Industry still wary of nation
posted on
Nov 27, 2010 11:58AM
Crystallex International Corporation is a Canadian-based gold company with a successful record of developing and operating gold mines in Venezuela and elsewhere in South America
Peter Koven, Financial Post ยท Saturday, Nov. 27, 2010
Oyu Tolgoi is off and running. So are many other Mongolian mining projects. So, has the country turned a corner and become an appealing place for miners to invest money?
The industry doesn't seem to think so.
Canada's Fraser Institute puts out an annual survey of mining companies in which it ranks jurisdictions from best to worst. Mongolia came second-last in the latest update, behind such luminaries as Venezuela, Zimbabwe and even the Democratic Republic of Congo.
How is that possible? Alex Molyneux of SouthGobi Resources Ltd. says it just reflects jealousy on the part of companies that missed the boat on Mongolia.
On the other hand, there is the unfortunate story of Khan Resources Inc.
If Oyu Tolgoi's development is proof of Mongolia's ability to reach out to the world beyond China and Russia, Khan's tale suggests the country can still get squeezed by its powerful neighbours. "We're in a tough situation," chief executive Grant Edey says.
Toronto-based Khan has spent more than a decade in Mongolia trying to develop the Dornod uranium deposit, a project discovered by Soviet geologists in the 1970s and later abandoned.
The company was making progress until last year, when then-Prime Minister Sanj Bayar suddenly created a nuclear energy agency (NEA) that enacted a law requiring 51% state ownership of all uranium deposits. Since Dornod is the country's most promising deposit, it was easy to see what the main target was.
The Mongolian and Russian governments then signed a nuclear co-operation deal that included a development proposal on Dornod. Khan had no say in the deal, which appeared to push it out of the picture.
Months later, with Khan's share price bottoming out, Russia's state-owned uranium giant, ARMZ, launched a hostile takeover bid.
With few other options, Khan negotiated a friendly takeover with a state-owned Chinese company, which only served to anger the government. "Unfortunately, Mongolians do not like the Chinese," Mr. Edey says.
The NEA invalidated Khan's licences using some ridiculous rationale -- one argument was that when Khan raised money on the Toronto Stock Exchange in 2007, it violated a Mongolian law created two years later. Not surprisingly, the Chinese bid disappeared and Khan's share price sank again.
Looking behind the curtain, Khan suspects that Russia exerted political influence on Mongolia to get its way. Mongolia relies on Russia for key imports, including energy, and has to manage relations carefully.
Khan took its case against the government to a local court, and actually won. However, the court has no power to reinstate the licences.
The Khan situation has understandably thrown up red flags on investment in Mongolia.
Of course, the fact that the company went to court and won shows that Mongolia wants to uphold the rule of law. Experts point out that filing a similar complaint against the governments in China or Russia would be a waste of time.
pkoven@nationalpost.com