Mongolian Mining Sector Update: Regulatory Uncertainty and Risk Mitigation Strategies

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Recent developments in the Mongolian mining sector depict an increasingly unpredictable business environment, which severely constrains the foreign mining companies’ ability to invest and operate in the country. Major regulatory uncertainties ranging from the security of mineral tenure and resource rights to the enforcement of commercial contracts have resulted in an increased number of foreign players delaying capital investment projects or canceling them altogether. Foreign direct investment in the country has been reduced by almost half over the past year, triggering a sharp drop in the country’s reserves and causing an 18% depreciation of the Mongolian tögrög against the U.S. dollar. The resulting economic crisis has in turn ratcheted up the pressure on the Mongolian government to capture an increased share of the mineral revenues generated in the country.

The uncertainties plaguing the Mongolian mineral sector run deeper than the government’s ability to navigate this challenging economic environment. The parliament’s ongoing efforts to overhaul the mineral law have caused increasing apprehension with respect to royalty rates, extent of state ownership in mineral projects, and the concept of strategic deposits accompanied by restrictions on foreign investment. More recently, a series of corruption cases involving Mongolian mining officials has brought into question the validity of 106 mining licenses covering an area six times larger than the currently-active mining licenses in Mongolia. The uncertainty associated with these cases has caused foreign mining companies to suspend investments in these areas for an indefinite period of time. Experts predict that many of these foreign investors will definitely leave the country if the issue is not resolved in a timely manner.

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