High stakes: Working out revenue shares at Oyu Tolgoi causes disagreement

autumn session that year, a group of legislators called on the government to seek a renegotiation of the OT deal. At issue was the point at which the government has the right to increase its stake in the mine from 34% to 51%. According to the initial agreement, Mongolia can boost its stake to 51% once Rio Tinto has recovered the costs of developing it, or after 30 years. Mongolia wants to do so sooner. Though the government’s official position that it would respect the contract was restated a day later, that episode has been followed by more threats to the investment agreement.

After the June 2011 parliamentary elections the ruling Democratic Party made D. Gankhuyag the minister of mining, and he pledged to resign if the OT agreement were not reopened. When the 2012 autumn parliamentary session then began, legislators discussed reviewing all major mining sector deals, and later the government stressed that it was not singling out OT for that treatment. A few weeks later, the government made a formal request to Rio Tinto to renegotiate, which the multinational miner rejected. On November 24, parliament debated OT, with S. Bayartsogt arguing in favour of honouring the agreement as is and S. Ganbaatar speaking on behalf of the faction of parliamentarians who have consistently supported changing it.

That discussion did not end with a formal vote or action, but local-language media responses indicated that Bayartsogt’s argument received more support.

PROFIT-SHARING DISAGREEMENT: Rio Tinto’s position is that the investment agreement signed in 2009 is sacrosanct. A marketing campaign put out by the miner has featured billboards in the centre of Ulaanbaatar making the claim that, regardless of ownership stakes, 71% of the profits from OT will go to Mongolia and 29% to Rio Tinto. That number is based on an International Monetary Fund study that estimated Mongolia’s actual take at between 55% and 71% of OT’s profits.

With the issue of OT’s revenue split an ongoing one, relations between the two parties are souring. Some parliamentarians threatened to sue Rio Tinto over the The massive mixed-minerals Oyu Tolgoi (OT) mining project is far from the only ongoing development in Mongolia’s mining sector, but it is the closest thing to a proxy for the health of the whole. As a concentrator was installed and the mine prepared for commercial production in early 2013, all eyes were on the back-and-forth between the government and the mine’s majority owner and operator, Rio Tinto, over how the two sides would share revenue. If there is accord, Mongolia’s mining sector is primed to grow. Should they fail to agree the economic narrative is at risk. DEAL OR NO DEAL?: The stakes are high because OT is likely to account for a third of GDP once it is fully ramped up in 2020. By then it is expected to account for 36% of the country’s economy, and will produce 450,000 tonnes of copper and 330,000 ounces of gold on an annual basis, according to OT figures. OT is 66% owned by Turquoise Hill Resources, with the balance held by Mongolia. Turquoise Hill is a Canadian mining exploration company known as Ivanhoe Mines until 2012, and is 51% owned by Rio Tinto. If OT does not happen – if the parties fail to compromise, or cannot accept a solution they perceive as less than perfect but still beneficial – foreign investors could deem political risks too serious to warrant investment and leave the country en masse. That could mean be the end of economic growth in Mongolia for at least the short term.

Those concerns aside, OT was ready for the production phase as of late 2012. Commercial sales could be possible by the end of the second quarter of 2013.

LONG TIME COMING: Mongolia has been working since the end of its communist period to monetise its vast mineral deposits. One of the main obstacles has been the country’s lack of a reputation as a viable destination for foreign investment. The 2009 investment agreement signed with Ivanhoe and Rio Tinto could provide an example of Mongolia as a reliable investment partner. However, questions have arisen thanks to the government’s repeated attempts to change the terms. In October 2011, during the first day of parliament’s ads, alleging that the company was seeking to mislead the public. Suspicion grew after the 2012 Summer Olympics in London because Rio Tinto, which produced the medals awarded to athletes, announced that some ore from OT samples was used in the mix. That could have been a point of pride for Mongolia, but instead some politicians wrongly assumed production has started without Rio Tinto informing the government.

Further, a watchdog group has emerged with concerns about whether there is enough water for the mine and the workers to live at it, which has helped fuel negative sentiment. In Ulaanbaatar there is also an understanding that although Mongolia’s legal regime may be considered a risk for foreign investors, there are few other places on the planet with mineral deposits so large, so from the Mongolian perspective the country still looks friendly to foreign investors in the global context.

TAX TRENDS: “The global trend is an increase in the overall tax burden on mining companies because governments view mining companies as quite profitable in light of increased mineral prices,’’ according to a 2012 study of mining tax regimes by consultancy PwC. As of late 2012 it seemed certain that the Mongolian government would find a way to take more from OT.

The 2013 budget changed the royalty rate to be paid from a flat 5% of certain revenue to between 5% and 20% depending on copper prices, which contravenes the investment agreement. The flat 5% rate agreed on in 2009 for copper is competitive in a global context, according to the PwC study, which compared 22 major minerals-producing countries. A number of them have graduated rates based on copper prices, and if Mongolia applies its scale, a rate of 20% would top the rest of the producers on the list. A flat 5% rate for gold is already higher than most other countries in the study, and the graduated rate of 20% would also be the highest in the group. That new rate would apply not just to OT, but to other copper mines as well.

TAXING LESSONS: That sliding rate, akin to a windfall tax, would be similar to one in existence from 2006 to 2011. During that period, the tax burden on Erdenet was 106%, according to L. Bolormaa, editor of the Mongolian Mining Journal.The amount of exploration activity in the country at that time dropped as foreign firms decided not to renew their licences or to not bother with exploration. The windfall tax was later cancelled because Rio Tinto and Ivanhoe Mines made it a condition of signing the OT investment agreement.

Whether an increased royalty tax would be applied was unclear as of November 2012, but one definitive step toward collecting more from OT was made in the form of Mongolia cancelling its double-taxation agreement with the Netherlands, where OT is incorporated, implying a higher tax burden. Still, Mongolia’s politicians were sending out mixed messages. “We will stick as far as possible to the current agreement,” Ts. Sukhbaatar, Mongolia’s ambassador to Beijing, told Dow Jones Newswires. “This [renegotiation attempt] was raised by some politicians, not by the government … it is a political campaign tool. The majority of the government understands how to handle foreign investments.”

Share

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Mongolia 2013

Mining chapter from The Report: Mongolia 2013

Cover of The Report: Mongolia 2013

The Report

This article is from the Mining chapter of The Report: Mongolia 2013. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart