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TABLE OF CONTENTS Jun 1 - 7, 2009 Volume 95 Number 15 - 0 comments

Mongolian Election Causes Market Jitters

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By: Anthony Vaccaro

Sometimes the market gets it right, and sometimes it doesn't.

In the case of the recent Mongolian presidential election, it would seem it's a little of both.

While some advance media reports had incumbent president Nambaryn Enkhbayar winning in a close election, the market seemed to anticipate his counterpart Tsakhiaginn Elbegdorj coming out on top and began discounting stocks associated with the country accordingly.

When Elbegdorj did come out on top, the market battered miners in the region -- the highest profile of which is Ivanhoe Mines (IVN-T, IVN-N) -- even more harshly.

Ivanhoe's share price began a steady decline from $8.35 on May 8, down to a close of $6.49 on the Friday before the May 24 election. When word of Elbegdorj's victory came out, its shares fell another 10% to close at $5.85 on May 25.

But is the market's negative impression merited, and will it persist?

While it is true that Elbegdorj ran on a Barrack Obama-inspired campaign of change, and his rhetoric did at times tilt towards the populist side of things, to label him a left-wing radical would be inaccurate.

Just a year ago, pundits in the country were describing Elbegdorj, not Enkhbayar, as the more business- friendly of the two.

"The market pessimism is a totally inappropriate reaction to the election result," says Steve Saunders, president of the North America- Mongolia Business Council. "The market's overreaction was at a minimum premature, and at maximum totally unjustified. Elbegdorj has a very sophisticated internationalist viewpoint about mining and everything else -- he is not a narrow-minded resource nationalist."

So just who is Elbegdorj? The two-time former prime minister of the country did his undergraduate studies in Russia in the late 1980s -- just as communism was collapsing and the spirit of glasnost was taking hold.

He followed up his education there by going to Harvard, where his admiration for free markets and democracy grew stronger still.

"The world needs a strong America," he told the TV show Inside Arizona Business just two years ago. "Some nations can offer fine wine and fine cars. America offers freedom, and there is kind of an intangible bond between our nations."

Hardly the words of a Hugo Chavez-style populist.

Importantly for mining investors, Elbegdorj was on the committee that drafted the country's mining code in 1998 -- a code that is widely seen as being a great leap forward for the once-communist country.

What is more, Elbegdorj's Democratic Party is considered centrist-right compared with the central-left stance of Enkhbayar's Mongolian People's Revolutionary Party (MPRP). Those lines were, however, blurred recently as Elbegdorj took the more populist position by saying that the mineral wealth of the country would be shared by all Mongolians.

"The gloom-and-doom expectations are based on things said in the campaign," Saunders says. "All you have to do is look at the record of any elected official in any democratic country to realize that you need to take campaign rhetoric with a grain of salt."

Much of the concern over Elbegdorj's rhetoric had to do with his party's 19-point wish list of things it would like to see in the investment agreement between the government and Ivanhoe and its partner at the Oyu Tolgoi copper-gold project, Rio Tinto (RTP-N, RIO-L). A windfall tax was one such item.

The concern is that such points could spoil the prediction Ivanhoe president and chief executive John Macken made in early May that the long-awaited agreement would be approved in six to eight weeks.

While it's a refrain that investors have heard before, only to be disappointed by seemingly countless delays, Macken reasoned that this time the global economic downturn would push the issue towards resolution.

There is no doubt that dwindling commodity prices have starved government coffers of the revenues they were becoming used to. If Ivanhoe's massive Oyu Tolgoi project goes into production, it would not only mean more jobs for Mongolians -- who list unemployment as their chief concern -- but also more cash flows for the government.

Indirectly, the World Bank is backing Macken's thesis. The bank recently announced that it was revising its strategy in Mongolia because of how hard the country has been hit by the economic downturn.

It said a new approach would look to ensure fiscal sustainability, protect the poor, and encourage transparent and prudent mining investments and a more competitive and stable medium-term business investment climate.

The last point is the most relevant to Ivanhoe, and touches on the core of the country's dilemma over the last 15 years.

Mongolia adopted a market-based economy in 1990, a situation that instantly deprived it of the Soviet aid that once made up roughly a third of its gross domestic product.

Predictably, its move into capitalism -- after some 60 years under communism -- was not a smooth transition.

On the positive side, economic growth has been scorching, averaging close to 9% per year between 2004 and 2008. That growth ushered in a new era of wealth as demonstrated by a sharp rise in per capita income to US$1,290 in 2007 from a meagre US$390 in 1995.

But coupled with that growth was intense inflation -- which reached a peak of 40%. The situation left many of the poor on the outside looking in, and fed a belief that foreigners were profiting from the soil that belonged to all Mongolians.

However, that view may be changing. With growth projected at 2-3% for 2009, inflationary pressures have eased.

That, combined with the fact that the country's external current account went to a 9.6% deficit in 2008 from a surplus of 4.4% of GDP in 2007, has made getting a major project like Oyu Tolgoi into production more of a priority.

And that will likely not change with Elbegdorj now at the helm.

As it stands, the investment agreement has been reviewed by parliament and all other interested parties, such as unions and NGOs.

Recommendations from the review process have been relayed to Ivanhoe and Rio Tinto, and they will offer responses that will then be put to a vote in parliament.

For Macken's prediction to come to fruition, such a vote would have to take place before parliament breaks for a national holiday in the second week of July. It is not scheduled to reconvene until October after that point.

While Saunders won't suggest a timeframe for when he thinks a deal could be signed, he does say that the progress in negotiations is in itself a positive development.

"They've finally gotten to the point of dealing realistically with a hard proposal," he says. "They finally have a specific and practical document in front of them and the way to look at the current situation is that they are trying to fine tune it."

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