Since the beginning of the new century, Mongolia’s vast mineral resource potential has attracted numerous international mining investors, and many Chinese enterprises have also joined this boom. Indeed, mining investments in Mongolia present significant opportunities; however, the risks involved cannot be overlooked. Over the past two years, the Mongolian government has introduced a series of relevant regulations and policies—including a new Mineral Resources Law—that have substantially impacted the country’s mining investment environment. As a result, the risks associated with investing in Mongolia’s mining sector are on the rise and deserve serious attention.
　　
　　 I. Current Status and Development Trends of China-Mongolia Mining Cooperation
　　
　　 Mongolia is rich in mineral resources and is currently in the early stages of development, with enormous untapped potential. This undoubtedly makes it highly attractive to China. Over the past decade, the Mongolian government has accelerated the privatization of mining enterprises by amending Mongolia’s Mineral Resources Law and Foreign Investment Law, and has introduced a series of policies designed to attract foreign investment, significantly improving the country’s investment climate for the mining sector. Mongolia enjoys political stability and is a close neighbor of China—more than half of its border runs along China’s territory. The two countries share remarkably similar climatic conditions, have many cultural and ethnic commonalities, and enjoy excellent bilateral relations. As a result, Mongolia has naturally become one of the top preferred destinations for China’s mining industry as it “goes global.”
　　Judging from the enormous demand generated by China’s industrialization process, Mongolia’s export-oriented development strategy, and the relatively close geographical proximity between the two countries, cooperative development of mineral resources should be a key area of Sino-Mongolian cooperation, injecting greater momentum into bilateral collaboration. Based on current practical needs, Mongolia’s oil, coal, copper, gold, zinc, iron, uranium, fluorite, phosphate rock, and certain construction materials could all become priority areas for joint ventures between the two sides. Precisely because of these factors, in recent years many Chinese-funded enterprises have flocked into Mongolia’s mining sector, sparking a significant boom in Chinese investment in Mongolian mining. In 2004 alone, there were 22 Chinese companies investing in Mongolia’s mining industry. To date, the number of Chinese mining enterprises investing in Mongolia has exceeded 40, with some of the larger companies including: China Nonferrous Metal Construction Corporation, Shougang Group, Baogang Group, Chinalco, Jiangxi Copper Corporation, Shenhua Group, Luneng Group, Daqing Oilfield Company of CNPC, and Dongsheng Petroleum Company of Sinopec Victory Oilfield. Other notable enterprises include Zijin Mining Group’s Zijin (Mongolia) Co., Ltd., Jinxin Dewang Company, Mongolia Qinghua Group, and Jindu Mining Co., Ltd., as well as Fujian Zijin Mining Company and China Nonferrous Mining & Construction Corporation.
　　
　　 In the past two years, Chinese-funded enterprises have been increasingly investing in Mongolia’s mining sector. In particular, in 2005, investment reached US$173 million, a 135% increase over the previous year and more than 1.5 times the total investment made before 2003. By the end of 2005, China’s total investment in Mongolia’s mining sector had reached US$360 million, accounting for 53% of China’s total investment in Mongolia.
　　
　　 Most Chinese-funded enterprises investing in Mongolia’s mining sector come from neighboring provinces such as Hebei, Shandong, Heilongjiang, Inner Mongolia, Xinjiang, and Gansu. A small number originate from inland or southeastern coastal provinces like Jiangxi, Henan, and Fujian. The primary mineral resources targeted by these Chinese enterprises include gold, lead, zinc, iron ore, coal, and petroleum. However, due to insufficient development of Mongolia’s infrastructure—such as exploration and transportation facilities—to keep pace with demand, most of the enterprises currently investing in Mongolia are still in the early stages of preparation, and very few have actually begun full-scale operations.
　　
　　 Judging from current development trends, the enthusiasm of Chinese enterprises for mining in Mongolia is likely to persist in the short term. At present, many other Chinese-funded enterprises—both state-owned and private—are eager to enter the market, forming groups to conduct on-site surveys and eagerly seeking opportunities in Mongolia. However, Mongolia’s newly enacted Mineral Resources Law and the windfall tax on copper and gold will have a significant negative impact on the current boom in Chinese mining activities in Mongolia, potentially shaking some investors’ decision-making processes. Several planned projects have already begun to stall. Nevertheless, looking ahead, Mongolia boasts abundant mineral resources and enjoys strong complementarity with China. Many minerals that China currently faces shortages of have been discovered in Mongolia. Moreover, China possesses distinct advantages in terms of capital and technology. Therefore, Mongolia’s role as a key, long-term mining partner for China will remain unchanged.
