ULAN BATOR/MELBOURNE Mongolia's efforts to protect its mineral wealth have scared investors so much that not even the first exports from its biggest mine and the expected re-election this week of a president who wants foreign capital will turn sentiment around.
With the country's economic growth heavily tied to its vast copper and coal resources, Mongolia should have been celebrating the first copper sales to China from the $6.2 billion Oyu Tolgoi mine.
Instead, the government twice this month told mine operator Rio Tinto (RIO.AX)(RIO.L) to delay the first shipment, partly due to a dispute over the repatriation of profits. Some analysts said the holdup was also aimed at keeping a lid on nationalism ahead of the presidential vote on Wednesday.
Industry experts believe exports will start soon, but the delays follow a year in which Mongolia introduced draft legislation to tighten control over mining activity and limit foreign investment.
"Whilst the country has lots of resource potential and holds Oyu Tolgoi, a world-scale mine, there's too much headline risk," said Darko Kuzmanovic, a portfolio manager at Caledonia Investments, which holds global mining stocks but has steered clear of Mongolia-focused miners.
President Tsakhia Elbegdorj said he would seek to ease legal uncertainty after the election. The results are expected on Thursday.
"I think we have to combine our national interest with the interests of our investors and have more favourable conditions for investors," he told Reuters after his final campaign rally on Sunday.
Mongolia's government has been under public pressure to ensure the country gets a fair share of its resources, but the timing of the draft legislation, just as the global mining boom peaked, was poor, said mining experts.
"It has overplayed its hand," added Kuzmanovic.
HOPES ON PRESIDENT
Foreign direct investment slumped 17 percent to $3.9 billion in 2012 and fell 12 percent in the first quarter of 2013 from the same period a year earlier, according to Mongolia's National Statistics Office.
Mining executives hope that if Elbegdorj is re-elected as expected, he will be under less pressure to push a resource nationalism agenda since he will no longer be in campaign mode.
That should ease policy confusion and help revive foreign investment.
"Certainty on who the president will be - and the incumbent appears to be clear favourite - I think is critical," said David Paull, managing director of Australian-listed Aspire Mining (AKM.AX). "That will create a period of political stability and that's the key thing people look for."
Aspire, backed by Hong Kong-based commodities trader Noble Group (NOBG.SI), is working on a coal project in northern Mongolia. Its stock has dived 73 percent over the past year on worries about regulatory uncertainty and sliding coal prices.
While making promising noises about consulting the industry over the new mining law and amendments to the strategic foreign investment law, the government put off debate on the legislation until after the election.
Some of the proposed measures foreign investors are uncomfortable with include giving the state the right to free shares in strategic mineral deposits, giving it authority to change tax rates on mine leases and making it easy for the state to take back leases with limited compensation.
"I think the underlying problems that give rise to investor uncertainty are not going to go away, irrespective of who is going to be president," said Agost Benard, the primary credit analyst on Mongolia at ratings agency Standard & Poor's.
Mongolia is hurting, with coal export revenue, the biggest contributor to the country's trade receipts, down 42 percent in the first four months of the year.
Standard & Poor's has already warned it could downgrade Mongolia's BB- sovereign bond rating in the next six to 18 months, as the economy grows increasingly dependent on commodity prices, which are dropping.
The World Bank, too, is worried.
Mongolia's economic growth slowed to 12 percent in 2012 from nearly 18 percent in 2011. The World Bank expects growth of around 13 percent this year, still one of the fastest rates in the world. In April, it said significant uncertainty over key growth factors - especially mining - made the economic outlook "highly volatile".
MINE TO BOOST ECONOMY BY A THIRD
Mongolia is a landlocked country of 2.8 million people, sandwiched between its giant neighbours China and Russia. Nearly 40 percent of the population live below the poverty line.
Which is why a lot is riding on Oyu Tolgoi, a mine that is expected to boost the economy by a third by 2020.
While Mongolia has issued all permits needed for Rio Tinto to start exporting, the government is pressing the company to keep all revenue in the country, vice minister of economic development Ochirbat Chuluunbat told Reuters.
However, that was not holding up exports, he said, declining to give further details. Rio Tinto has declined to comment on what was behind the delays.
The agreement that governs Oyu Tolgoi gives Rio Tinto the freedom to put export revenue anywhere it wants, sources familiar with the situation have said.
Oyu Tolgoi is the biggest project in the country and the government needs the royalties. The mine will have average annual output of 330,000 tonnes of copper and 495,000 ounces of gold in the first 10 years, putting it among the world's five largest copper mines.
It is the most advanced of Mongolia's two biggest mining projects. The other is the giant state-owned Tavan Tolgoi coal mine, whose development has been stalled by a slump in the coal market, which has dented revenue and forced the government to put plans for a public listing of the asset on ice for at least a year.
Both are perfectly located near China, which needs huge amounts of copper, coal and iron ore even though its economic growth has slowed.
With coal prices having dropped about 30 percent over the past 18 months, some analysts think it will be a long time before Tavan Tolgoi is fully developed.
"The world doesn't need another coal mine," said Kuzmanovic.
Mining executives, bankers and lawyers are cautiously optimistic the start of sales from Oyu Tolgoi will give some momentum to investment in Mongolia, but they don't expect a flood.
"Acquiring financing is difficult now. It'll take a lot of change," Jim Dwyer, executive director of the Business Council of Mongolia, said at a recent conference in Ulan Bator.
(Additional reporting by Maxim Duncan in ULAN BATOR. Writing by Sonali Paul. Editing by Dean Yates)
Our top photos from the last 24 hours.