Mongolian election to take investment climate temperature

At a shareholders meeting earlier this month Ivanhoe Mine’s (IVN-T, IVN-N) president and chief executive, John Macken, told the audience that he expected the long awaited investment agreement between Ivanhoe and the Mongolian government to be approved in six to eight weeks.

It’s a refrain that investors have heard before, only to be disappointed by seemingly countless delays on the government’s end.

This time, however, Macken reasoned that it would be the global economic downturn that 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 copper and gold project Oyu Tolgoi could get into production, it would not only mean more jobs for work hungry Mongolians, but more cash flows for the government.

Indirectly the World Bank is backing Macken’s thesis. The bank 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 fifteen years.

Mongolia moved over to a market-based economy in 1990, a situation which instantly left it without the Soviet aid that once made up roughly a third of its GDP.

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

On the positive side economic growth has been scorching – it averaged close to 9% per year between 2004 and 2008. Such 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 the meager level of just US $390 in 1995.

But coupled with that growth was intense inflation – which reached as high as 40% one year. 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.

But that view may be beginning to change. With growth projected to be in the 2 to 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.

While the office of president is a more ceremonial position that in western democracies – in Mongolia, it is the parliament that holds power — an election on May 24th could be seen as a bellwether for popular sentiment.

The challenger, Elbegdorj Tsakhia, has painted himself in a more populist light and has used strong rhetoric with regards to government involvement in the mineral sector.

Incumbent president, Nambaryn Enkhbayar, is seen as more pro foreign direct investment, and his victory would likely be taken as a positive sign by the market.

Polls have Enkhbayar slightly ahead, but by all accounts it will be a close election.

While Ivanhoe is not in a position to pick favorites, its share price could use some positive news. Since closing in Toronto at $8.35 on May 8, the company’s share price has been falling, and on May 22 it closed at $6.49 on volume of 350,000 shares traded.