　　
　　 II. Potential of Mongolia’s Mineral Resources and Current Development Status
　　
　　 Mongolia is a country rich in mineral resources. To date, more than 80 types of minerals have been discovered or confirmed, including oil, coal, copper, tungsten, gold, silver, molybdenum, aluminum, iron, lead, zinc, uranium, manganese, fluorite, phosphate, salt, graphite, gypsum, and talc. Among these, copper, gold, uranium, and fluorite hold the greatest potential for future resource development. Salt, natural soda ash, and phosphate rock also boast significant advantages, while oil and coal show considerable potential as well. Since Mongolia enacted its Mining Law in 1997, the mining sector has experienced rapid growth, with annual output value increasing at a rate of 8% to 12%. The number of mining licenses issued has surged from 198 to over 5,500 today. Foreign mining companies have flocked to Mongolia; currently, more than 200 foreign mining firms are engaged in mineral exploration and development activities in the country. The growth of the mining industry has created numerous employment opportunities and improved infrastructure. In the past two years, the global rise in mineral prices has presented Mongolia with unprecedented opportunities for mineral exploration and development.
　　Currently, the mining sector plays a crucial role in Mongolia’s economy. In 2006, the value of mining output accounted for 30% of the country’s GDP and 72% of its industrial production. In 2006, exports of metals and mineral products reached US$2.29 billion, representing 75.7% of the nation’s total export value. Among these, metal exports surged by 43.6%, reaching US$1.53 billion and accounting for approximately 50.7% of the nation’s total export value. The main mineral products include copper, gold, coal, petroleum, molybdenum, zinc, silver, tungsten, fluorite, salt, and gypsum.
　　1. Oil and natural gas
　　
　　 Mongolia does not have abundant oil and gas resources, which are mainly concentrated in the eastern and central regions. Major prospective oil and gas areas include the Tamsag Basin in the Eastern Province, the Eastern Gobi Basin in the southeast, and the Nilgin Basin in the central region.
　　
　　 In recent years, Mongolia has seen a significant increase in its oil production. In 2006, output reached 369,000 barrels, representing an 83.6% rise over 2005 levels. The main production area is the Mongolian Tamsag Basin, located in Mongolia’s Eastern Province, which borders China’s Inner Mongolia Autonomous Region. Crude oil production from this basin accounts for roughly two-thirds of the country’s total output. Another major oil project is the exploration and development initiative jointly undertaken by Sinopec’s Dongsheng Company and Australia’s Roc Petroleum in the East Gobi Basin in southeastern Mongolia. The company has invested a total of 100 million yuan and currently operates 11 oil wells; five of these wells have already begun producing oil, with daily crude oil output exceeding 50 tons.
　　
　　 2. Coal
　　
　　 Mongolia has identified and evaluated more than 200 coal deposits, with total reserves estimated at around 10 billion tons. These deposits are primarily found in Cretaceous, Carboniferous, Permian, and Jurassic strata. Among them, Cretaceous coal is the most significant, with five major coal-forming basins covering one-third of eastern Mongolia. Carboniferous coal is predominantly distributed in the Altai Mountains; Permian coal is more widely found in the southern regions; and Jurassic coal dominates the northern areas.
　　
　　 Currently, the coal produced mainly comes from coal mines such as Baganuur, Nariin Sukhait, Shivee-Ovoo, Aduun Chuluun, and Sharyn Gol. Due to underdeveloped infrastructure and insufficient processing equipment, Mongolia’s coal production had been stuck at around 5 to 6 million tons in previous years. However, in the past two years, production has significantly increased, reaching 7.885 million tons in 2006. To boost coal production, the government has invested 24 million U.S. dollars over the past few years to improve production conditions.
