Foreign investors don’t mince words at Mongolian conference

Ulaanbaatar, Mongolia — Mining executives at the recent Discover Mongolia 2007 Conference held here spoke out strongly against controversial mining laws they claim are strangling mine development and urged the government to become more transparent and market-oriented in its policy making.

The list of grievances ranged from Mongolia’s opaque investment climate, uncertainty over tenure, and laws that give the state the right to buy into deposits that were discovered with both public and private funds and are deemed of “strategic importance.”

“The Mongolian government needs to act smartly and it needs to act quickly,” said J.K. Cluer, chief executive of privately held Altan Rio, which has two gold projects and one copper gold project in the country. “These deposits aren’t easy to find and the government needs to act quickly to ensure that exploration continues to go along.”

With its vast mineral wealth, Mongolia has the opportunity to become “a financial powerhouse on the strength of its resources alone,” Brian Thornton, chairman of Xanadu Mines, an unlisted Australian company exploring for coal, uranium and copper gold deposits, told The Northern Miner.

“The problem is that along the way, the means to make this happen — that is the minerals laws and related taxation laws — have intervened to hijack the process,” Thornton said. “Explorers and mine developers need a few basic principles in place for them to invest — certainty of tenure, transparency, legally binding taxation agreements and an appreciation of the risk and reward concept that applies to all mineral activities.”

But mining companies may have to wait a while longer before those principles permeate through the parliament and society of this landlocked nation.

Seventeen years after emerging from isolation and holding its first multiparty elections, this former communist country is still grappling with democracy and free-market concepts.

One of the biggest gripes voiced at the conference was over the regime’s introduction in May 2006 of a 68% windfall profits tax on gold and copper mining. Under the unpopular law, miners must pay taxes of 68% on their shipments of gold and copper when the price of gold reaches US$500 per oz. and copper is over US$2,600 per tonne — thresholds significantly below current market prices.

Martin Quick, chief executive and president of uranium and gold explorer Khan Resources (KRI-T, KHRIF-O) called the laws “draconian,” and said they make Mongolia “unattractive” for investors.

“There are no projects on earth that can handle a sixty-eight per cent windfall tax and survive,” Xanadu’s Thornton said.

He argued that among other problems, the tax distorts the exploration market by redirecting scarce exploration dollars to “non-windfall” commodities.

The windfall profits tax law sent a chill through the industry that sent share prices of many companies tumbling and led to a dramatic drop in exploration activity. Mongolia subsequently fell to no. 62 of 65 mining regions in its attractiveness to miners last year, down from no. 33 the year before, a survey by Canada’s Fraser Institute showed.

“The immediate impact of such a perception may not be obvious to the average citizen,” said Bret Clayton, chief executive of Rio Tinto‘s (RTP-N, RIO-L) copper group, in a hard-hitting speech during the Nov. 8-9 conference. “But the long-term damage caused by this loss of confidence is very real in terms of opportunities foregone as a result of companies turning their attention to more attractive regimes. That is why the Oyu Tolgoi investment agreement has implications that go far beyond the operation itself.”

Clayton noted that changes to the mining laws over the last 18 months had dramatically changed the environment for the minerals industry and the development of the giant gold-copper Oyu Tolgoi project in the Gobi desert that Rio is developing with Ivanhoe Mines (IVN-T, IVN-N).

But the draft investment agreement on the project does not include a windfall profits tax, Clayton said.

“The negotiation teams recognized that when combined with other taxes, royalties and government equity participation, a sixty-eight per cent windfall profits tax makes the economic development of this project unattractive,” he said.

Oyu Tolgoi deal

The Mongolian government completed its review of the Oyu Tolgoi investment agreement in June and presented it to parliament for approval in July. But it has yet to be passed and the delays are proving exceptionally costly.

“We, as partners, are spending US$30 million to US$40 million a month on this project and we will not be able to continue to spend (that amount) without certainty with regard to how we will be able to develop this deposit, under what terms, and when,” Clayton said in an interview on the sidelines of the conference.

“We’re not saying we’re going to pack up and leave the country. We mean that we’re going to have to review the fact that we’re spending US$30-40 million trying to keep momentum going to get this developed as soon as possible.”

In October, Rio Tinto and Ivanhoe Mines announced a strategic partnership for the construction and operation of Oyu Tolgoi — which, if and when it wins parliamentary approval and moves into production, will become one of the world’s largest copper-gold mines.

At the end of March, drilling established that the Oyu Tolgoi deposits contained 987 tonnes of gold (31.6 million oz.) and more than 32 million tonnes of copper (71 billion lbs.) in resources in the measured, indicated and inferred categories, based on a 0.6% copper-equivalent cutoff.

