New ETF From Global X Indicates Growing Investor Interest in Mongolia

Perhaps interest in Mongolia hasn’t run this high since Genghis Khan and his descendants roamed far past the steppes of Eurasia nearly 800 years ago, sweeping to conquest on all sides. Back then, the united Mongol Empire swallowed territories from China to Europe and Russia to India, even part of the ancient Silk Road—named for the lucrative silk trade with China—as part of its vast land holdings.

Now, however, the launch of a new ETF from Global X Funds indicates growing investor interest in the country. The Global X Central Asia & Mongolia Index ETF (AZIA) seeks opportunities presented by central Asian countries, including Mongolia, and their close trade ties with China, as well as their rich natural resources. Opportunities are there aplenty, though the road is far from smooth.

Russia and China are far from the only outside nations exploring opportunities in Mongolia. The Anglo-Australian mining company Rio Tinto is deeply involved, in the wake of 2009 legislation that advanced an investment agreement to develop the Oyu Tolgoi mine, thought to be one of the world’s largest unmined copper deposits; it is also rich in gold and silver. Output from the mine is expected to boost the country’s GDP by 33% once it’s fully operational, with an ore deposit that runs for 20 miles beneath the sands of the Gobi Desert—comparable in size to Manhattan. The yield is expected to reach 330,000 ounces of gold annually, and an even more spectacular 450,000 tons of copper.

Rio Tinto has already spent more than $6 billion in development on Oyu Tolgoi (the name means “turquoise hill” in Mongolian), through its Turquoise Hill Resources unit. The Chinese aluminum firm Chalco bid on a majority interest in SouthGobi Resources, which mines coal from Tavan Tolgoi, another huge Mongolian mine. Toronto-based Kincora Copper owns the Bronze Fox copper-gold deposit. Mongolrostsvetmet is a joint venture between Russia and Mongolia, mining fluorspar, gold and iron. Other countries mining in Mongolia include Thailand, Hong Kong, Germany, the U.S. and Switzerland.

But here’s the rub: in mid-2012, a resource nationalism effort to retain more income and resources from its mines led Mongolia to change its laws, and outside investment dropped by 17% for the year. From Mongolia’s point of view, the new laws made sense, since currently coal from Tavan Tolgoi costs more to mine and deliver than Mongolia makes from its current agreement with Chalco. In addition, as its agreement with Rio Tinto is currently written, Mongolia stands to make no royalties from Oyu Tolgoi until Rio has recovered its investment, which could take years.

Mongolia suspended SouthGobi Resources’ mining licenses last year after Chalco’s bid, and followed with a law restricting foreign ownership of companies in strategic sectors, including mining, to 49%. In addition, coal delivery to Chalco was halted in January as Mongolia sought to renegotiate contract terms. In February, Rio Tinto threatened a delayed launch of the Oyu Tolgoi mine in a dispute with the government. Funding requirements in a stage-two mining report by the company reflect an inflation rate of some 30% in building costs for the mine, and neither the government nor the company are satisfied with the investment agreement as it stands.

A new minerals law has also been proposed that would allow the government to change tax rates on mine leases, take back leases that provide limited compensation, and gain free rights to shares in strategic mineral deposits. The proposal has not been welcome news to mining companies, whose shares plummeted on the government’s actions.

Now, however, the government is wooing companies and investors back. Among new measures proposed to ease the way for foreign companies to do business in the country is the removal of a requirement for Mongolia’s parliament to review minority investments by private companies. State-owned companies, however, would still be required to undergo a parliamentary review.