In a surprise announcement last week, the Prime Minister of Mongolia S. Batbold reported that Mongolia will cancel the auction of the exploration and mining licenses associated with the Tavan Tolgoi (TT) coal deposit in the Umnugovi province of Mongolia.  The TT deposit is located in southern Mongolia and is considered one of the largest untapped coal deposits in the world.

Previously it was understood there was going to be a 51%/49% ownership structure between the Government of Mongolia and the private company(ies) awarded licenses to exploit the TT site.  Based on the understanding that TT was to be developed as a joint venture, much like Oyu Tolgoi (OT), a number of high profile companies were in the running for receiving a license to develop a section of the TT deposit, including USA’s Peabody, China’s Shenhua, BHP Billiton, Vale of Brazil, as well as Jindal from India and consortiums from both South Korea and Russia.

It seems the Mongolian public feels as if it received very little from the OT deal, despite the fact that the agreement was signed a few short months ago and production is still years away.  So instead of the private sector bearing at least half of the risk in the TT project, the government of Mongolia, and more specifically the citizens of Mongolia, are now going to have to worry about market fluctuations, the availability of credit and all of the other associated risks of owning and running a project of this size.

To me this begs the question:  where will the money come from?  The government has already been spend-happy during the past few months with the handing out to every citizen MNT70,000 (USD50), which does not seem like much on an individual basis but when multiplied by the entire population of 3.7 million it comes out to be about USD180 million.  Add to that the MPs (there are 76) voting themselves MNT1 billion to use as they sees fit in their constituencies, and you suddenly have the makings of massive inflationary issues when the country can least afford it, during the Tsagaan Sar lunar new year holiday when spending and purchases spike.

I am all for assisting the poor and ensuring the citizens of Mongolia get their fair share of the minerals Mongolia is lucky (or unlucky, depending on your perspective) to have.  I simply think a more targeted and long-term approach to the situation should be taken,  Instead of giving each individual the same amount, whether they are walking around with a Louis Vuitton bag on their shoulder or digging through the trash for plastic bottles.  The MNT70,000 comes from the Human Development Fund.  It seems to me Mongolia would do well to upgrade its schools, hospitals, and infrastructure (especially running water, heating and electricity to the ger districts) before handing out free money, which is probably going to do very little to actually develop anything.  When the Mongolian Minster of Health goes to Korea for treatment, something is seriously awry.

As pessimistic as this may sound, I do have hopes for Mongolia.  The country is in a position to benefit enormously from its minerals as long as they are handled with care and an eye on the future.  It would be nice to see Mongolia benefit more from taxes, royalties and profit-sharing schemes instead of having an equity stake in these huge, money-intensive projects.  The people of Mongolia deserve more from its elected officials than the paltry sum they have received thus far, namely education, healthcare and safety and security.  With such a small population the benefits derived from the gold, copper and uranium underground could help support the building of world-class hospitals and universities in the country.  Here’s hoping the politicians of Mongolia focus on bettering the lives of their constituents instead of padding their own bank accounts.