New Trade Policies Unlock Foreign Investment in Mongolia

Mongolia is quickly becoming a hub of international trade and investment. According to the 2020 World Investment Report published by the United Nations Conference on Trade and Development, foreign direct investment flows to Mongolia totaled US$2.4 billion in 2019, an increase from US$2.2 billion in 2018, owing largely to a continuation of large mining projects, including the country’s world-class Oyu Tolgoi copper-gold mine. 

Recently, a number of diplomatic and legislative initiatives were made to protect and promote partnerships between Mongolia and its neighbors Russia and China, as well as overseas investors.

The China-Mongolia-Russia Economic Corridor

The start of 2019 marked seven decades of diplomatic relations between Mongolia and China. China’s Mongolian component of its Belt and Road Initiative (BRI) — the China-Mongolia-Russia Economic Corridor (CMREC) — is designed to facilitate trade between Mongolia and its neighbors while at the same time opening Mongolia to overland routes to the European Union as well as sea ports in Asia.

The CMREC is one of six major corridors envisioned by China’s BRI. The project aims to promote infrastructure connectivity and regional economic integration while developing trade and investment. The corridor intends to position Mongolia as the critical link in newly-developed trade networks between the East and West and, once completed, is expected to reduce freight times, create new export routes and cut down bureaucratic barriers. The Mongolian government itself has invested in national infrastructure through railway expansion and the construction of more than 6,000 km of roads.

The CMREC will begin in the Chinese port of Tianjin, trending northwest toward the cities of Zhangjiakou and Erenhot before crossing the China-Mongolia border. Mongolian stops along the corridor include Choyr, Ulan-Bator and Darkhan. The corridor then crosses the Mongolia-Russia border toward the Russian towns of Kyakhta and Ulan-Ude. For northeast China’s provincial powerhouses, the CMREC represents the shortest path to Europe, positioning Mongolia as a key logistics hub.

Mining success

Roughly 80 percent of Mongolia’s current export volume is directed toward China. While the CMREC will open Mongolia to additional international investment partners, the country has already begun the process of expanding its horizons. In particular, the Mongolian government only has 34 percent equity stake in the high-profile South Gobi Oyu Tolgoi mine, often referred to as the backbone of the Mongolian mining industry, as a symbol of Mongolia opening its doors to international majority-holding partnerships like Canada-based companies Ivanhoe Mines (TSX:IVN,OTCQX:IVPAF) and Turquoise Hill Resources (TSX:TRQ,NYSE:TRQ).

Oyu Tolgoi is one of the largest known copper-gold deposits in the world. The mine has seen immense success since open pit mining began in 2011. In 2013, the mine’s copper concentrator, the largest industrial complex ever built in Mongolia, began processing mined ore into copper concentrate. Production is expected to continue for decades to come.

As Mongolian legislation continues to pave the way for large-scale resource development, Mongolia remains one of the world’s most significant prospective sources of lithium. With confirmed reserves of at least 200,000 tonnes of lithium, the country has positioned itself as the ideal candidate for lithium exploration and development. As rising demand for electric vehicles (EVs) and lithium-ion batteries may begin to challenge the world’s existing lithium sources, most of which originate from South America’s Lithium Triangle, new sources of lithium could prove extremely valuable.

One of the companies hoping to capitalize on one of the world’s most unique mining opportunities is ION Energy (TSXV:ION), an early-stage exploration company that currently holds one of the largest and highest-grade lithium licenses in a country that neighbors the world’s leading lithium consumer. ION has secured a sizable 81,758 ha license in Mongolia’s southern Gobi region, only 24 km from the Mongolia-China border. Early exploration work on the property has identified both lithium brine, as well as spodumene targets with grades as high as 811 parts per million with notably low potassium and magnesium content.

Mongolia’s arid climate and 250 days of sunshine per year help maintain high evaporation rates when processing lithium brine, a low-cost and environmentally friendly method of lithium production. Brine deposits account for 66 percent of the world’s lithium reserves, occurring in saline desert basins known as salars. In comparison to hard rock lithium extraction, brine extraction is up to 50 percent cheaper when it comes to exploration capital and operating expenses. Its impact on the environment is also much cleaner, owing to the fact that lithium brine is already a solution, eliminating the need for ore processing or extensive logistics.

In 2019, China accounted for 39 percent of global lithium consumption. Its eastern neighbors, South Korea and Japan, were the second and third largest consumers of lithium, at a 20 and 18 percent share of global lithium consumption, respectively. In the same year, the global EV lithium-ion battery market reached a total of US$17.4 billion and is expected to grow to US$95.3 billion by 2030.

Lithium, Mongolia and the US

Over the last decade, Mongolia has focused efforts on strengthening its third neighbor foreign policies.

In 2019, during Mongolian President Khaltmaagiin Battulga’s state visit to Washington, the US became Mongolia’s fifth strategic partner. Mongolia’s third neighbor foreign policy towards the US has sought fruitful economic cooperation, and the Mongolia-US strategic partnership aims to diversify Mongolia’s mining-dependent economy, increase its workforce and reinvigorate free trade.

In addition to the diplomatic strategic partnership, the recent Biden win and the worldwide “greening” of economic stimulus announcements further solidify Mongolia’s potential as an emerging leader on the lithium front.

Changing regulations

In September 2016, Canada and Mongolia signed an international Agreement for the Promotion and Protection of Investments, also known as the Canada-Mongolia Investment Agreement, a framework that offers greater certainty for Canadian investors. The agreement is one of many bilateral agreements between nations meant to promote and protect foreign investments — it has been estimated that more than 2,900 similar international investment agreements (ILAs) exist worldwide. Canada has entered into 32 ILAs while Mongolia takes part in 43.

The Canada-Mongolia Investment Agreement was designed to protect Canadian investors when investing in Mongolian territory. According to the United Nation’s Investment Policy Review on Mongolia, Canada held an 8 percent share in Mongolia’s total foreign investment inflows between 1990 and 2012. With the Canada-Mongolia ILA ratification in February 2017, Canadian investors are now more protected than ever and can effectively rely on international law to secure their investments in Mongolia.

Takeaway

Mongolia’s geological potential, arid climate and close proximity to major Asian markets solidifies its position as one of the last frontiers for mineral exploration and mining. Diplomatic and legislative initiatives, including the ongoing Mongolia-US strategic partnership, CMREC and the Canada-Mongolia Investment Agreement, are expected to promote infrastructure connectivity, economic growth and international trade.