December 20, 2011 on: business, Economical, Mining

Mongolia's metals and coal-related boom shows no sign of abating, with recent state figures confirming healthy growth across the economy. However, there continue to be concerns over a demand slump in China and the timing of a major mine listing.

In the same period, foreign trade surged by 90% year-on-year (y-o-y), reaching a value of $4.33bn. While imports rose to $2.82bn, or more than twice last year's figure, exports were up by $1.5bn – a 66.5% increase on the first 10 months of 2010. The broad-based swell of economic activity reported by the NSO tallies with World Bank estimates that Mongolia's GDP growth reached 17.3% in the second quarter of 2011 – the fastest in the world. When production at the Oyu Tolgoi copper and gold mines reaches its expected peak between 2013 and 2014, that mine alone is expected to boost GDP by 20% to 30%. Oyu Tolgoi is scheduled to produce some 450,000 tonnes of copper and about 650,000 ounces of gold per year in its first decade. The Tavan Tolgoi coal deposit, in Mongolia's south Gobi region, has an estimated production life of more than 30 years, with annual production of 15m tonnes. A planned initial public offering (IPO) of Erdenes-Tavan Tolgoi, the state-owned entity charged with developing the project, is expected to raise $3bn. In a confidence boost to investors concerned the country's vast mineral wealth will leave it susceptible to so-called “Dutch disease” (when a booming resource sector creates economic conditions hurting all other industries), there were healthy signs in other economic areas such as tax collection and industrial output. Tax revenues surged to MNT964.7bn ($733.17m) by October, a 46.7% y-o-y rise, according to the NSO. Revenues from taxes on goods and services increased 73.6% y-o-y to MNT494.6bn ($375.9m), while taxes on foreign trade rose 84.2% to MNT126.4bn ($96.1m), and the value of social security contributions went up 49.2% to MNT120.5bn ($91.58m). Those figures will likely be welcomed by the International Monetary Fund (IMF), which, along with the US government, sent a delegation to the country in August. The IMF’s aim was to both offer technical assistance and help adapt international standards to improve local tax collection. The NSO also noted a 10.1% y-o-y rise in total industrial output. While the increase was driven by a 10.8% rise in mining and quarrying, the government's efforts to encourage diversification seem to be taking effect. There was a 10.6% increase in manufacturing, including a 9.6% increase specifically for food and beverages production. “Our economy is quite vulnerable as it depends on the export of one or two raw materials,” Prime Minister S Batbold told OBG. “We would like to address these issues by diversifying our economy, for which we are introducing new financial and support mechanisms aimed at the non-mining sectors. … This includes the creation of value-added and processing centres in Mongolia, so that we do not only export raw materials but also increase production, to create more jobs and bring in new technologies.” The strength of domestic growth is clear, though external factors such as prices and a possible slowdown in demand for the country's vast resources could hinder expansion. In November, reports that Beijing plans to encourage the development of electric vehicles saw the price of London Metal Exchange (LME) three-month copper climb $121 (1.6%) to end at $7760 a tonne. However, there are concerns that demand in China, which accounts for about 40% of global copper demand, could yet fall victim to the weakening global economic outlook and financial uncertainty. Another factor in investor confidence for Mongolia is concerns over delays with the Erdenes-Tavan Tolgoi IPO, scheduled to list in Hong Kong and London in second-quarter 2012. Angus Caithness, Erdenes-Tavan Tolgoi's CFO, told Reuters on November 20 that while the Mongolian cabinet set up a new company to serve as the vehicle for the triple listing of the eastern block in mid-November, there is still a lot of work to do before shares can begin trading. “Obviously with this [listing], there are a number of legal and technical issues to be overcome,” said Caithness. The uncertainty is raised by the government's failure to reach a final decision on an investment agreement for the project’s western block. With Chinese, Russian, US, Japanese and South Korean groups among the major bidders, the deal has taken on geopolitical aspects, putting pressure on the Batbold administration ahead of June 2012 elections. “It is hard to say [when it will be finalised], however I do know that everybody is doing their best to conclude the negotiations as soon as possible,” said Caithness, adding that he had few concerns about the current global financial climate affecting the mine's prospects. “I personally do not see the BRIC [Brazil, Russia, India and China] nations' growth slowing down too dramatically,” he said. “This suggests to me that prices will remain strong and once the infrastructure constraints in the country are resolved, the company's margins will increase even further.” Please note that this article has not been written, is not copyrighted and does not in any case represent the views or opinions of M.A.D. Investment Solutions or any of its affiliate individuals or companies. 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SOURCE OF THIS ARTICLE : Oxford Business Group

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