Rio Tinto paid US$303 million to buy 37.1 million shares of Ivanhoe for an initial stake of 9.95%, but has the option to acquire over 40% of the company.

Under the draft investment agreement for Oyu Tolgoi, investors will provide all of the capital for development of the project, including a US$900-million soft loan to allow the government to participate to a level of 34%.

The mine will pay the prevailing taxes and royalties and investors have promised that Mongolian citizens will make up more than 90% of the workforce. The companies have also agreed to build a power plant and a copper smelter capable of producing at least 500,000 tonnes of copper concentrate a year.

The draft agreement outlines a revenue split of 55% to the government and 45% to the commercial enterprise, regardless of the metal price.

“That means through what will be its 34% ownership, income taxes and royalties and everything else, the government loses more than we do through delay. We gain and we lose together,” Clayton said.

“We’re not trying to threaten people,” he added. “But there obviously has to be some consequence to all of us of not being able to bring this to conclusion and that is unfortunate.”

Whether parliament will pass the investment agreement before the current parliamentary session closes at the end of January, however, is anyone’s guess.

Several industry insiders said they believed parliament wants to hold out for an even larger stake in Oyu Tolgoi — possibly as high as 50% — although it remains unclear how the government could pay for such ownership.

Still others noted that the absence of a windfall profits tax provision in the agreement may be a sticking point for some members of parliament.

Either way, one thing is clear. The entire industry is waiting to see what happens with Oyu Tolgoi, which, because of its sheer scale and timing, has become the de facto template for the industry.

“People are watching,” Clayton said. “If a company like Rio Tinto can’t come in and work with the government and negotiate a fair and equitable agreement, I think there are other people out there that would say, ‘well, what is my chance?'”

A minefield

Participants also voiced concerns about a law that gives the government the right to take up to a 50% stake in “strategic” deposits that were discovered through publicly funded exploration and a 34% stake in deposits that were discovered through privately funded exploration.

Strategic deposits ar
e defined as those that affect national security, the economy, and would contribute more than 5% of the country’s gross domestic product (GDP). Last year, Mongolia’s GDP was US$2.3 billion, according to government officials.

“If a mineral has an impact on the economy, it is a strategic deposit,” D. Bayar, adviser to the minister of trade and industry, told conference attendees in a question and answer session. “The Mongolian people want to have better living conditions, so we aim to use the revenues to benefit the regional economy.”

When investors complained the definition was too vague and could include just about any deposit in the country, Kh. Badamsuren, director of the geology, mining and heavy industries department in the Ministry of Industry and Trade, tried to reassure them.

“You should not be scared of government participation,” he said. “These are assets that belong to the Mongolian government, so the government has to realize this ownership on behalf of the Mongolian people.”

The government has set up a state-owned company — Erdenes MGL — to manage its participation in the deposits. When asked how Erdenes proposed to pay for its ownership in its strategic deposits, an Erdenes official said the company is currently evaluating several possible methods, including the issuance of bonds, a “carried interest situation based on dividends,” takeoff agreements, or loans from international financial institutions such as the Asian Development Bank. Up to 10% of Erdene’s shares can also be publicly traded.

But some foreign executives privately noted that borrowing money from foreign financial institutions simply isn’t an option.

“Mongolia’s national finances do not allow them to go out and borrow sovereign credit in chunks of billion-dollar-type numbers,” said one executive who spoke on the condition of anonymity.

Currently, the government has identified 15 deposits as having strategic importance and has an unpublished list of another 39 that it may classify as strategic at some time in the future. But mining executives from more than one company warned there could be a “C” list with another 109 deposits that may be designated as strategic in the future.

Given that much of the country was geologically surveyed with state funds, said one foreign miner who requested anonymity, then anything that was covered by geological mapping and geochemical programs could be considered as having been discovered by state funds.

“There is a certain arbitrariness in how these are chosen,” said Thornton of Xanadu Mines. “There needs to be a vigorous debate about the selection process and the whole rationale. It’s crazy to say there will be more than one hundred of these in Mongolia. What is even sillier is the notion that some of the equity acquired by the government is then listed on the market. This is woolly thinking at best.”

Print

Be the first to comment on "Foreign investors don’t mince words at Mongolian conference"

Leave a comment

Your email address will not be published.


*


By continuing to browse you agree to our use of cookies. To learn more, click more information

Dear user, please be aware that we use cookies to help users navigate our website content and to help us understand how we can improve the user experience. If you have ideas for how we can improve our services, we’d love to hear from you. Click here to email us. By continuing to browse you agree to our use of cookies. Please see our Privacy & Cookie Usage Policy to learn more.

Close