In a case that is being closely watched by mining interests worldwide, Canada’s Ivanhoe Mines and Rio Tinto have formally told the Mongolian government they are unwilling to renegotiate their investment agreement for the $7 billion Oyu Tolgoi gold and copper mine. The companies also wrote to members of Mongolia's National Security Council, consisting of the president, the speaker of the Parliament and the prime minister, asking for help to ensure the government's “full and immediate” support for the arrangement.
Ivanhoe Mines, of which Rio Tinto owns 49 percent share, holds a 66 percent interest in the project, with the Mongolian government retaining the remaining 34 percent. Oyu Tolgoi is now roughly 50 percent complete, is expects to begin commercial production of copper, gold and silver concentrate in early 2013. Oyu Tolgoi, the world's biggest untapped copper deposit, is expected to produce 1.2 billion pounds of copper, 3 million ounces of silver and 650,000 ounces of gold per year in its first decade of operation.
A vast landlocked nation in the heart of Central Asia of 603,908 square miles, slightly smaller than Alaska, with one of the lowest population densities in the world, Mongolia's 3 million inhabitants sit atop one of Eurasia's greatest untapped caches of minerals.
Perhaps not surprisingly, the Oyu Tolgoi 2/3-1/3 split in favor of Ivanhoe and Rio Tinto has ignited fierce debate in Mongolia, where discussions about how to preserve the country’s resource patrimony have raged for years. Last month on the sidelines of the United Nations General Assembly Mongolian President Tsakhia Elbegdorj told reporters that Mongolia's law banning mining in the country's river and forest areas is necessary to protect the mineral-rich Asian country's environment and herdsmen's livelihoods, adding, "Half of the territory is covered by exploration licenses. I think that's enough. We have to save our wealth (for) our next generation," he said of his 2009 suspension of approvals of all new mining projects until comprehensive new regulations are drawn up. Nearly 2,000 mining licenses were reviewed as a result of the 2009 law and hundreds were suspended, but Mongolia is not yet able fully to enforce the legislation because it is currently too cash-strapped to pay compensation.
During last month’s Discover Mongolia forum in the capital Ulan Bator, Rio Tinto’s country director Cameron McRae essentially threatened those nationalist Mongolian politicians who felt that the current 66/34 percent split on the mine favoring Ivanhoe was inequitable, saying “If even a few voices call for Mongolia’s commitments to be broken and agreements to be changed, there is a risk that this will undermine investor confidences. These few will have to answer to the many Mongolians whose jobs will be on the line, and the local businesses whose prospects will be jeopardized. We are confident that Mongolia will not let this happen; that stability and the rule of law will prevail; that Mongolia’s long-awaited economic promise will become a reality.”
But McRae’s insistence on the letter of the law pales into insignificance to an obtuse remark made by Ivanhoe CEO Robert Friedland, who stated, "The nice thing about (Oyu Tolgoi) is that there are no people around, the land is flat, there's no tropical jungle, there are no NGOs."
There is a clause in the Oyu Tolgoi contract that would allow Mongolia to raise its stake to up to 50 percent after 30 years, but it would require unanimity between Rio Tinto, Ivanhoe and the Mongolian government. Dashdorj Zorigt, Mongolia’s mining minister, says that the discussions over Oyu Tolgoi are only focused on one aspect of the investment agreement – the timing under which the government can raise its stake and have been on the table for months.
What is most extraordinary about the dispute is both the sheer rapaciousness of the Western mining concerns and Mongolia’s willingness to accommodate most of their demands. In 2006 Mongolia's Mineral Law was amended to increase government royalties and licensing fees, reduce tax incentives, set duration terms for exploration licenses, and provide for up to 50 percent government ownership of strategically important resources when jointly funded by the state and private investors. On 25 August 2009 the Ulsyn Ikh Khural (State Great Hural, or Parliament) finally repealed the 68 percent windfall profit tax, effective from 1 January 2011, setting the stage for massive foreign investment.
The CIA estimates that more that 36 percent of Mongolia’s population lives below the poverty line, with an annual per capita income of $2,900. Developing the country's mineralogical resources over the last several years acquired distinct political overtones; during the June 2009 parliamentary campaigns, the opposition Ardchilsan Nam, or Democratic Party, promised each Mongolian a 1 million tugrik ($696) "share of treasure." The successor to the former Communist Party, the ruling Mongol Ardyn Khuv'sgalt Nam, or Mongolian People's Revolutionary Party, subsequently topped the DP's largesse, promising that each Mongolian would receive from the "country's profit" a 1.5 million tugrik ($1,043) grant.
With Rio Tinto and Ivanhoe expecting to produce 1.2 billion pounds of copper, 3 million ounces of silver and 650,000 ounces of gold per year from Oyu Tolgoi, surely they can revise their agreement somewhat to allow Mongolia’s citizens to have a larger “share of treasure.”
But don’t hold your breath, even as on 29 September Rio Tinto went into major spin mode to deny claims made by Mongolian legislators that the company had accused Mongolia of being "greedy."
While there is undoubtedly greed involved, hearing the majority shareholder apply the epithet to its junior partner in Oyu Tolgoi with a 34 percent share seems somewhat… bizarre.
By. John C.K. Daly of Oilprice.com