Help Shield Industry From Political Risks', September 12). As an example, In June 2017, China Gezhouba Group Co Ltd entered into a non-binding agreement to co-operate with Aspire Mining subsidiary Northern Railways to plan and source financing for the proposed 549km Erdenet - Ovoot line. The proposed multi-user railway would enable Aspire to exploit the second largest coking coal reserves in Mongolia.

Mongolia In Regional Top Three For Mining Regulation Despite Political Risks
Select Countries - Mining Regulation Scores
Scores out of 100, higher score = more attractive market. Source: BMI Mining Risk/Reward Index

Downside Risks Persist

At the same time, we note that the removal of Erdenebat from office by members of his own party combined with the corruption allegations and incoming opposition President Khaltmaa Battulga reflect the still-numerous risks in Mongolia's mining industry. The political landscape of the country could still shift policies on issues such as foreign investment and trade that have sizable effects on mining. Most notably, the current government is struggling to manage its external debt burden - at USD23bn, or more than twice of GDP, and efforts have resulted in unpopular austerity measures as well as growing political rhetoric against Chinese investment in the country.

Mongolia Mineral Production Forecasts (2017-2026)
2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f
f = BMI forecast. Source: USGS/BMI
Coal Mine Production, mn tonnes 38.49 42.34 48.06 56.23 67.76 81.98 99.20 114.08 125.49 138.04
Coal Mine Production Volumes, % y-o-y 3.00 10.00 13.50 17.00 20.50 21.00 21.00 15.00 10.00 10.00
Copper Mine Production, '000 tonnes 344.44 358.22 411.95 519.06 711.11 782.23 821.34 862.40 896.90 932.78
Copper Mine Production Volumes, % y-o-y 6.00 4.00 15.00 26.00 37.00 10.00 5.00 5.00 4.00 4.00
Gold Mine Production, moz 0.88 0.91 1.05 1.32 1.81 1.99 2.09 2.20 2.29 2.38
Gold Mine Production Volumes, % y-o-y 6.00 4.00 15.00 26.00 37.00 10.00 5.00 5.00 4.00 4.00