After two decades of laissez faire, the government last year introduced regulations and laws to rein in foreign investors. These include insisting that a foreign company acquiring more than a 33 percent stake in a mine or other strategic industry get approval from a government agency. Investments above 49 percent must be approved by parliament. The government has more than Rio Tinto in its sights. St. Louis-based Peabody Energy, London-based Anglo American and several smaller mining companies also operate in the country.
“There’s a real doubt in the minds of Mongolians about foreign investment,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group, whose $1.5 billion Templeton Frontier Markets Fund returned 24 percent last year. His fund has only 1 percent of its money in Mongolia. “It’s very low on the totem pole,” he says.
Some investors who have made Mongolia a priority may be heading for the exits, says Travis Hamilton, managing director of Singapore-based Khan Investment Management, which owns stakes in Mongolian companies. “Without legislative clarity, clear leadership and a welcoming environment for investment, the government risks a flight of capital,” he says.
Even the U.S. ambassador to Mongolia has joined the fray, chiding the government and investors for their hostility to one another. “The lack of respect is killing projects,” Piper Campbell told delegates at a mining conference in Ulaanbaatar. “I have been in meetings with the government and businesses where both sides accuse the other of violating laws, acting corruptly and other lapses — without thought of the impact of those kind of attacks. Both sides leave the room angry, the disputes fester, and when disaster inevitably comes, everybody acts surprised.”
Mongolia may already be paying a price for its toughening stand. After jumping 139 percent in 2010 and 47 percent in 2011, the tiny Mongolian Stock Exchange’s Top 20 Index tumbled 19 percent last year. It has fallen 15 percent this year, shrinking its market capitalization to $545 million as of April 8.
For Alisher Ali, founder of Silk Road Finance, an Ulaanbaatar-based investor in frontier markets, that’s a buying opportunity. He says he’s increasing his stakes in companies such as APU JSC, a beverage maker based in Mongolia.
“This period of underperformance is short-term,” says Ali, who also invests in Burma and Mozambique. “Ultimately, the Oyu Tolgoi issue will be resolved because it is in the long-term interests of both Rio Tinto and the government.”