THE very nature of the coalition government formed after Mongolia’s parliamentary election seems certain to result in an increase in politization, polarization, confrontation and divisiveness in the resource-rich North Asian nation. In terms of mineral resources, the coalition will be under substantial pressure to be more populist with policies and, therefore, resource nationalism will be a greater risk, investors will be a lot less willing to part with funds to support Mongolian mining projects and there will be elevated levels of volatility for the country’s resource equities.

The impending election created much uncertainty in the first half of 2012 and there has been little change since the late June election. This has not been beneficial to the nation’s mining industry, which has also not been aided by a period of global economic softening and reduced demand for Mongolia’s main resource, coal, from its biggest customer, China.

Murmurs of reviewing the investment agreement for the Oyu Tolgoi Copper-Gold Project of Rio Tinto and Turquoise Hill Resources (formerly Ivanhoe) have intensified as has the possibility of the 7.5 billion tonne Tavan Tolgoi (TT) Coal Project remaining entirely in Mongolian hands. Few major Mongolian projects are progressing smoothly with Aluminum Corp of China Ltd’s (Chalco) attempted takeover of SouthGobi Resources a prime example. The announcement earlier this year prompted Parliament to pass legislation capping foreign investment purchases to below 50% unless government approval is attained. Mongolia has also dragged its feet over renewing some of SouthGobi’s licences, scaring away customers, squashing production and causing SouthGobi’s share price to plummet. This has now resulted in the bid being withdrawn.

The uncertainty is being exacerbated by continuing problems with issuing new exploration licences and renewals while there is also considerable ambiguity surrounding the term ‘strategic importance’ in relation to certain mineral deposits.

Regarding the Oyu Tolgoi agreement, private Mongolian investment company Frontier Securities states that 12 MPs from the original 20 who signed a petition this year seeking to revise the agreement were elected to the new Parliament, and as such the probability of a revival of this call cannot be ruled out. Since the election the number of MPs seeking a review has grown to 24, with only 36 needed to ensure this takes place.

Regarding TT, Frontier says that with new Prime Minister Norov Altanhuyag’s extensive experience in the project, it believes TT will advance, broadly speaking, as planned and that new Government will aim to make it a success. However, again due to populist and resource nationalist pressures, Frontier believes that there is likelihood of some concessions of certain degree in one way or another to these pressures.

These issues need to be resolved if Mongolians are to receive full benefits of the country’s mineral wealth and the coalition’s major player, the Mongolian Democratic Party, is well placed to do that as indicated by the level-headed and generally fair mining sector policies outlined in its pre-election platform. Its overall policies are characterized by low taxes and support of production and industry with the goal of establishing a comfortable middle class and an emphasis on creating jobs and income for Mongolians, universal residential programs, paying attention to their health, education, safe environment, freedom and liberties. At the same time, policies popular with voters such as increases in salaries and pensions are likely to continue as well as much needed targeted social programs.

It will have to ensure it works closely with the other coalition partners and there will be mistakes made while walking this tightrope, but such is the strength and potential of Mongolia’s mining sector that the country’s economy is still certain to be led in an upward direction by the industry for years to come. It will not be an easy task for the new Prime Minister whose coalition’s priority is sustainable development of Mongolia’s tiny but fast-growing economy while also trying to please its impatient citizens as well as its two giant neighbours Russia and China.

Since essentially voters have empowered the new Parliament with a strong resource nationalist mandate, the coalition is likely to stick to the pre-election stance of complying with the law on regulation of foreign investment into enterprises of strategic significance but it is of utmost importance that the new government also sends the right signals to foreign investors.