　　
　　 3. Copper, molybdenum
　　Mongolia boasts extremely abundant copper (molybdenum) mineral resources, primarily concentrated in a late Paleozoic–early Mesozoic tectonic-volcanic belt that trends roughly east-west. As a result, three east-west-trending copper (molybdenum) ore belts have formed, known as the Northern Mongolia Belt, the Central Mongolia Belt, and the Southern Mongolia Belt. The Northern Mongolia Belt is home to Erdene’s largest porphyry-type copper (molybdenum) deposit—Edent—located in central Burgess Province. The Southern Mongolia Belt hosts the renowned Oyu Tolgoi copper-gold mine, situated in the Southern Great Region, just 80 kilometers from the Chinese border. Additionally, there is the large Chagan Suvarga porphyry copper (molybdenum) deposit, located in the semi-desert region of East Gobi Province.
　　
　　 Copper is Mongolia’s most important mineral product, and nearly all of Mongolia’s copper and molybdenum concentrates are exported to China. Erdenet Mining Corp.—owned 51% by the Mongolian government and the remainder by the Russian government—is one of Mongolia’s most significant mining companies and the country’s leading producer of copper and molybdenum ores. Its annual production capacity stands at 27 million tons of ore. In 2006, the company’s copper mine output was approximately 130,000 tons, and its molybdenum output reached 1,404 tons. In 2006, the company completed an expansion project that increased its ore-processing plant’s capacity to 60 million tons. The company is the largest taxpayer and profit contributor in the country. As a state-owned enterprise, it was not affected by the “excessive profits tax” in 2006.
　　
　　 Ivanhoe Mines and Rio Tinto are the two most significant potential producers of copper in Mongolia. In 2006, Ivanhoe Mines signed an agreement with Rio Tinto to jointly develop the world-class Oyu Tolgoi copper mine. Under this agreement, Rio Tinto made a direct investment of US$303 million to acquire a 9.9% stake in the project; additionally, Rio Tinto invested another US$388 million to secure an additional 9.95% stake in the project. Rio Tinto was also restricted from holding more than 40% of Ivanhoe Mines’ shares until October 2011. Ivanhoe Mines stated that Rio Tinto’s total current investment could reach as much as US$2.3 billion. By 2011, Rio Tinto would be able to increase its stake in Ivanhoe Mines to 46.65%.
　　
　　 In September 2007, Ivanhoe Mines secured US$350 million from its partner Rio Tinto in the form of credit financing to develop the Oyu Tolgoi copper-gold mine project. The company stated that preparations for the commencement of construction of the first of the two mines planned for the Oyu Tolgoi copper-gold mine project would result in monthly expenditures exceeding US$40 million during the second half of 2007.
　　
　　 4. Gold
　　Mongolia has identified more than 300 gold mining sites, primarily concentrated along 16 gold-bearing belts. The North Khentii gold belt boasts the best development conditions, accounting for 94.6% of Mongolia’s proven gold reserves. This belt extends in a NE-SW direction, measuring 400 kilometers in length and 30 to 100 kilometers in width. It holds 83.1 tons of placer gold and 52.2 tons of vein gold. Within this belt lies the renowned Boroo gold deposit, located 130 kilometers northwest of Ulaanbaatar. The main ore vein system stretches 2.5 kilometers in length, 800 meters in width, and 300 meters in depth, with typical gold grades ranging from 3 to 4 grams per ton, locally reaching up to 10 grams per ton. The estimated gold content is 40 tons, making it suitable for open-pit mining. This deposit is already under development. The Gatsuurt gold deposit, situated near the Boroo mine, also shows considerable potential; a feasibility study has been completed, and its gold reserves in the central and primary belt are estimated at 38.1 tons. In addition, numerous placer gold deposits are distributed throughout the Tüle River basin in central-northern Mongolia. Currently under development is the Zaamar placer gold deposit, located 280 kilometers northwest of Ulaanbaatar. According to available data, this river basin is poised to become one of the world’s largest placer gold-producing regions.
　　
　　 Over the past 10 years, Mongolia’s gold mining industry has experienced significant growth, with gold production increasing from 7 tons in 1996 to 22.6 tons in 2006. Ninety percent of gold production is exported, with the majority being shipped to China.
