An ore conveyor from the primary crusher to the coarse-ore storage and concentrator complex at Oyu Tolgoi, Mongolia. Source: Ivanhoe Mines
The Mongolian government has dealt a fresh blow to the country’s increasingly fragile investment image.
On Wednesday, finance minister Sangajav Bayartsog officially confirmed the government will seek to increase its participation in one of the country’s flagship mineral deposits at the expense of Canada's Ivanhoe Mines, the majority shareholder in the project.
Minister Bayartsogt told local media that Mongolia wants to revise the investment terms for the Oyu Tolgoi mine, the biggest undeveloped copper and gold project in the world with reserves of 1.4bn tonnes. The mine is developed jointly by Ivanhoe and Rio Tinto (which owns 48.5 per cent in the Canadian company).
The government also instructed the head of the cabinet secretariat to send official notices informing the miners of Ulan Bator’s plans and inviting officials from the two companies to engage in formal talks.
Currently Ivanhoe owns 66 per cent of Oyu Tolgoi, and the government has a 34 per cent stake. As of Wednesday, Ulan Bator has made it clear its sights are set on a considerably larger equity holding. The Mongolian government also wants to increase the taxes paid by Ivanhoe.
Since late 2010 there have been increasingly loud calls within the Mongolian parliament to re-open the investment agreement for Oyu Tolgoi to amend the project's legal, tax, and regulatory framework.
Such protectionist voices have the potential to morph into an official policy stance, as Mariyam Zhumadil, Almaty-based analyst at Halyk Finance explained:
…the Minister's statement turns the long-rumored government plans to revise the Oyu Tolgoi investment agreement from populist remarks of select legislators into a probable government action. We believe that Mongolia will be not just seeking revisions of the project's tax regime, but will also aim at increasing the state's stake in Oyu Tolgoi from 34% to up to 50%.
And it is not only Oyu Tolgoi where Ulan Bator is looking at changing the rules.
Just last week Mongolia's national security council rejected a government proposal that would have seen China's Shenhua Group in partnership with Japan's Mitsui, a multinational consortium led by Russian Railways and US miner Peabody Energy, jointly develop the prized Tavan Tolgoi coal deposit. Having already participated in a tender process, the companies will now hold more talks with Mongolian officials.
Ulan Bator certainly has form in meddling with contracts, and it is hard to escape the thought that Mongolia, which is keen to tap foreign expertise to develop its vast resources, could be shooting itself in the foot by making such moves in relation to its two flagship deposits. Halyk’s Zhumadil said the approach of next year’s parliamentary election is the likely driver of the move towards protectionism.
Nevertheless, while the government’s recent actions will likely scare investors, the long-term investment case for Mongolia remains intact.
The country has a wealth of untapped mineral resources over which international banks and investors are salivating, and which should drive future economic growth. Mongolia’s Ministry of Mineral Resources and Energy predicts that capex in infrastructure and investment at Tavan Tolgoi and Oyu Tolgoi alone will keep real GDP growth above 7 per cent until 2012 (it was 8 per cent in 2010) and could push annual growth to more than 20 per cent in the medium term.
A war on two fronts
Ivanhoe and Rio, the two miners developing Oyu Tolgoi, have been at loggerheads since mid-2010 when the Canadian firm adopted a shareholder rights plan, a ‘poison pill’, to protect against coercive takeovers (Rio had been creeping its way toward control of Ivanhoe).
And the Mongolian government’s plans to increase its holding in the mine has served to exacerbate the conflict further. On the same day Ulan Bator announced its intentions the chief executive of Rio’s copper unit told investors at a briefing with senior management that "talks were under way" with the government.
Ivanhoe founder and CEO Robert Friedland later said in a statement that Rio had provided “unauthorised and incomplete” information and said the Canadian company will provide further details in a future statement following communication with Rio. A Rio spokeperson declined to comment when approached by Bloomberg.
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