By the Blouin News Business staff

Mongolia’s reputation takes a hit in latest mining spat

by in Asia-Pacific.

Coal is loaded onto dump trucks in Tsogttsetsii, Omnugovi province, Mongolia, on Thursday, June 19, 2014.  Bloomberg/Bloomberg via Getty Images

Coal is loaded onto dump trucks in Tsogttsetsii, Mongolia, June 19, 2014. Bloomberg/Bloomberg via Getty Images

On Monday, Mongolia signaled it will not pay Canadian uranium explorer Khan Resources $104 million ordered by an international tribunal in a licensing dispute. In 2009, Mongolia canceled the company’s licenses to mine the Dornod uranium project and instead granted the rights to Russia’s ARMZ, causing the current spat. The Mongolian government’s decision to annul the payment is a setback for the country’s international reputation — notably because it needs to convince foreign miners to invest enormous amounts of capital if it wants to revive its flagging mining industry.

Jim Doak, the chairman of Khan Resources, traveled to Ulanbataar last week to try to collect the payment, although he was not optimistic about the government’s willingness to pay. Prior to the trip, he said Khan Resources had hired an unidentified company that specialized in collecting delinquent government debts by seizing assets, such as airplanes or ships temporarily located outside the country. Tense talks with the government broke down, as predicted, but the following day Doak was found dead in his hotel room. While police say no foul play was involved, the timing has raised international suspicion of Mongolia’s government. Doak was diabetic and may have died from natural causes, but anything less than a full and transparent autopsy may spook investors for good. Investigators are currently preparing an autopsy, the results of which will be released within ten days.

Mongolia was once the darling of the mining world, and its vast potential and multi-billion dollar inflows of FDI led to the highest GDP growth rate in the world in 2011 (17.3%). Rio Tinto invested $6.6 billion in the massive gold and copper mine Oyu Tolgoi, the flagship of the country’s mining-led transformation. But disputes with mining companies and a decline in commodity prices resulted in a drastic fall in FDI in Mongolia, from $4.45 billion in 2012 to $507.6 million last year. The Mongolian government owns 34% of Oyu Tolgoi, and a bitter dispute with its partner Rio Tinto over cost overruns, profit sharing, management control, and a $30 million tax bill led to an indefinite halt of an ambitious and costly expansion of the mine. Similar conflicts have held up development of the $4 billion Tavan Tolgoi coal mine. The Asian Development Bank now forecasts Mongolia’s GDP growth will slow from 7.8% in 2014 to 3% this year.

However, Mongolian Prime Minister Saikhanbileg Chimed has promised to resolve several high profile disputes with foreign companies, and there have been encouraging developments. In early April, the government announced it had agreed “in principle” to a deal with Rio Tinto to proceed with the $5 billion phase II expansion of Oyu Tolgoi. The prize is too irresistible to keep delaying: according to an updated study from September, over a mine life of 41 years ,it would produce 24.9 billion pounds of recoverable copper, 11.9 million ounces of gold, and 78 million ounces of silver, totaling $92 billion at today’s metal prices.

But the Khan Resources case has given Mongolia’s renewed P.R. campaign a black eye. The firm’s strategy for collecting on its arbitration award “will not change one iota as a result of Jim’s passing,” said its president, Grant Edey. Meaning the dispute will be prolonged and generate additional negative publicity.

But other mining companies may be confident enough in their own arrangements to continue operations anyways. Xanadu Mines announced on Tuesday that it restarted its fully-funded exploratory drilling at its flagship Kharmagtai copper-gold project, in the same province as Oyu Tolgoi. If Khan Resources’ treatment by Mongolia is the exception rather than the norm, then the country may be poised for a mining comeback.