　　
　　 5. Silver
　　
　　 Mongolia’s silver mineral resources are primarily concentrated in the remote mountainous regions of the northwest. Among these, the largest deposit is the Asgat silver mine, discovered in 1976. Located on the northern side of the Mongolian Altai Mountains at an elevation of 2,700 to 3,100 meters, the mine is approximately 170 kilometers from the nearest town, Ulaag, and features 11 mineralized zones, each ranging in length from 1.5 to 12 kilometers, with widths from 5 to 80 meters and depths from 400 to 500 meters. The ore bodies themselves are between 0.8 and 3.3 meters thick. Preliminary estimates indicate that the deposit contains 4,970 tons of silver with a grade of 297 grams per ton. In addition to silver, the ore also contains 0.03% to 0.09% bismuth, 0.04% to 0.7% antimony, and 0.19% to 1.17% copper.
　　
　　 Additionally, the Menggen Wundur area, located 310 kilometers southeast of Ulaanbaatar, is also a silver-polymetallic mining district. It is 200 kilometers from the Baghanor coal mine and railway station, and 90 kilometers from the Berkh fluorite mine. The average ore grade is 70 grams per ton of silver, 0.09% tin, 1.09% lead, and 0.85% zinc.
　　
　　 6. Zinc, lead
　　
　　 The deposits are widely distributed, with several large- and medium-sized ore deposits known to be concentrated in eastern Mongolia. Among the more significant deposits are the Tumurtin-Aobao zinc deposit, the Chaf lead-zinc-silver deposit, and the Ulaan polymetallic silver deposit. The Tumurtin-Aobao zinc deposit, located south of Choibalsan, the capital of the Eastern Province, is a skarn-type deposit with zinc ore reserves of approximately 7.7 million tons and a ore grade exceeding 10%. Nearby, there is also a cluster of smaller mines, all of which have been explored and are currently being mined.
　　The Chaf Lead-Zinc-Silver Mine is located 120 kilometers northeast of the city of Qorqon, not far from the China-Mongolia border. It is a carbonate-vein-type deposit controlled by fractures. On either side of the ore veins, there are developed clay alteration zones and fine-grained pyrite-altered zones. A total of 10 ore veins have been identified in this mine, but only two have been explored so far. Currently, the preliminary exploration phase for the entire area has been completed, with a total drilling effort exceeding 110,000 meters. The proven and probable reserves amount to 1.67 million tons (C2 + P1, with lead as the primary metal). The average grade of Pb+Zn is 8.2%, and the silver content is exceptionally high—specifically, vein No. 4 (the main ore vein, 2,400 meters long and already explored) contains as much as 280 grams of silver per ton.
　　
　　 The Ulan lead-zinc deposit in the Eastern Province is located west of the Chaf deposit. The ore reserves amount to approximately 68 million tons, with a zinc content of 2%, a lead content of 1.2%, an silver content of 53 grams per ton, and an gold content of 0.21 grams per ton.
　　
　　 Mongolia’s zinc production is relatively low; in 2006, the output from zinc mines was 54,850 tons. The primary producer is China Nonferrous Construction Group Corporation, which currently operates the Tumurtin-Aobao zinc mine. The mine’s current annual production capacity is 70,000 tons of zinc concentrate. All of its products are sold to the domestic Chinese market.
　　
　　 7. Iron ore
　　
　　 Mongolia’s iron ore resources are primarily concentrated in three regions, with the Bayan Khongor iron ore belt in Selenge Province and Central Province being the most significant. This region contains three large-scale iron ore deposits. The Tumurtei iron mine currently has proven iron ore reserves of 230 million tons, with an average grade ranging from 51% to 54%. The Bayan Gol iron mine holds reserves of 110 million tons, with an average grade of 52%. The Tomur-Tologoy iron mine has reserves of 20 million tons, with an average grade ranging from 52% to 57%. The other two regions are the Khangai-Khent mountain iron-manganese mining district in the Khangai and Khent mountains, and the Gobi-Khulun iron ore belt in eastern central Mongolia.
