Mongolia’s Development of Critical Minerals
Opportunities and Challenges
Charles Krusekopf provides an overview of Mongolia’s mineral resources, with a focus on its large deposits and growing exports of copper. He highlights the opportunities for cooperation with the United States, Japan, South Korea, and European countries on mining development as well as the challenges Mongolia faces in developing its mineral resources and exporting them to markets beyond China.
Mongolia is one of the largest countries in Asia by land area, and it contains extensive mineral deposits, including copper, coal, fluorspar, gold, iron, petroleum, tungsten, uranium, and zinc. Minerals account for nearly 90% of its exports, and given the country’s geographic location, limited capital, and lack of infrastructure, almost all exported minerals are sold directly to China after minimal domestic processing.
Mongolia has emerged as a major supplier of coal and copper, but foreign investment and development of deposits and exports have been stymied by inadequate infrastructure, government intervention, and policy uncertainty. Mongolia has successfully used its position as both a former member of the Communist bloc and a current functioning democracy to build good relations with its two neighboring states, Russia and China, as well as with “third neighbors” such as the United States, Japan, South Korea, India, and countries in Europe. The United States and its allies have included Mongolia as a potential partner through the Minerals Security Partnership program, and Mongolia has encouraged mining investments from third-neighbor states to reduce its dependence on China and Russia. Yet, even though opportunities exist for U.S. and other Western firms to participate in mining development in Mongolia, China will remain the primary market for its mineral exports. Mongolia’s ability to emerge as a major supplier to markets beyond China remains constrained by geography and a lack of infrastructure.
This commentary provides an overview of Mongolia’s mineral resources, with a focus on its large deposits and growing exports of copper, which is a key critical mineral as the world shifts toward electric vehicles. It highlights the growing foreign interest in Mongolia as a partner for critical mineral cooperation, including high-level agreements with the United States, Japan, South Korea, and major European countries, as well as the challenges Mongolia faces in developing its mineral resources and exporting them to markets beyond China.
Mongolia’s Mineral Resources and Development
Mining is by far the largest sector of the Mongolian economy, accounting for an estimated 72% of industrial production, 87% of exports, 75% of FDI, and 25% of total GDP. Due to the limited size of the Mongolian market and a lack of capital and technology to undertake value-added processing activities, 88% of Mongolia’s minerals are exported without processing. Almost all exports go to China, where they are processed and utilized by Chinese manufacturers.
Mongolia is home to two of the largest copper mines in the world. The first is the Erdenet copper-molybdenum mine in northern Mongolia, which was developed as a joint venture with the Soviet Union in the 1970s and remains a Mongolian state-owned enterprise today. The second major mine is the Oyu Tolgoi mine in the Gobi region of southern Mongolia, which was discovered in 2001 and is being developed by its owners, including Rio Tinto from Australia. The Mongolian government holds a 34% stake in the mine.
In all, Mongolia has estimated copper reserves of over 1 billion tons. Annual production is expected to more than double from 300,000 tons of copper concentrate per year to over 600,000 tons per year from 2028 to 2036 once the Oyu Tolgoi mine is fully operational in 2023. The Oyu Tolgoi underground mine holds ore bodies that are expected to produce copper for at least one hundred years, and additional deposits of copper at Oyu Tolgoi and other sites in Mongolia such as Kharmagtai and Zun Mod have been identified.
Mongolia’s Domestic and Geopolitical Limitations
Prior to 1990, Mongolia was closely aligned with the Soviet Union. Virtually all trade was with the Soviet Union and Council for Mutual Economic Assistance countries, while development projects in the country were built as Soviet-Mongolian joint ventures. After the collapse of the Soviet Union, Mongolia began to develop its own foreign relations and domestic policies. It embraced democracy and an open-market economy and encouraged foreign investment and aid flows from the West, including the United States, Canada, and European countries, in addition to Asian neighbors such as Japan, South Korea, China, and India. Although Mongolia continued to rely on Russia for imports of electricity and refined petroleum products, it shifted its focus for both imports and exports toward China. Given Mongolia’s geography and the dominant role of China both as a consumer of raw materials and as a producer of consumer and industrial goods, China remains the dominant market for almost all of Mongolia’s exports and most of its imports.
