Mongolia is considering a proposal to revive stalled foreign investment in large mining projects by reducing its equity stake in strategic mines in exchange for higher royalties. The government unveiled its plans last Friday when Prime Minister Chimed Saikhanbileg proposed in parliament an amendment to the country’s mineral resources law.
Mongolia hosts some of the world’s largest copper and coal deposits but its economy has been stagnant due to disputes with foreign investors over mining assets, including the US$6.5 billion Oyu Tolgoi copper-gold mine. Rio Tinto has stalled a US$5.4 billion underground expansion project at Oyu Tolgoi because of disputes over cost overruns and $30 million in tax that the government says it owes. Without the underground expansion, or phase two, there is limited value in Oyu Tolgoi for strategic investors.
The government believes higher royalties would help it earn more from the strategic deposits faster than under the current scheme. The government currently takes a minimum of 34% equity in strategic deposits but could ask for up 50% if state funding was used for exploration. With equity, it must wait until after investors recuperate their initial costs before receiving dividends for its shares.
Mongolia has 16 strategic deposits, including Oyu Tolgoi and the Gatsuurt gold deposit licensed to Toronto-listed miner Centerra Gold. These deposits have the potential to generate at least 5% of the country’s GDP.
A number of Mongolian MPs have repeatedly demanded a larger stake in Oyu Tolgoi while others have invoked Resolution 57, passed in 2009, which states that the government can negotiate to increase its stake to 50% once investors earn back their initial investment. Rio has rejected repeated requests to renegotiate the investment agreement they signed for the mine in 2009. However, implementing the terms the prime minister has suggested may require some sort of renegotiation.
The impasse has seen Mongolia’s mining industry slow to almost a standstill and has also seen the country’s economic growth slow dramatically from record levels a couple of years ago.