ULAN BATOR -- Just over a kilometer south of Genghis Khan's statue in front of Mongolia's government house sits the headquarters of Oyu Tolgoi, the local joint venture of global miner Rio Tinto.
The gaze of the 13th-century leader of the Mongol horde, said to be on watch against invaders from the south, meets the logo of Oyu Tolgoi, which is developing the biggest foreign investment project in the country's history. But while the old warrior stands guard, the current government's wariness about foreign investors taking away the country's minerals is easing.
After years of clashes over the $6.5 billion Oyu Tolgoi mine, the first copper shipments are at last reaching customers.
That is not to say the government, which owns one-third of Oyu Tolgoi, and Rio Tinto, the Anglo-Australian company that indirectly controls the rest, have resolved all their conflicts. The government continues to seek a higher share of the Gobi Desert mine's proceeds than that stipulated in the 2009 investment agreement. With approval of a planned $4 billion financing package to build an underground shaft facing an uncertain fate in parliament, Turquoise Hill Resources, the company through which Rio has invested, said Nov. 14 that it may instead raise $2.4 billion through a share offer. The company halted digging of the shaft in July, resulting in the layoff of 1,700 workers, shortly after the open-cut section of the mine went into production.
Parliament, though, has softened its tone in light of the country's faltering finances. Lawmakers returned from recess two weeks early in September for an emergency session after the tugrik, the local currency, fell 7% against the U.S. dollar in a month. New figures also showed that Mongolia suffered a 43% on-year decline in foreign investment in the first half of 2013, and that this year's budget deficit would likely exceed the legal limit of 2% of gross domestic product.
The chastened parliament endorsed a new foreign investment law. This removed a restriction, imposed in 2012, requiring government approval for foreign private companies' investments in "strategic sectors," including mining.
To narrow the deficit, parliament is now considering budget amendments that would cut spending for the year by 10.8%, to 6.6 trillion tugrik ($3.78 billion). Expected revenue has fallen 13.7% to 6.3 trillion tugrik.
The shortfall in returns traces back to Oyu Tolgoi, which the International Monetary Fund has projected will generate a third of Mongolia's GDP when it reaches full production. Ulan Bator received $280 million from the mine last year, according to Rio, which made it the country's second-largest source of tax revenue before commercial operations had even begun.
For Mongolia, the good news is that royalties are finally coming in. Shipments to companies in China, the primary customers for the mine, were held up until Oct. 19. The copper languished at a bonded warehouse just over the frontier, blocked from entry by Chinese customs officials ostensibly over missing paperwork.
Meanwhile, the opening of the mine has expanded Rio's copper output by almost a quarter, according to Surenjav Odbayar, head of research for Ulan Bator broker National Securities. Yet copper prices are expected to fall in the coming months as supply growth, mostly from other mines, outpaces demand.
The appetite of China, the metal's biggest consumer, is a key variable. Analysts surveyed by Reuters expect supply to exceed demand this year by 182,000 tons, with the surplus rising to 328,000 tons next year.
A positive resolution of the Oyu Tolgoi saga is critical for reassuring foreign investors, such as U.S.-based Peabody Energy and French uranium miner Areva, that Mongolia will not continually seek to revise terms of investment.
But the business environment remains unpredictable.
The Mineral Resources Authority earlier this month canceled exploration licenses held by Canada's Kincora Copper and 77 other companies after the officials who issued them were found guilty of corruption. The government and the licensees are discussing how to proceed.