Exploration Work Providing Opportunities in Growing Mongolian Economy

Mongolia’s mining industry is working to tap into the country’s rich resources, providing new opportunities for explorers.

Recent exploration in Mongolia has demonstrated the great potential of the East Asian nation’s untapped mineral wealth. Oyu Tolgoi, one of the largest copper and gold mines in the world, exemplifies this great potential in this under-explored mining jurisdiction. Five mineralized deposits have been discovered to date at Oyu Tolgoi, one of which has been in production since 2013. Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) is the operator of Oyu Tolgoi through its 51 percent ownership of Turquoise Hill Resources (TSX:TRQ), which has a 66 percent stake in the asset. The Mongolian government also owns a 34 percent stake in Oyu Tolgoi.

The Mongolian economy is in the midst of serious growth, with a projected jump of 6.3 percent in GDP in 2019. The government understands that support for the country’s mining industry is key to sustaining further growth, and has begun implementing programs aimed at providing that support. As a result, Mongolia is attracting foreign mining investment in large mining projects.

Mongolia’s mining industry linked to GDP growth

For most of the 20th century, Mongolia’s economy was under the control of the Soviet Union with agriculture and herding at its center. Some mining activity took place during this time, but it wasn’t until after Mongolia gained independence in 1990 that the country’s mining industry opened up to foreign investment. Today, mining accounts for 23 percent of Mongolia’s overall GDP. Coal and copper are responsible for about 70 percent of Mongolia’s total export revenues, with the majority sold to neighboring China.

In recent years, the mining industry has become one of the biggest factors in Mongolia’s economic growth. According to the Asian Development Bank (ADB), “GDP growth averaged 10.3 [percent] per year during 2011–2015, one of the fastest in the world over that period, and the fiscal and balance of payments surpluses that large mining projects generate provide scope for vast improvements in living standards.” The quick pace of this mining industry-driven economic growth earned the East Asian nation the moniker, “Minegolia.” After a sharp downturn following depressed commodity prices from 2014 to 2016, the economy bounced back in 2017 and has experienced significant growth since.

“Mongolia’s growth rate recovered sharply since 2016. The turnaround in real GDP growth was boosted by strong external demand for Mongolia’s mineral exports, the resumption of the second phase of the Oyu Tolgoi copper mine and loosening monetary and credit conditions,” said Geoff Gottlieb, an International Monetary Fund (IMF) senior economist, who led a team to Mongolia in June 2019. “In addition, the government’s improving policy mix strengthened domestic confidence.”

In 2018, Mongolia’s economy posted a 6.9 percent growth in GDP compared with 5.3 percent the year before, according to Reuters. “Increased mineral export revenues due to the higher commodity prices and improved domestic demand helped Mongolia’s economy perform better than expected,” said Lakshmi Boojoo, director of the Economic Policy and Competitiveness Research Center in Mongolia. Looking forward, the World Bank has a positive outlook for further growth in Mongolia supported by the mining and manufacturing sectors. The ADB estimates that the country’s mineral wealth is between US$1 trillion and US$3 trillion in coal, copper and gold. In the first quarter of 2019, Mongolia’s GDP expanded 8.6 percent year-on-year and the IMF projects that the country’s GDP will grow by at least 6.3 percent in 2019.

Gold mining in Mongolia

Copper and coal may reign supreme in the nation for now, but Mongolia’s leaders are keen on promoting the development of its gold mining sector as well. A few years ago, the government launched the Gold-2 Programme aimed at doubling its annual gold production by 2020. To do that, the program supports gold exploration and mining companies through a favorable royalty and tax regime, accelerated mine permitting procedures, streamlined regulations at the provincial level and increased gold and foreign currency reserves.

Canada investing in Mongolia mining

Landlocked between the region’s two greatest economic powers, China and Russia, Mongolia has begun looking to form strategic partnerships with nations outside this sphere of influence. In September 2016, the Mongolian government showed a strong level of commitment to developing its mining sector by signing the Foreign Investment Promotion and Protection Agreement (FIPA) with Canada.

“The FIPA provides Canadian investors operating in Mongolia with a legal framework that will help bring greater predictability and certainty to their investments,” according to the Government of Canada. Canada is now one of the top investors in Mongolia and the FIPA helps to further create a positive investment climate in this emerging economy. In 2018, Canadian direct investment in the country totaled approximately C$6.1 billion with a vast majority of that going to the Mongolian mining sector.

Junior exploration companies working towards production

Mongolia’s vast mineral wealth remains predominantly untapped by modern exploration and extraction methods. Considering the Mongolian government’s positive working relationship with its Canadian counterparts and the serious need for increased flows of foreign direct investment in the country’s mining sector, one of the world’s last frontiers for mineral exploration is attracting a lot of attention from junior exploration companies. Companies such as Steppe Gold (TSX:STGO), Erdene Resource Development (TSX:ERD) and Kincora Copper (TSXV:KCC) are all working towards Mongolia’s next potential mining project.

Steppe Gold was the first company to participate in the Gold-2 Programme and has two gold projects in Mongolia, Uudam Khundii (UK) and Altan Tsaagan Ovoo (ATO). The company recently completed a private placement for C$2 million that it intends to put towards further exploration and development in Mongolia. Steppe Gold has also attracted funding from the Mongolian National Investing Fund PIF SPV, which has subscribed for a 12 percent two-year secured convertible debenture of Steppe Gold for an initial amount of US$3 million. On January 30th, Steppe Gold announced it had closed the debenture financing with the Mongolian National Strategic Investment Fund PIF SPV, which it intends to use to fund gold production at the ATO gold mine.

The UK project is a first of its kind joint venture (80/20) between Steppe Gold and the Bayankhongor provincial government. The ATO gold project in the Dornod province is officially expected to begin leaching in Q1 2020, with production commencing shortly thereafter, a significant milestone for any resource project. The company announced it had mined, crushed and stacked approximately 400,000 tonnes of ore at a grade of 1.99 g/t gold on the leach pad as of January 29th, 2020.

Steppe Gold now intends to commence leaching and production as well as complete the feasibility study into its Stage 2 Expansion Project at ATO, which aims to increase annual gold production to 150,000 ounces per annum from underlying fresh ore rock. The open-pit, heap-leach operation currently has the potential to produce approximately 147,000 ounces of gold and 673,000 ounces of silver from oxide ores over a 4.5-year mine life. The high-grade gold and silver mineralization on the Mungu Trend on the ATO property has the potential to extend that mine life another 12 to 15 years.

Takeaway

Mongolia’s underexplored, mineral-rich landscape offers plenty of upside opportunity for today’s gold and copper exploration companies looking for large-scale projects. These opportunities are supported by a mining-friendly government that has implemented several important initiatives in recent years to strengthen its economy and grow its nascent mining industry.

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