Rio Tinto’s (LSE:RIO) decision to pay C$300 million to become the majority shareholder in Ivanhoe Mines (NYSE:IVN) last month was greeted by investors worldwide with open arms, but junior minors in Mongolia are also welcoming the Anglo-Australian mining giant’s latest move as they expect more global attention on their projects as a result.
By increasing its shareholding in Vancouver-based Ivanhoe to 51 percent from 49 percent, Rio Tinto will effectively take ownership of the Canadian group’s existing investments, including its crown jewel, the Oyu Tolgoi copper and gold mine in Mongolia.
Located in the south Gobi Desert, the Oyu Tolgoi mine is the single biggest financial investment in Mongolia to date, and is slated to begin production in the first half of 2013. The project is expected to produce an average annual production of 450,00 tonnes of copper as well as 330,000 ounces of gold, with a mine-life expectancy of for over 50 years. Oyu Tolgoi will become one of the world’s biggest copper and gold mines if it delivers on its potential.
The drama behind Oyu Tolgoi’s change in ownership has also placed Mongolia under the radar of investors across the globe, which is a “great thing, there’s no doubt about that,” according to Igor Kovarsky, CEO of Vancouver-based Kincora Copper(TSXV:KCC). He pointed out that the more interest and confidence that investors have in Oyu Tolgoi and Mongolian investments in general, the more the local government will commit to building up supporting infrastructure in addition to attracting more foreign capital. Kincora’s own Bronze Fox project is 140 km northeast of Oyu Tolgoi, and the company hopes to have detailed results of feasibility studies by the end of this year.
“We have indications that we are moving in the right direction,” Kovarsky said, adding that the company expects high copper content below the surface. But his company is far from alone in seeking fortunes in Mongolia.
“There aren’t that many Western-type labs” in Ulaanbaatar, and there are a lot of junior miners all looking to use those facilities, so there has been a great deal of backup in processing findings from the mines, Kovarsky said, adding that as a result the scene in Mongolia’s capital has changed greatly over the past few years.
Kincora itself has close ties to Ivanhoe, not least because it was Ivanhoe that first explored the Bronze Fox project from 1997 to 2005. In order to secure its rights to Oyu Tolgoi, however, Ivanhoe had to relinquish its rights to Bronze Fox, which passed through a number of owners. It was not until September 2010 that Kincora Copper began to acquire interest in the Bronze Fox project, and ownership was only completed last August, with the project’s former owner, Duchintav Khojgor, becoming a 20 percent stakeholder and board member of Kincora.
It should also be noted that BHP Billiton (ASX:BHP) owned Oyu Tolgoi from 1996 and then sold to Ivanhoe, which invested heavily in exploring the site at deeper depths, with astounding results.
Certainly, there is no shortage of mining companies both big and small seeking to tap into Mongolia’s vast commodities potential, including Voyager Resources (ASX:VOR), Entrée Gold (AMEX:EGI), and Erdene Resource Development (TSX:ERD), as well as a joint venture between Ivanhoe and BHP Billiton at Ulaan Khud North.
Still, mining in Mongolia is not without risks, including political uncertainty ahead of the June elections. The coalition government is under pressure to renegotiate a 2009 investment agreement for Oyu Tolgoi, but revisions to the initial deal may rattle foreign investors’ confidence in any government contract moving forward.
Meanwhile, London-based Business Monitor International warned in a report last November that “Mongolia’s current account deficit is alarmingly high on account of the country’s capital- and energy-intensive mining sector, as well as the growing appetite for foreign service imports in transportation. Although the shortfall should be sufficiently covered by foreign direct investment, a more challenging regulatory picture and waning foreign demand for mineral goods threatens to rapidly derail Mongolia’s balance of payments situation into a major correction.”
The momentum for Mongolia’s copper mines for now, though, is undoubtedly on the upswing.
Securities Disclosure: I, Shihoko Goto, have no interests in the companies mentioned in this article.