In the 1990s, mining exploration and production in Mongolia increased, becoming the most important national industry. During this time, Mongolia followed other post-Communist states by privatizing many state-owned assets such as housing, shops, and small businesses. Yet it maintained the state ownership of many core economic sectors such as electricity production and distribution, in addition to several legacy joint venture enterprises that were developed in Soviet times, including the national railway system, the Erdenet copper mine, and fluorspar mines. In 1997, Mongolia adopted a new minerals law that supported foreign investment, and in 2001 the discovery of the Oyu Tolgoi deposit initiated a decade of foreign investment that led to rapid economic growth and earned Mongolia the nickname “Minegolia.”
Starting in the mid-2000s, however, the government and public began to question whether Mongolia and its people were receiving appropriate benefits from foreign investment and foreign-owned mines. Mongolia passed several laws that suspended or revoked mining exploration licenses, limited investments from Chinese state-owned enterprises, and permitted the Mongolian government to acquire equity stakes of between 34% and 100% in major mineral projects. After peaking in 2011–12, foreign investment in mineral projects began to fall due to both a slowing global economy and Mongolia’s increasingly restrictive foreign investment policies and actions. Disputes between the government and foreign investors ended up in international arbitration. While the foreign companies generally prevailed, Mongolia gained a reputation as a risky place to do business.
Public sentiment in Mongolia largely favors state ownership of natural resources, and the government has maintained ownership stakes ranging from 34% to 100% in twelve of the largest natural resource projects in the country. State ownership has created numerous hurdles for the development of mining projects, infrastructure, and value-added processing. Many decisions that affect mining are made based on political rather than economic calculations. Disputes between the Mongolian government and Rio Tinto, for example, significantly delayed development of the Oyu Tolgoi copper mine and signaled to other investors that even the largest mining projects in Mongolia had a high level of political risk.
Foreign Interest in Mongolia’s Mineral Resources
Mongolia has been highlighted as one of the countries with significant deposits of rare earths, but the country does not have any operating rare earth mines. The Bayan Obo mine in China, which accounts for approximately 50% of all global rare earth production and 40% of reserves, is located close to the Mongolian border. However, the known deposits of rare earths in Mongolia generally contain lower-quality ore that will require significant resources to develop and produce.
Several rare earth projects have been proposed in recent years, with interest from Germany, Japan, South Korea, and China to invest, but no mines have been developed due to the high cost and low potential for returns. Yet Mongolia has recently made some progress on working with countries to develop domestic mines. In August 2022, the South Korean foreign minister visited Mongolia and signed an agreement to boost cooperation on global supply chain issues, with a focus on the development of rare earths. This visit was followed by agreements between the Mongolian government, a leading Mongolian mining firm, and the South Korean telecommunications firm KT for the joint development of critical mineral resources, including rare earths for the benefit of KT and other Korean firms.
The U.S. government’s passage of the Inflation Reduction Act, which requires producers of electric vehicle batteries to reduce their dependence on Chinese critical minerals to qualify for U.S. tax credits, has accelerated interest in the role that Mongolia might play within critical minerals supply chains. In September 2022, Mongolia joined a handful of other developing nations invited by the United States to participate in a meeting of the Minerals Security Partnership, an initiative between the United States, the European Union, Japan, and other wealthy nations aimed at reducing global dependence on China for critical minerals. In October 2022, German chancellor Olaf Scholz pledged to increase German involvement in the development of Mongolia’s minerals, especially for copper and rare earths. In May 2023, French president Emmanuel Macron made a visit to Mongolia and pledged support for Mongolia’s critical minerals development. In June 2023, Mongolia and the United States signed a memorandum of understanding to work together to improve Mongolia’s technical capabilities and encourage foreign investment in critical minerals projects in the country. An inaugural dialogue on critical minerals bringing together government and business representatives from the United States and South Korea was held in Ulaanbaatar in June 2023. While these initiatives have signaled an interest in working with Mongolia, the development of large-scale projects to produce rare earths or other critical minerals in the country faces significant hurdles. These include unpromising ore bodies, high costs, and political risks from both internal government interference and the potential for China to block the export of rare earth products going through its territory.
