Source: Bloomberg                          Date: 27, April, 2011

Mongolia’s aim of quadrupling its rail network will send coal, copper and rare earths to nations such as Japan and South Korea under a plan to reduce reliance on the Chinese market and boost economic development. The nation’s drive to lay 5,700 kilometers of track across the country and to Russia’s Far Eastern ports stands to benefit such companies as Australia-listed Aspire Mining Ltd. and Canada’s Prophecy Resource Corp., said Mr. Richard Harris, CEO of Hong Kong-based Quam Asset Management. Quam has raised USD20 million for a Mongolia-focused fund that is due to start investing in a few months.

“The missing link in the Mongolian gold rush now is transportation infrastructure,” said Mr. Roland Nash, who helps manage about USD150 million of Russian stocks. “The key for the Mongolians is to attract investments from as many different countries as possible to lessen their dependence on China.”

Mongolia’s economic growth may surge to 23 percent in 2013, more than twice the forecast expansion in China, as large mining projects begin production, the International Monetary Fund says. Agriculture and mining each account for about 20 percent of gross domestic product. Aside from its main exports of coal and copper, the country also holds oil, potash, iron ore and uranium, as well as rare earths used in electronics, wind turbines and smart bombs.

Mongolia has grown increasingly dependent on commerce with China’s 1.3 billion people since the 1991 breakup of the Soviet Union: More than 75 percent of exports went to its giant neighbor in 2009, according to European Union figures. The relationship hasn’t always been easy, and the country remains vulnerable to pressure from the rulers of the world’s second-biggest economy. “Using the Russia route, Mongolia will have better access to a global market rather than just dealing with China,” said Mr. Chris Weafer, Moscow-based strategist. “You need that to maximize the commercial value of its goods. Otherwise China dictates prices.”


Mongolia this year is to start building a 400-km link from the Tavan Tolgoi coal basin and Oyu Tolgoi copper deposit, two of the world’s biggest untapped resources, joining with an existing rail line north to Russia and south to China. An expanded rail network eventually will stretch directly from Tavan Tolgoi to China and Russia. Extended train routes to the west and the north will link with untapped silver, iron and coal deposits, according to Eurasia Capital, Mongolia’s biggest investment bank. “A necklace of resource deposits lies across the south of Mongolia and the idea is to connect it to rail, connect it to China, and have options with a route via Russia,” said its analyst D. Musaev. “It’s a policy that defines what Mongolia will do over the next decade.”

To prove Russia offers a realistic outlet, trucks filled with coal from Tavan Tolgoi drove to Ulaanbaatar, where their cargo was loaded onto a maiden 30-car train that left for Russia’s biggest Far East port, Vostochny, on October 28 last year. The “historic event” shows that Mongolian coal can travel via Russia to South Korea and Japan, OAO Russian Railways CEO Vladimir Yakunin said at the launch ceremony for the train, according to a statement posted on the state-run company’s website.

For now, Mongolia trucks its output into China, which is at least three times more expensive than moving bulk commodities by rail, Mr. Musaev said. That will not be an option when output at Tavan Tolgoi and Oyu Tolgoi reaches projected capacity, he said, given the high fuel and environmental costs.

Tavan Tolgoi’s owner, state-controlled Erdenes MGL LLC, expects coal production of as much as 30 million tons a year, according to a presentation made in Moscow in November, which didn’t give a timeframe. That is more than the record 25 million tons from all of the nation’s coal mines in 2010. Copper production at the Oyu Tolgoi deposit will reach about 600,000 tons a year in its first decade, says Ivanhoe Mines Ltd., which is developing the site with Rio Tinto Group, the world’s No. 2 mining company by sales, and the Mongolian government.

Moving those commodities by truck will be costly. The price of coal sold by Tavan Tolgoi Co., which already mines one area of the namesake coal basin, more than doubles to USD61 per ton by the time the fuel arrives at the Chinese border, according to a presentation by the Mongolia Mineral Resources and Energy Ministry made in Moscow in November. On top of the USD28 per ton in mining costs, the company pays USD32.50 for trucking, road charges and loading, the presentation shows. Even with a rail connection, the cost of exporting via Russia versus through China would be higher given the distances involved, Mr. Musaev said. Huanhua, the nearest Chinese port to Tavan Tolgoi, lies 1,638 km away. Russia’s Vanino port is 5,044 km and Vostochny 5,069 km from the Mongolian coal basin.

The price will be worth it because the option offers an extra export route and the opportunity to develop deposits that are too distant to utilize trucks, according to Mr. Weafer. Processing Mongolian freight will also help Russia boost its own economy in the more isolated Far East areas, which suffers from labor shortages, he said.

“The future of Russia and modernizing the economy of Siberia and the Far East is closely tied with the Asia Pacific region,” President Dmitry Medvedev said on April 15 in Boao, China. Integration in the region “should be comprehensive and involve all countries, without creating new dividing lines.” In December last year, Russia wrote off about 98 percent of Mongolia’s $172 million debt. Russian Railways owns a stake in AO Ulaanbaatar Railways, Mongolia’s national operator, and guaranteed a loan for it from Russian state-controlled VTB Group in October 2010 to buy locomotives.

Russia plans to sell shares equal to about 12 percent of Russian Railways, which Mr. Weafer said stands to benefit most from Mongolia’s railway plans. The company may be worth several times its share capital of more than USD53 billion, Mr. Yakunin said last year.

Aspire Mining is partnering with SouthGobi Resources Ltd. for a coking-coal project, while Prophecy Resource was given a license in February for its Chandgana Tal coal deposit. Hong Kong-listed Mongolia Energy Corp. and Mongolia Mining Corp. are two others whose business would improve with rail links, according to Monet Capital, a Ulaanbaatar-based bank.

Still, while the economy has been growing at an average 6 percent rate during the last 10 years, the expansion has fluctuated “sharply” from 1 percent in 2000 to 10 percent in 2007 and minus 1.6 percent in 2009, the IMF said in a research paper this month.

“You have to really do your homework” to pick Mongolian equities, said Mr. Javier Garcia, lead manager at Swiss & Global Asset Management of the 70-million-euro Julius Baer Black Sea Fund, 4 percent of which is in Mongolia. “I’m not bearish, but I would be extremely selective.”

The volume of cargo between Russia and Mongolia grew 10 percent to 1.15 million tons in the first nine months of last year over the same period in 2009. The volume of Russia-China rail freight, which transits Mongolia, was 2.3 million tons in 2009, according to Russian Rail. In Russia’s Far East, Vostochny port plans to expand its coal-handling capacity, according to the terminal’s website. Eurasia Capital estimates Russia will need to spend USD2 billion over three years to cope with major coal and ore export volumes from Mongolia.

Mongolia will need to pay about USD3 billion for the initial 1,100-km of new rail, Lotte Engineering & Construction Co., which is leading a South Korean group that is bidding for the building contract, said last month.

“Mongolia is making a geopolitical choice and gaining a stronger bargaining position” by striving to boost transport connections with Russia, Mr. Musaev said