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Source : Highgrade

Highgrade: Market forgives Mongolian politics

by : Chris Cann 

The market value of Mongolian-based copper and gold explorer Kincora Copper has rebounded strongly since elections late last month June, a sign that focus has returned to its promising Bronze Fox asset and recently acquired Tourmaline Hills project, rather than the underlying political uncertainty.

Kincora lost half its value between a mid-March high of $C0.34 and parliamentary elections on June 28, then a further 53% in the immediate aftermath as the markets tried to figure out what a preliminary victory to the Democratic Party over the incumbent Mongolian People’s Party would mean for miners.

The local concerns leading into the election had centred on the process for issuing mining licences, which was allegedly corrupt; and the lack of wealth that had trickled down to the communities at the bottom of the food chain despite the influx of foreign direct investment into major mining and infrastructure projects.

That led to heavy anti-business sentiment and nationalistic rhetoric from both the major parties, which competed to present themselves as the group most likely to extract a fair deal from foreign mining groups for Mongolians.

Greater regulation to control the acquisition of mining assets by foreign state-owned companies along with material increases to government ownership were amongst a sea of changes proposed to the mining landscape that spooked investors.

Legislation over foreign state-ownership has since been rushed through, however this move shouldn’t come as a surprise and in reality is nothing more than most first world and developing nations already have in place – leading mining nations Australia and Canada have both grabbed headlines in recent years over protectionist policies regarding their mineral assets.

Further steps toward resource nationalism, however, are unlikely. More likely is a repeat of the trend in late 2008 and into 2009 following the previous election.

Leading up to the June 2008 vote, the country had been in a state of similar political paralysis, the Ivanhoe deal at Oyu Tolgoi looked in jeopardy, and a 68% windfall tax for mining projects had been set.

Following the elections, the Oyu Tolgoi stability agreement that has now formed a template for future development contracts was signed, the windfall tax was scrapped, and a lengthy period of exploration and further investment ensued.

Luke Leslie is a Kincora director and the head of Origo Partners Metals & Mining Private Equity, which makes up 28% of the Kincora registry and specialises in Mongolian resources investment. He told HighGrade that the government was fundamentally pro-investment but was forced to play politics around election time.

“There was a lot of noise surrounding this election and I think a lot of that noise was aimed at getting re-elected,” Leslie said. “A fair few of the proposals are fairly unrealistic.

“Specifically in terms of increased government ownership and increased taxes etcetera, it’s hard for me to comment but I can’t see those kinds of laws being hurried through. Mongolians are quite practical about that kind of thing.”

He said regardless of any precise changes that may or not take place, there would be far greater clarity in the near future now that the election is passed.

“There’s now a new government that doesn’t have to worry about an election for some time and can get to grips with what needs to be done so there’s reason for some optimism.”

The issue of corruption surrounding mining licences is a fuzzy one. Mongolian business and politics tend to overlap greatly and so it is hardly a surprise that politicians who are also explorers/developers may be accused of bias when it comes to awarding concessions. The Democratic Party is aware of the issue and has promised greater regulation and supervision of the office in charge of this process.

But this overlap has also shown that despite the grumblings about the flow through of wealth in Mongolia, the people are supportive of the mining industry in general and want projects to be developed – the most popular MP with voters was a Democrat heavily involved in mining developments.

The dust has largely settled from the election and Kincora has recovered a great deal of its value having improved 112.5% over the three weeks since its July low. This was partly helped by a non-brokered $C2.5 million placement of convertible notes to Origo Partners but is largely down to an improved sentiment toward Mongolia.

With clarity improving and the realisation that all the big talk leading up to the election was, most probably, just talk, the market has revisited the case for Kincora.

Though there is little doubt that the company will evolve into a development story – its Bronze Fox asset is a lookalike for Oyu Tolgoi and was in fact once owned and reluctantly discarded by Ivanhoe Mines, while the deal over its Tourmaline Hills gold play centres on an expectation of at least 1 million ounces – Kincora is still an exploration play.

Drilling is ongoing at both projects and results are expected to come out any day that will wrap an initial resource around Tourmaline Hills. That will form the base camp from which the company can climb towards its 1Moz milestone early next year.

Work at Bronze Fox meanwhile is focused on the shallow oxide zone at the West Kasulu copper prospect – just one of four major copper and gold prospects within the project area. The plan is to put the numbers together to support a simple oxide operation that would fund the company in coming years.

The West Kasulu oxide possibility has been assessed by an independent consultant and is advancing toward an initial resource as well as a feasibility study. The level of confidence in the project is boosted by the decorated individual Kincora has presiding over it, John Rickus. Rickus, a Kincora director, is a copper porphyry specialist who spent six of his 40 plus years in the industry as Rio Tinto’s head of technical services.

The plan is to consider likely recoveries, acid supply and water provision as the resource is drilled out over the current quarter in order to launch into a feasibility study in the fourth quarter.

“The oxide operation is not the goal for Kincora,” Leslie stressed. “We’re looking at it in light of the market and whether it makes sense be a little bit distracted from deeper drilling for the high grade sulphides so we can establish an operation that funds all the exploration as well as new acquisitions in the area for the next five to 10 years. So it depends completely on economics and whether the numbers are what we hope they’ll be.

“We’re still looking to establish the numbers for an Oyu Tolgoi-style operation. This is just something we can bank.”

Development funding for a smaller scale oxide operation should not prove too difficult for the well connected Canadian junior – it is intimately associated with Origo Partners, as already mentioned, and has both a partner from a London resources fund on its board and a prominent Mongolian entrepreneur who in turn is enviably entwined with other serious local businessmen and financiers.

So, should an oxide operation be established, Leslie and the team would have provided a buffer between its development plans and fickle markets, which run hot-and-cold on the Mongolian story. And, all things being equal, that buffer should be built within three years, which means Kincora is unlikely to be upset in the lead up to the 2015 election.