By Marino Pieterse,
Goldletter International editor
The Mongolian Parliament voted on July 16, 2009 to authorize the Government to conclude a long-term, definitive Oyu Tolgoi Investment Agreement with Ivanhoe Mines and its strategic partner Rio Tinto.
This decision and subsequent developments provide the Mongolian mining industry with the certainty needed to progress as the changes made by the Parliament are also to be applied to other future Mongolian mining projects.
In early August negotiations led to the companies and the government settling on terms of a revised agreement that was endorsed by the Governmentâ€™s Cabinet and the National Security Council, consisting of the Prime Minister, the President, and Speaker of the State Great Khural (the national Parliament).
The Government then requested a special session of Parliament to consider changes proposed by the Government to four laws, with annulment of Mongoliaâ€™s 3-year old 68% windfall profit tax with effect from January 1, 2011, remaining the most contentious, to support and facilitate the finalization of the draft Oyu Tolgoi Investment Agreement.
These changes were fully approved on August 25 and to be signed within two weeks to facilitate the Oyu Tolgoi Investment Agreement. Other changes include giving the Mongolian Government a 34% equity interest in the project.
With the approval for Oyu Tolgoi already expected earlier, Ivanhoeâ€™s share price jumped 24% to Can$8.00 on July 2 and reached an interim high of $10.32 on July 15, but then plunged to an interim low of $7.73 on July 29, as a result of further delaying the final decision on the agreement.
Since then, with finalization of the agreement in sight, the companyâ€™s share price enjoyed a strong boost, reaching a 12 month high of $12.50 on August 28.
Discoveries reported since 2001 at Oyu Tolgoi now total estimated (NI 43-101 compliant) measured and indicated resources of 20.9 million ounces of gold, plus a further inferred resource of 24.2 million ounces of gold and 40.6 billion measured and indicated pounds of copper, plus a further inferred 38.2 billion pounds of copper based on a 0.06% copper equivalent cut-off.
In 2006, Ivanhoe Mines and Rio Tinto formed a strategic partnership and form a joint Ivanhoe Mines-Rio Tinto Technical Committee to engineer, construct and operate the Oyu Tolgoi Project.
The agreement provides for Rio Tinto to make investments in the equity of Ivanhoe Mines under defined conditions, totaling around US$1.5 billion.
Mongolia was for 70 years from 1921 dominated by the former Soviet Union. Having achieved independence in 1991, the country has been a fledging democracy since that time with a president elected every four years.
The MPRP Party (formerly Communist Party) holds a slim majority in the national Parliament, the State Great Khural, the countryâ€™s main legislative body and highest authority, on a coalition basis with the Liberal Party. An agreement was signed to share power until the parliamentary election of 2012.
The current Prime Minister Sanjaa Bayar was elected in December 2007, after winning chairmanship in his party, the MPRP. After the Parliamentary election held in June this year, as his party won the majority, he was re-elected as the PM and now leads a Coalition government.
Economic activity in Mongolia has traditionally been based on herding and agriculture, but the country also has some of Asiaâ€™s richest deposits of minerals and the Chinese demand for minerals fuels its current mining boom.
The country lies within a major intracontinental mobile belt that separates the Siberian and Chinese cratons. This belt hosts the Kazakhstan and Mongolian metallurgical belt.
Prior to 1991, Mongolia had been dependent on the Russian government for financial and technical assistance to develop its resources. However, foreign aid was cut off almost overnight with the collapse of the Soviet Union. Although there was widespread opposition to extensive privatization of the formerly state-run economy, the government passed a number of economic reforms that encouraged foreign investment, especially in the mining sector.
The investment climate started to improve with the passage of the Minerals Law in 1997. Amendments to the Minerals Law in 2006, however, created concern among the international mining community because it allows the government to invest in strategic properties discovered in the private sector.
The law before the current amendments gave the State either a 34% stake or a controlling interest of up to 50% in a deposit if the deposit has been defined by exploration activities funded by the State budget.
The initial version of detailing the public-private partnership to be approved by the Parliament applying to
Ivanhoeâ€™s Oyu Tolgoi Project, called for 34% Mongolian ownership, no tax waiver, and an advance payment of US$225 million with lower interest rates.
