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Will foreign investors give Mongolia another shot?

Leslie Shaffer | Writer for CNBC.com
Tuesday, 26 Nov 2013 | 6:35 PM ET
Mongolia hopes to end Rio Tinto dispute by 2014
Saikhanbileg Chimed, Chief of the Cabinet Secretariat of Mongolia is positive the conflict between Rio Tinto's Oyu Tolgoi mine and the Mongolian government will soon subside.

Foreign investors abandoned one-time frontier-market darling Mongolia over the past 18 months amid a dispute over a mine development, but the country hopes a resolution and its new investment law can lure them back.

Rio Tinto's $6.6 billion Oyu Tolgoi mine in Mongolia has been at the center of a prolonged dispute over revenue sharing between the government and its private sector partners, including concerns the company disagreed with demands that all revenue remain within the country at a Mongolian bank.

(Watch: How Mongolia is creating stable investment)

The dispute "greatly undermined foreign investment," while a "restrictive and unpredictable" investment regime deterred foreign investors, Moody's said in an October note. Foreign direct investment (FDI) fell 17 percent in 2012 and then fell a further 42 percent in the January-to-August period this year.

But now, Mongolia appears to have both issues licked.

In mid-December, Rio Tinto is sending a high-level delegation to Mongolia to finalize negotiations on developing the Oyu Tolgoi mine, Saikhanbileg Chimed, chief of the cabinet secretariat of Mongolia, told CNBC.

"Hopefully we're going to announce the timetable for next year when this project financing starts and when the second phase is going to start," he said. Rio Tinto didn't immediately return a call requesting comment.

(Read more: Frontier markets: Top opportunity or too risky?)

In addition, Saikhanbileg expects the country's new investment law will restore foreign investors' confidence. The law eliminates distinctions between foreign and local investors and offers long-term tax stability. With a two-thirds majority in parliament required to push through any changes to the law, it might be considered very nearly written in stone, easing uncertainty over changes to regulations.

Camels move along the newly paved road built as part of Oyu Tolgoi's infrastructure investment in the south Gobi desert, Khanbogd region, Mongolia.
Paula Bronstein | Getty Images
Camels move along the newly paved road built as part of Oyu Tolgoi's infrastructure investment in the south Gobi desert, Khanbogd region, Mongolia.

"I think it's a great first step," said Travis Hamilton, managing director at Khan Investment Management, which offers a single-country Mongolia fund.

"Mongolia is doing all of the right things in terms of the new legislation," Hamilton said. "It's recognizing they need foreign investment."

But will foreign investors return?

While Saikhanbileg expresses confidence they will, Hamilton is less certain. "When I talk to investors, the confidence is not there just yet. They need to see a little more happening," he said. But if the Rio Tinto resolution materializes, it will be "a huge positive. If that in fact does happen, that may be the catalyst that turns on the tap of foreign investment," Hamilton said.

(Read more: Frontier markets feel the love as emerging peers crumble)

Resolution of the Rio Tinto dispute is key to Mongolia's development, with Saikhanbileg saying the Oyu Tolgoi project potentially represents about a third of the broader economy. And in the resource-rich country, "It's only one of 50 more potential projects," Saikhanbileg said.

Over the past 18 months, asset prices in the country have been "beaten up horrendously" as foreign investors pulled back, Hamilton noted. "There's an inherent need for FDI," he said.

"Mongolia is going to see huge money flows; it's going to see infrastructure being built. It will inevitably bring a significant multiplier effect across the entire economy," Hamilton said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1