　　Mongolia’s iron ore production is relatively low, reaching 180,000 tons in 2006—a 7.1% increase over the previous year. China’s two major steel groups, Shougang and Baogang, are currently the primary investors in Mongolia’s iron ore development. Their most significant project is the Tumurtei Iron Ore Project, operated by Tumurtei Iron Ore Co., Ltd. of Mongolia. This company is a joint-stock enterprise jointly controlled by three Chinese enterprises and Mongolia’s Tumurtei Iron Ore Company. Among them, Shougang holds the vast majority of shares.
　　
　　 8. Fluorite
　　
　　 Mongolia is rich in fluorite resources. In 2006, its reserves stood at 12 million tons, with a reserve base of 16 million tons, accounting for 3.3% of the global total and placing it fifth worldwide. The major fluorite deposits are concentrated in the central-eastern regions, specifically in Khentii Province, Central Gobi Province, and Eastern Gobi Province. Mineralization is primarily controlled by Mesozoic tectono-magmatic activity zones. The most important deposit is Borondor in Khentii Province, which is Mongolia’s largest fluorite production base. Other significant deposits include Undurkhan in Khentii Province and Chuluut Tsagan Deler in Central Gobi Province. In 2006, the country’s total fluorite production reached 393,000 tons, representing a 7.1% increase over the previous year. The primary producer is Mongolrostsvetmet Company, and its key mining operations are located at Borondor in Khentii Province as well as Airag and Urgen in Eastern Gobi Province.
　　
　　 III. Other Favorable Conditions for Mining Investments in Mongolia
　　
　　 In addition to its significant potential for developing mineral resources, Mongolia also boasts favorable conditions for mining investment, including political stability, rapid economic growth, expanding private-sector investment and domestic consumer demand, a steadfast commitment to reform and opening-up, the enactment of a new Mining Law, further refinement of the legal framework, the regularization of the mining market, and increased transparency in mining administration.
　　
　　 1. The new Mining Law promulgated in 2006 regulates the issuance and management of licenses and enhances transparency in business operations.
　　
　　 According to Mongolia’s previous Mineral Resources Law, foreign citizens and legal entities, just like Mongolian citizens, have the right to apply for and obtain licenses for mineral resource exploration and mining, as well as the right to transfer and mortgage these licenses under very lenient conditions—conditions that have attracted a large number of investors. According to data from 2007, the Mongolian Agency for Mineral Resources and Petroleum had issued and still held 4,551 mineral resource exploration licenses and 1,037 mining licenses. The total area covered by these licenses exceeds one-third of Mongolia’s entire land area. Virtually every region in Mongolia with even modest mineral potential has already been subject to applications for mining rights. However, this situation has given rise to numerous problems. In recent years, Mongolia’s mining boom has greatly stimulated the country’s mining rights market, leading to a sharp increase in both corporate and individual investors entering Mongolia’s mining sector. As a result, mineral exploration and development licenses—and related documents—have become highly sought-after “commodities.” Some local speculators and illegal actors have taken advantage of this situation by continuously inflating the prices of essential documents, driving up their costs yet again and unnecessarily increasing the expenses faced by foreign investors entering this field. According to analysis, a significant number of license holders lack the actual capacity to carry out exploration and mining operations; rather, their primary purpose in obtaining these licenses is to “transfer” them or use them as collateral to partner with capable foreign enterprises. Since Mongolia’s mining rights are now largely held by private individuals, new investors seeking to start mining operations in Mongolia must pay exorbitant prices to acquire mining rights from Mongolian stakeholders, causing license prices to soar by tens or even hundreds of times.
　　
　　 To address this situation and standardize the mining management market, the government has amended the Mineral Resources Law. The new law stipulates that exploration and mining licenses will be granted only to legal entities established in accordance with Mongolia’s laws and regulations, actively engaged in business operations, and paying taxes to the Mongolian state. The new law also introduces a provision requiring mining license holders to publicly disclose, within the first quarter of the following year, the quantity of products sold during the current year, as well as the amounts of taxes and fees paid to the national and local budgets. Furthermore, the new law sets forth a minimum annual expenditure threshold for exploration activities that exploration license holders must meet on each hectare covered by their license. If the actual exploration expenditures for a given year fall below the minimum expenditure threshold prescribed by the law, this will serve as one of the grounds for the state administrative authorities to revoke the license. These measures will help rectify and standardize the chaotic state of Mongolia’s mineral licensing system, prevent the hoarding, speculation, and fraudulent practices associated with licenses, promote more orderly management of mining investments in Mongolia, and enhance transparency in business operations.