In a presentation earlier this year, senior mining specialist of the World Bankâ€™s Oil, Gas and Mining Policy Division, Dr Graeme Hancock, said that the Mongolian mining sector has the potential to significantly contribute to the nationâ€™s economic growth, but its development will depend on the governmentâ€™s ability to establish and maintain the following:
â€¢Â A clear mining policy
â€¢Â A competitive stable and predictable fiscal regime for mining, and a stable and transparent legal and regulatory framework to manage mining development, protect the environment and ensure good corporation governance
â€¢Â Policies and procedures to attract and retain world class investors who have the resources, management and technology to locate and exploit mineral deposits in a sustainable way
â€¢Â Efficient mining sector institutions and strong administrative capacity for oversight
â€¢Â Appropriate policy responses to and transparent management of expected increases in mineral revenues and ensure lasting benefits.
On September 17, 2008, the Mongolian Parliament approved the structure of its new coalition government with 15 ministries and 11 ministers, including the new Ministry of Mining and Energy.
Prime Minister Sanjaa Bayar said the country was recognizing the vast potential wealth available to Mongolia through development of the mining industry, estimated by the World Bank to account for about 20% of real GDP, 56% of gross industrial output, 69% of exports and 37% of revenue for Mongolia in 2007.
The government also planned to distribute mining revenue made from strategic deposits with a minimum of Mongolian Tugrik 1.5 million (US$1034) awarded to each eligible citizen in the country.
While government ownership questions and debate over new mining laws have stalled the development of new projects, optimism exists that the new coalition government will work.
If so, this would have a drastic positive impact on the valuation of mining companies active in Mongolia, having been severely under pressure as a result of a notice of August 14, 2007, given by the Cadastral centre of the Mineral Resource and Petroleum Authority of Mongolia (MRPAM) to 18 international and national companies about invalidation of their exploration licences.
The notice was given following the recommendations of the State Audit Board, which discovered that the area covered by the 34 licences out of more than 6000 currently effective licences, had been explored by
State budget in the past and according to law, passed by parliament on July 8, 2006, the exploration licences had to be revoked because they were covering deposits ready for mining development.
However, in a statement by the chairman of the MRPAM on September 10, 2007, it was said that so far not a single licence out of the 34 had been invalidated, assuming that the MRPAM is fully committed to strictly following the Mineral Law, which protects interests of both foreign and domestic investors.
On October 1, 2008, former President Nambaryn Enkhbayar in his opening speech to the Mongolian Parliament said that it is the reality that Mongolia cannot invest in its deposits independently, introduce advanced technology and provide qualified experts and therefore there is no other way than attracting major investors aspiring to recover their investment and make profits.
By saying so, there is no other way than for all parties concerned to accept market principles of allowing investors to own more than 51% of their deposits.
In the second week of November 2008, a parliamentary working group prepared a draft resolution that would compel Mongoliaâ€™s Government to speed up passage of major mining deals for the high-grade coal mine Tavan Tolgoi and the world-class copper gold Oyu Tolgoi Project, both in Omnogobi Province.
On December 4, 2008, the Parliament voted to adopt a resolution that authorizes the Mongolian Government, led by Premier Minister Sanjaa Bayar, to negotiate a draft Investment Agreement for Oyu Tolgoi and present it to Parliament before February 1, 2009.
On March 13, 2009, Mongoliaâ€™s national Parliament gave the assurance that compilation of an Investment
Agreement for the Oyu Tolgoi copper-gold mining complex will continue to be a principal property for Mongoliaâ€™s coalition government when the Parliament reconvenes during the first week of April on its 2009 spring session.
However, until June 18, 2009, when Ts Elbegdorj was sworn in as Mongoliaâ€™s new President, no further progress had been made.
The new President said that after years of discussion and debate final proposals are taking shape detailing the public-private partnership that will be created to begin mining at Ivanhoeâ€™s vast Oyu Tolgoi Project to be followed by the Tavan Tolgoi coal deposits.
The final version of the Mongolian version to be submitted to national Parliament, calls for 34% Mongolian ownership of the Oyu Tolgoi Project, no tax waver, and an advance payment of US$225 million with lower interest rates.
The demand for a 55% share of the profits has not been decided.
- Information courtesy of Goldletter International, the international independent information and advice bulletin f or gold and related investments