China has also offered to help Mongolia develop its rare earths and other mineral deposits, but Mongolia has been reluctant to allow Chinese ownership of significant natural resource projects or infrastructure. Instead, it seeks to maintain a degree of independence and leverage by engaging and balancing the interests of several partners, including China, the United States, Russia, the EU, Japan, South Korea, and India. In particular, it has sought to balance China’s role by maintaining joint ventures with Russia to operate mines and railways that were developed during the Soviet era, while simultaneously encouraging Western mining companies to play an important role in exploration and development.
The United States has been a significant aid donor to Mongolia through the Millennium Challenge Corporation program and other efforts, investing more than $1 billion in a country seen as a leading democracy and friend in a critical region. However, U.S. firms have so far played a limited role in Mongolia, and trade and investment between the two countries remain at very low levels. The United States is only the seventh-largest source of FDI in Mongolia, well behind Canada, which is the largest foreign investor through its engagement in the Oyu Tolgoi project. This key copper mine was developed by firms from Canada and Australia. By 2030, it is slated to become the fourth-largest copper mine in the world, producing over 500,000 tonnes of copper concentrate per year.
China still has the largest number of investment projects in Mongolia. Yet these projects are primarily in service and manufacturing, and its direct engagement in major mining projects or infrastructure development has been limited due to Mongolian concerns. China has thus far not challenged Mongolia over these restrictions, understanding that no matter who develops and produces natural resources in the country, the products will be sold to Chinese buyers at a favorable price, given the lack of alternative export options.
Almost all of Mongolia’s mineral exports are sent to China. Not only is demand from the Chinese market high, but Mongolia’s landlocked status and the congestion on Chinese and Russian railways make it financially and physically infeasible to export heavy cargos to markets beyond China and Russia. Mongolia has proposed building an east-west railway and attempting to connect to the Russian railway and port system in the Russian Far East. These proposals, however, are not economically viable and are unlikely to ever be built, leaving Mongolia almost completely reliant for the foreseeable future on exports to China by rail and truck through border stations in Inner Mongolia. In addition, Mongolia is still heavily dependent on China to process minerals. While it is pursuing some proposals for the development of more domestic, value-added processing of copper ore and coal, the economic feasibility of large-scale processing within Mongolia remains limited.
Mongolia’s significant deposits of several key minerals, combined with its strategic position between Russia and China, have been both a blessing and a curse for mineral development. Legacy mines and infrastructure, proximity to the Chinese market, and large deposits of coal and copper have helped Mongolia’s economy grow rapidly through mineral exports. Yet the country has been unable to transition from a supplier of raw materials to a higher level of production and development.
While Mongolia has sought to become less dependent on Chinese investment, it has had limited success in attracting foreign investment from other countries. New projects such as the partnership with South Korea to encourage exploration and production in rare earths may bear fruit over time, and the underground expansion of the Oyu Tolgoi mine will boost copper and gold production and exports. It is unlikely, however, that major new mineral projects will be established in Mongolia in the near to medium term. Reasons include the country’s restrictive policies on foreign investment and project development, inadequate infrastructure, and geographic position, which will always give China and Russia final control over Mongolia’s domestic mineral exports. In sum, Mongolia will continue to play an important role as a supplier of raw materials to China, but it faces numerous challenges that limit its potential as a supplier of critical minerals to global markets.
Charles Krusekopf is a Professor at Royal Roads University in Victoria, British Columbia.
 Federal Institute for Geosciences and Natural Resources (Germany) and Mineral Resources Authority of Mongolia, “Rare Earths of Mongolia: Evaluation of Market Opportunities for the Principal Deposits of Mongolia,” 2013.