　　
　　 2. Investment in mineral exploration has grown rapidly and yielded significant results.
　　
　　 Mongolia boasts significant mineral exploration potential, attracting a large number of international companies to invest in mining exploration there. In recent years, as global prices for mineral commodities have risen sharply, Mongolia’s investment in mineral exploration has grown rapidly. In 2004 alone, Ivanhoe’s exploration budget in Mongolia reached 78 million U.S. dollars, accounting for 79% of the country’s total exploration budget and enabling Mongolia to enter the top 10 globally in terms of mineral exploration budgets for the first time in a decade. In 2004, the country’s actual exploration expenditures totaled approximately 100 million U.S. dollars. According to another report, in 2006, Mongolia’s budget for solid non-ferrous metal exploration amounted to about 285 million U.S. dollars, representing 4% of the world’s total exploration budget and placing Mongolia ninth worldwide. The substantial exploration investments have already yielded considerable results, particularly in the discovery of major deposits of copper, gold, coal, and uranium. Among these discoveries, the most significant—and one that has attracted worldwide attention—is the preliminary identification of Oyu Tolgoi, currently the second-largest porphyry copper-gold deposit in the world.
　　Currently, mineral exploration activities in the region are concentrated on copper, uranium, gold, and coal. Particular attention is being paid to the Oyu Tolgoi copper mine and its surrounding prospecting areas. The Oyu Tolgoi copper mine exploration camp, located 80 kilometers from the China-Mongolia border, is currently the largest exploration camp in the world, with a total of 750 employees on site. As of July 2005, the Oyu Tolgoi copper mine exploration project had completed 570,000 meters of diamond core drilling, with drilling-related expenditures alone reaching 70 million U.S. dollars.
　　
　　 Erdene Company’s exploration efforts for sandstone uranium deposits in Southern and Central Gobi have also attracted widespread attention. Another noteworthy development is that major mining companies have begun large-scale basic geological surveys. For example, BHP plans to use the FALCON airborne gravity system to conduct extensive surveys along the Mongolian side of the China-Mongolia border in provinces such as Eastern Gobi, Southern Gobi, and Bayan Khongor. Following its equity stake in primary mineral exploration companies like Asian Gold Mines, BHP will collaborate with these firms in exploration activities, aiming to discover more large-scale ore deposits.
　　
　　 3. The economy is developing rapidly.
　　
　　 Since the Mongolian People's Revolutionary Party regained power in the second half of 2000, it has carried out extensive efforts to stabilize the political situation, adjust foreign policy, and promote economic development. By overcoming the adverse impacts of cold waves, snowstorms, and epidemics, Mongolia has maintained steady macroeconomic growth. Since 2002, the country’s domestic production has gradually recovered. According to statistics, Mongolia’s GDP exceeded 1 billion U.S. dollars in 2003, representing a 5.5% increase over the previous year. In 2004, Mongolia’s economic performance continued to be strong, with significant growth across various socio-economic indicators. In particular, GDP grew by 10.6%, setting a new high for the country’s economic growth rate since 1990—far surpassing the 6% growth target set by the government at the end of 2003. Although economic growth slowed somewhat in 2005, it still reached 6.2%. In 2006, GDP growth rebounded to 8.4%, and per capita GDP exceeded 1,000 U.S. dollars. Currently, Mongolia’s socio-economic life continues to show a favorable development trend.
　　
　　 IV. Major Existing Issues and Risks
　　
　　 1. Increased operational costs for businesses
　　
　　 Since the introduction of the new Mineral Resources Law in 2006, the costs of mineral exploration and development in Mongolia have risen significantly, primarily due to the following factors: ① The royalty rate has been increased from the original 2.5% to 5%; ② Exploration license fees have been raised from US$0.05, US$0.1, and US$0.1 per hectare for the first, second, and third years, respectively, to US$0.1, US$0.2, and US$0.3 per hectare; mining license fees have also increased substantially; ③ If the proportion of foreign nationals employed by license holders exceeds 10% of the total workforce, a fee equivalent to 10 times the minimum wage must be paid per job per month (this regulation has had a particularly significant impact on Chinese enterprises); ④ Tax incentives have been reduced: the original 100% tax exemption period has been shortened from the first five years to the first two years, and the 50% tax exemption period has been reduced from the subsequent five years to the subsequent three years. Furthermore, in 2006, the Mongolian Parliament passed a legislative proposal imposing an excess-profits tax on exports of copper and gold, significantly increasing the tax rates on these commodities. Specifically, a tax rate of 68% is now levied on the portion of the price of each ounce of gold exceeding US$500, as well as on the portion of the price of each ton of refined copper exceeding US$2,600. These increases in costs and reductions in tax incentives have led to higher operating expenses for companies, squeezed profit margins for investing enterprises, and lowered the overall investment attractiveness of the sector.
　　
　　 2. The instability of legal policies increases investment risks.
　　
　　 After more than a year of intense debate, Mongolia’s new mining law was finally enacted in 2006. It represents the outcome of a delicate balancing act among Mongolia’s major political forces and interest groups. The mining sector has already assumed a critically important role in Mongolia’s economy. In recent years, thanks to the sharp rise in international mineral prices, mining has brought enormous wealth to the Mongolian people. At the same time, however, a substantial portion of mining profits has been siphoned off by foreign investors, sparking considerable discontent within the Mongolian government and society. Many believe that the existing mining policies and regulations are overly favorable to foreign investors, leading to a net outflow of wealth from Mongolia. Influenced by global trends of “resource nationalism” and “resource nationalization,” Mongolia has seen the emergence since 2005 of several social movements, including the “Healthy Society Citizens’ Movement,” “My Mongolian Land,” and the “Give Half of Oyu Tolgoi to Mongolians” movement (or the “50:50” movement). These groups have raised slogans such as “Return Resources to the People” and “Protect the Environment for Future Generations.” In 2006, the “50:50” movement sharply criticized the draft contract between Ivanhoe Mines and the Mongolian government, arguing that the contract granted excessive privileges to the Canadian company. Leaders of the movement called for renegotiations to ensure that profits would be shared equally. Overall, there is strong public demand in Mongolian society for the government to revise the mining law, calling for significant changes to key provisions—including substantially increasing royalty rates and related taxes—and for the state to acquire stakes in mining companies, potentially up to 50 percent ownership. It is precisely against this backdrop that the new mining law was introduced. The new law introduces major revisions and adjustments in areas such as royalty rates, licensing fees, license durations, mining incentives, and government involvement. This new mining law was enacted less than ten years after the previous mining law was promulgated and implemented in 1997—though it had already undergone one minor adjustment in 2001. Given the magnitude of these recent changes, the international community has expressed concern and raised questions about the stability of Mongolia’s legal and policy framework. Investors are now questioning the long-term durability of the new law.
　　
　　 3. The government has increased its level of involvement in business activities.
　　
　　 In 2006, the new Mineral Resources Law introduced a provision on “state participation in mineral resources,” which has drawn widespread attention from investors. The new law stipulates that the government has the right to participate in the development of strategically important minerals—minerals whose current or potential production could significantly affect national security, the economic and social development of the country and its regions, or whose annual output accounts for more than 5% of the country’s GDP. These minerals primarily include coal, copper, gold, lead, zinc, silver, uranium, and other such resources. When cooperating with private enterprises to explore and exploit strategic minerals for which reserves have already been identified and for which state budget funds have been used, the state’s equity stake can reach up to 50%. The specific equity ratio is determined through mining contracts based on the amount of capital invested by the state. For strategic minerals whose exploration and development are carried out without using state budget funds and for which reserves have already been confirmed, the state’s equity stake can reach up to 34%, with the exact ratio also specified in the mining contract according to the amount of capital invested by the state. Through these provisions, the state has strengthened its control over key mineral resources that are vital to the national economy and people’s livelihoods. However, on the other hand, this has increased the investment risks faced by enterprises, exposing them to greater uncertainty and unpredictability.
