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By Lara Crigger

With its rich deposits of natural resources, you'd think by now Mongolia would be higher on the mining radar. But this impoverished, agrarian country entirely missed out on the recent worldwide mining boom, stymied by its own overzealous legal restrictions and a government hungry for an ever-greater share of mining profits.

However, it looks like things may finally be turning around for Mongolia. Last Tuesday, the country's parliament revoked four 2006 mining laws, a move that could finally kick-start development of Mongolian mining—starting with the much-delayed (and much-anticipated) Oyu Tolgoi project.

So could Mongolia become the next mining mega-star? Or will its government again be its own worst enemy?

Windfall Tax Revoked

In particular, the new legislation revokes a draconian windfall profits tax, which exacted a 68% tax on Mongolian copper and gold. The levy applied to any copper sold above $2,600/ton and any gold sold above $500/ounce. (For comparison's sake: Copper now trades around $6,470/ton on the LME; gold currently hovers around $960/ounce.)

Another revoked law gave the regime a 34% stake in mines explored without government funding—and a 50% share in projects that had such funding.

Intended to allow the government to capitalize on the high metals prices during the boom, the 2006 laws worked a little too well, scaring off many investors interested in the country's resources.

That was bad news for Oyu Tolgoi, one of Mongolia's more promising deposits. Owned by Ivanhoe Mines (TO: IVN) and Rio Tinto (NYSE: RTP), Oyu Tolgoi is a gold and copper treasure trove located in the Gobi desert, just north of the Chinese border. In March 2008, Ivanhoe estimated the mine held 45.2 million ounces of gold and 78.9 billion pounds of copper—nearly 3% the world's total supply.

And that's not all Mongolia has to offer. The country also possesses significant uranium and coking coal deposits—and, of course, more copper and gold.

A Change Of Heart

Under Parliament's new deal, the windfall tax is thrown out, and the government gets a flat 34% stake in Oyu Tolgoi and other mines. It can raise that share 50% after 30 years, once the two miners have recouped their initial investment of about $4 billion.

This legislation puts the government in a good position to now sign investment agreements with Ivanhoe and Rio Tinto—which could happen any day now. Just last week, Finance Minister Sangajav Bayartsogt told MarketWatch that he expected an agreement to be finalized over the next two weeks.

Of course, we've seen all this before: Negotiations surrounding Oyu Tolgoi stretch back as far as 2003, but something has always prevented an investment deal from being signed—most recently, the 2006 taxes.

This time, however, the deal's expected to stick, given a change in political priorities. In June 2008, the Mongolian People's Revolutionary Party swept the elections, gaining 76 seats in Parliament; the resulting coalition government has placed higher priority on developing Mongolia's mineral resources, reopening negotiations with Ivanhoe and Rio Tinto.

Oyu Tolgoi would be Mongolia's first major mining project—and what a doozy it would be. With production slated to begin in 2013, the mine is estimated to produce 450,000 tons of copper and 330,000 ounces of gold annually for the next 45 years.

That could almost double the country's GDP, currently about $5 billion annually, says John Finigan, CEO of Mongolia's Golomt Bank.

"Predicated on this decision, Mongolia will generate the highest rate of growth of GDP of any country in the world over the next 10 years," he told Reuters. "This is transformational."

Developing Mongolia

Should Mongolia's mining industry rev up, its neighbors could benefit—especially China.

Mongolia is rich in coking coal, unlike China, whose steelmakers have had to import ever-rising amounts from far-away Australia instead. According to the World Bank, by 2015, Mongolia could export about 20 million tons of coking coal to its neighbor, with overall coal exports topping 45 million tons. (That's up from only 5 million tons at present.)

China also would be a natural choice for Mongolian copper exports, as the country's imports more than doubled to 1.78 million metric tons in the first half of the year, reported Bloomberg.

Coking coal exports could bring in an added $2 billion each year for Mongolia; add that to the $3 billion expected from Oyu Tolgoi, and suddenly, things are looking up for Mongolia miners.

But China isn't the only neighbor with an eye on Mongolian exports. Recently Russian president Dmitry Medvedev visited the country, settling, among other deals, a joint venture to mine the Dornod uranium deposit.

"Everybody has been waiting for this deal," Yuji Iwasaki, COO of investment bank Frontier Securities, told Reuters.

Some have predicted that a mining boom could initiate an economic renaissance in Mongolia, a country where a full one-third of the population is in poverty. Like many other countries, Mongolia suffered a credit crunch last year, where banks cut lending and the government spent its foreign reserves to support its currency.

But that might be jumping the gun, says Arshad Sayed, the World Bank's country manager in Mongolia. "The economy had almost gone into cardiac arrest by the beginning of this year," he told Reuters. "This agreement has revived it, but you can't expect it to start running immediately. It's too early to call victory right now."

Investors looking to play a potential Mongolian mining boom have few pure-play options available to them yet (although they can always purchase shares of Ivanhoe and Rio Tinto). If Mongolia does become a resources powerhouse, however, more opportunities could arise very soon, either in a country-based ETF or greater representation in mining ETFs.

Source: Mongolia: Mining's Next Big Thing?