“…a representative of SouthGobi said the Mongolian government had been informally notified and was supportive.” 
“Financial Times” – April 2, 2012
A statement released last week by SouthGobi (SGS) has broken our patience. Foreign investment is needed in order to mine the natural resources of Mongolia. Therefore, the Government of Mongolia has been supporting foreign investment.
Many issues regarding foreign investments have occurred for years and they have been settled in time. However, there is one issue we must address, which absolutely cannot be postponed. 
This is the issue of foreign state-owned companies dominating in the ownership of oil and mining deposits in Mongolia. The main reason governments are cautious of foreign state-owned companies from becoming a major player in one of its economic sectors is that governments try to avoid monopoly prices rather than political pressure.

Mongolia as a democratic, market economy country has a duty to protect itself from monopoly prices. Other countries and business organizations in the world fully understand it and stand together against a monopoly. Monopoly price, no matter how high or low it is, destroys the basis of market economy.

THE CHINESE GOVERNMENT CAN SET A MONOPOLY

PRICE ON MONGOLIA’S COAL

Last Sunday, SGS, which is 57.6% owned by Ivanhoe Mines, said that it would sell the majority of its shares to a Chinese state-owned company Chalco for USD 540 million. You might have thought it was an April Fool’s prank at first, but, sadly, it was not. 
The next day The Financial Times reported that a representative from SouthGobi said the Mongolian Government had been informally notified and was supportive. The transaction would not require Mongolian approval because the share transfer would take place in Canada.
About this potential trade, SouthGobi CEO A.Molyneux said, “It’s almost certainly going to happen, as long as the regulatory approvals happen and go forward”. 
However, he was not talking about the Mongolian Government; he was talking about the requirement that every single shareholder has to be presented with a proposal to sell their shares with the same ratio just like the law of the British Virgin Islands. These islands have a law that requires collecting votes from every shareholder 35 days from the day this kind of trade is announced. 
They say that the Government of Mongolia was informally notified and was supportive. What is this company that has informal relations with the Government of Mongolia and makes decisions on behalf of the Government? Who are these people making a joke out of Mongolians and our Government? 
Father and son Friedlands, other owners and directors must tell us where, when, and who they spoke to from the Government of Mongolia and who gave them approval. 
SouthGobi must be held responsible for looking down on the Mongolian Government. This company, SouthGobi, is going to insult us and leave after selling Mongolia’s coal reserves of 500 million tons to a foreign state-owned company, pocketing USD 540 million. 
Other countries in the world including the United States of America, the cradle of democracy and market economy, do not allow foreign state-owned companies to dominate in any of their economic sectors. The U.S. Foreign Investment and National Security Act of 2007 (FINSA) requires any transactions, trade or investment done with a foreign party to be reviewed and investigated 30 days before approving it. The world remembers that Congress did not approve the state-controlled China National Offshore Oil Corporation to buy the U.S. oil company Unocal in 2008. 
Meanwhile, Chinese state-owned companies have begun to buy a number of the Mongolian mining companies in Umnugobi Province directly and indirectly. 
Chinese state-owned companies are becoming the suppliers and buyers of Mongolia’s coal at the same time. They can seize the power to set prices on their own by controlling the whole value chain: mining, transportation, processing, producing end products and selling them. The Chinese government has been doing the same thing in Africa and Latin America. They are bringing their low-priced resources to China creating advantages for domestic producers. The international community is opposing this and meeting this issue with criticism. 
The SouthGobi example proves that the Chinese government is implementing the very same policy in Mongolia’s coal supply. The basis of this policy’s implementation has already been laid in almost all coal deposits in Mongolia. Five companies own three big coal deposits in Umnugobi Province and the Chinese state-owned companies are gradually taking over every single one of them. 
SouthGobi is listed on the Toronto Stock Exchange and 57.6% of its shares are owned by Ivanhoe Mines, 14% by“China Investment Corporation (a fully state-owned company) and 28.3% by the public. If the major owner of this company, which has 29 licenses in eight soums of Umnugobi Province, sells all of its shares to another Chinese state-owned company Chalco, the Chinese government alone will own over 71% and have the right to make every decision regarding the company. 
In the fall 2011, the Coalition Government of Mongolia gave Chalco, the world’s second biggest aluminum producer, a monopoly right to do mining in the east of Tavan Tolgoi (Zuun Tsankhi), which has a 6 billion ton reserve, allowing them to take out as much coal as they can. 
The Government was paid USD 250 million as an advance by selling a ton of coal for USD 70 and is finished distributing it to people. This came at the cost of election promises of the two parties and future re-election of a few individuals. They sold it at a pretty cheap price considering that Energy Resources is selling its coal in Ukhaakhudag for USD 114 a ton. 
Baruun Naran coal deposit with a reserve of approximately 200 tons is located right next to Ukhaakhudag and is owned by the Canadian company QGX. Sources say that Shenhua, a Chinese state-owned mining company, is trying to buy the Baruun Naran deposit. 
MAK (Mongolyn Alt Group) owns a coal reserve of 250 million tons and shares it with Qinhua, a Chinese company. Even though it is a private company from Inner Mongolia, no one knows for sure that it would not sell its shares to a Chinese state-owned company when pressured. 
Even Peabody, the world’s biggest private mining company, won the Tavan Tolgoi tender with a Chinese transportation company called Winsway for several coal deposits in the SouthGobi Aimag. A source states that the Chinese state-owned Shenhua, the world’s biggest coal producer, has proposed that Winsway bu its shares. Every trade can be made as long as price is agreed on. 
In this fashion, Chinese state-owned companies have begun to own most of the biggest coal deposits in Mongolia. This shows that Beijing could be a de facto policy maker on Mongolia’s coal very soon. It will be over if Ulaanbaatar seals their decision and makes them de jure. 
We have to remember that when we thought the US based Soko International was our “third neighbor,” it sold all of its shares to a Chinese state-owned company Petro-China one morning and left Mongolia. 
Why does the Government of Mongolia not see this? Why are they doing nothing about it? Where is our Security Council?

WHAT MUST BE DONE?

Developed countries in the world are full of junior companies and adventure seekers, who try to be the first ones to come to a country like Mongolia, where the laws are soft, in order to easily acquire licenses and raise a little bit of capital for natural resources exploration. Then, they play on the stock market and attempt to be bought out by major companies. 
Robert Friedland is just one of them, but a lucky one. He will soon sell Oyu Tolgoi to Rio Tinto for a highest possible price and he is probably happy now thinking that he has sold SouthGobi. 
Even though it is a normal procedure regulated by the laws of market where one sells and the other buys, the owner country has to be wary of foreign state-owned companies buying shares especially when it is a company from your neighboring country. If there is a dispute, the governments hold talks, consequences of which could be serious. On the other hand, when there is a dispute between private companies, the owner country’s court or an arbitrary court of a third country settles the dispute. 
Mongolians have only one way out of this. This month we have to urgently pass a law that bans any company in which 25% or more of shares are owned by a foreign state-owned company directly or indirectly buying 20% or more of shares of any company directly or indirectly, that is registered and operating in Mongolia 
The only reason why we need this law is not because they are Chinese companies but because we urgently need to change our legal environment that allows the value of our natural resources depreciated because the supplier and buyer of Mongolia’s mineral resources can be the same subject. 
Mongolian citizens must demand Parliament pass this law.

Translated B.AMAR