　　
　　 4. The international mining investment environment rating has significantly declined.
　　
　　 According to the 2006/2007 Mining Companies Survey released in 2007 by the Fraser Institute in Canada, Mongolia experienced a dramatic drop in its ranking in the category of “Policy Potential for Attracting Mining Investment” among major countries and regions worldwide. Last year, Mongolia ranked 33rd; this year, it has fallen all the way to fourth from last. In the survey’s ranking of mineral potential under current regulations and land-use restrictions—a metric that comprehensively reflects a country’s mining investment environment—Mongolia recorded the largest decline, dropping from third place last year to 58th this year, placing it eighth from the bottom. A key factor behind this sharp deterioration in the investment climate is the introduction of new mining laws and policies, such as the new Mineral Law and the windfall profits tax. Even when the draft amendments to the Mineral Law and the draft windfall profits tax were first proposed, experts pointed out that these measures would severely undermine Mongolia’s mining investment environment. International mining investors generally opposed these proposals, with some investors declaring that they would withdraw their investments from Mongolia if the drafts were enacted. Among them is QGX, one of the earliest Western mining companies to enter Mongolia. Now that these laws and policies have begun to take effect, it comes as no surprise that they are having a negative impact on Mongolia’s mining investment environment.
　　5. The accuracy of existing mineral data is poor.
　　The vast majority of Mongolia’s mineral resource data were compiled during geological surveys conducted by Soviet and Mongolian geologists in the 1950s and 1960s. As a result, the level of geological exploration is relatively low, and the accuracy of technical parameters is poor. Few mining sites have undergone truly detailed exploration. Currently, most mining rights in Mongolia are held by private entities, and many of these mining sites lack comprehensive exploration data. This is because detailed information on some mines previously explored by Soviet experts is still kept in Russia, while the data provided by mine owners themselves are often incomplete and contain inaccuracies.
　　6. The privileges of local governments may hinder the smooth progress of mineral development efforts.
　　Although Mongolia is a centrally governed country and mining management authority rests primarily with the central government, it is extremely difficult for mining projects to proceed smoothly without the support of local governments. Even after submitting an application to the mining authorities and obtaining exploration or mining permits, it does not necessarily mean that exploration or mining activities will go smoothly. This is because, according to relevant regulations, each province in Mongolia has the right at any time to designate any area within its jurisdiction as “special-use land” and place it under protection. Even in areas where exploration and mining are already underway, as soon as the provincial governor submits a proposal—subject to discussion and approval by the provincial council—such areas can be designated as “special-use land,” thereby halting exploration and mining activities there.
　　
　　 Moreover, Mongolia’s infrastructure is poor, and its transportation system simply cannot keep pace. Although most of the mining operations currently being developed by Chinese investors are concentrated within a 300- to 700-kilometer radius of the Chinese border, even under these circumstances, transportation capacity remains a serious challenge. After large quantities of mineral resources are extracted, it is extremely difficult to transport them out of the country. If enterprises were to rely solely on their own resources to build railways or highways, the development costs would be prohibitively high—far beyond what they could afford. In response to this issue, the Mongolian government has made considerable efforts, yet the results have been limited.
　　
　　 Water scarcity is also a major obstacle to mining development in Mongolia. Mongolia is one of the countries with scarce water resources; only 60% of its territory has underground water. Even if mineral deposits are present, they cannot be mined without sufficient water. This is especially true in the Gobi region, which is rich in mineral resources but suffers from a severe shortage of water.
　　
　　 The aforementioned situation has severely impacted Mongolia’s mining investment environment and serves as a warning to companies and individuals currently involved in or planning to enter Mongolia’s mining sector.

　　Primary Reference Materials
　　 [1] USGS, Minerals Yearbook, 2005, 2006
　　 [2] Draft mineral law worries international investors, The UB Post, September 15, 2005
　　 [3] World Exploration Trends: A Special Report from Metals Economics Group for the PDAC 2006 International Convention
　　 [4] Fraser Institute Annual Survey of Mining Companies 2006/2007
　　 [5] Rubin Weston, Chadbourne & Parke (MNP), Mongolian Mining: A Golden Opportunity? and D. Khand, (Portfolio Media, Inc. website)
　　 [6] Song Guoming. “Mongolian Mining Administration and New Directions,” Land & Resources Information, No. 6, 2006
　　 [7] Song Guoming, “Cooling Down the Fever for Chinese Enterprises Mining in Mongolia,” China Mining, No. 7, 2006