McRay. Part 2 Cameron McRae says two proposals are equal to windfall tax. (Part2)
Posted by Urjee on October 31, 20121 Comment
-Erdenet city was launched because of Erdenet enterprise. But researchers predicted that Oyu Tolgoi is five times bigger than Oyu Tolgoi. So we expect that a bigger than Erdenet city will be built in Umnugobi.
-I can reply to this question in detailed information but lets it briefly. During the investment agreement we have promised lot commitments such as construction of air strips, of paved roads to China, of power lines from Chinese power plant and creation of water supply and other infrastructures. Also we have committed to contribute to regional development and within the framework of this commitment; we have spent 125 million USD for supporting education in Mongolia. We are doing huge construction work. In meetings of Board of Directors of the company, we often discuss the opportunities and possibilities of future development if Khan-Bogd. Now we do not have any commitments to such development. But we are working on Master Plan and discussing it at bag, soum, aimag and the Government levels.
-Copper and coal are key commodities in Mongolian export. Our coal export almost hinders by the world and Chinese economic conditions. However, copper price is assumed to be relatively high. What is your guess on coal export stagnation and copper price stability?
-2008/09 crisis is explained by unstable world condition and European crisis. At that time, almost all Government of countries increased their expenditures to save their economies. They spent more than their revenues. Also European countries were indebted. This situation was also due to universal social benefits. It is the same as current handouts to children and students from Mongolian Government. Obviously, World economy has influenced on China to some extent. I think that China stopped to purchase coal from Mongolia not because they wanted to hinder to your economy but simply they do not have consumption. The supply is higher than demand so price of coking coal declined sharply. Because of that Mongolia experienced loss in two terms. Firstly, it was not able to supply coal in millions of tones as before. It can be seen from the data on coal export in the last June, July and August. Secondly, coal price went down dramatically. Hence revenue from coal export plunged. Not only budget revenue has been under-performed but coal exporting companies experienced huge loss. When they experience loss, fiscal revenue will decline. I think that current unpleasant condition will continue in the coming months. But economic situation for copper seems to be different. As compared with iron ore, coking coal, copper demand is higher than its supply at world. Mining exploration and copper ore supply could not overrun its melting capacities. This is of course good for copper mines. Also, copper demand is becoming more diversified which is key factor of high stable copper price. Now, one pound copper is 3.5 USD. This is reasonable. I assume that this will increase to 4.5 USD. Also gold price is high enough. Ounce gold is 1700 USD. Currently, prices for these two metals are stable but are not guaranteed as high for every day throughout of year.
-Could we hope that copper price will be stable even after commencement of Oyu Tolgoi production?
-Of course there is common phenomenon that with new supply, price of copper is declining. But market fundamentals are good so there is no need worrying. I hope copper price will be stable and high.
-Why am I asking this question is that what do you think which of these two has negative impact on Oyu Tolgoi’s operation and profitability: world economic crises or our political condition.
-Now the most worrying thing for Investors is political instability. I mean political instability is policy instability. Mongolia will attract foreign investors and create favorable conditions for them via following the previously made agreement and amending ambiguous provisions in the law on Foreign Investment. Solving the issue in political context and out crying at investors in changing already made agreement do not create strong basis for Mongolian economic growth. But I hope that the majority of them are capable of seeing things in economic context.
-Mongolia is democratic country. Citizens are well-educated and are politically active. Even though Mongolians are expressing their opinions and thoughts from various angles they are not taking any steps to stop and hinder the project. I think there was no such real movement on the project are they?
-The amendment to Investment agreement is the most dangerous attack to the project. What do you say on the Government’s intention on bringing not 71 percent but 95 percent of total benefit? Oyu Tolgoi was uncovered firstly in 1996 and it became attractive to Investor lately in 2001. Since then no investment agreement had been made until 2009. Since 2004/05 until 2009, there were discussions and debates on investment agreement and postponed operation of mining. It means because of political debates and unsuccessful agreements mining has been stopped for almost five years. The first attack after signing the agreement was that S.Batbold; former Prime Minister assigned his two ministers to start deal with me on October of 2012 that was initiated from 19 parliamentarians’ letter on the resolution #57.
-In my opinion, the former prime minister, S.Batbold’s arrangement made improvement in the agreement somehow. If I remember correctly, he did improvement in reducing loan interest rate and requesting mandatory permission from the Government of Mongolia on transferring license of deposit to state-dominated company of any country. Mongolian people are lucky. Even though we prolonged Oyu Tolgoi agreement for long time, we chose the best investor from the non-neighbors. Nowadays discussions and debates’ purpose is to improve the agreement, become more beneficial to Mongolia and to unite together via Oyu Tolgoi. Do you see Mongolian people’s traits on working as a group and how do you feel on working with Mongolians.
-I think your saying in uniting together via Oyu Tolgoi is praiseworthy. Frankly speaking, it is difficult to cope with some of them in working as a group. Generally speaking, it is great for Mongolians and Mongolians working at the company. I think Mongolians are shrewd, highly-educated and are endeavoring to learn more. They respect other foreign expats who are studying and wanting to share their experiences. That is great. Your country is in its inception period of democracy. That is why it is difficult to work with the parliament. In fact, it is incomprehensible to work in such condition. Outside work or the Government I feel happy and interesting to meet with Mongolians especially in gobi soums and settlements. I also work in Mongolian Cultural Board. I learn from it on multicultural events, music and handcrafts and I like it.
-Now I want to ask some ambiguous provisions of the agreement and process of the project. You have said that agreement with Chinese on power is at the last stage. For curiosity, Chinese proposed that they will supply power if we supply them all our concentrate. Is it true?
-Soon they will sign on the agreement on power supply from China. Parties expressed their interests in the last week and we have done intensively on agreement. Currently, there are no railway transportation to the North and West to supply to Japan and Korea via Vladivostok. Hence we will supply to China or via China. Also, China is in dearth of copper concentrate. So market condition requires us to trade with Chinese. Only reason for not selling to China is their unfair price proposal. Now we have done 75 percent of our agreement in compliance with international rules and guidelines so there is no worriment on low price incident. That means 75 percent of our products will be sold to high-ranking international mining. Upon the signature on the agreement, the rest 25 percent of products will have the same price. We will sell our products to Chine through five different customs gates. Chinese party does not require us to sell our products solely for them. But there are no reasons for not selling for them once it has market proximity and they will pay higher.
-Is there no chance to buy power from Mongolia?
-In according to Investment agreement, it is agreed that foreign investors shall buy their power from Mongolia within four years. That is our responsibility in the agreement. We have option to construct coal power station around Oyu Tolgoi site and Oyu Tolgoi will utilize it. We planned that we will fulfill our responsibility to supply our power from Mongolia in four years.
-I was told that you will borrow from World Bank and other international financial organizations. We have different data on it such as seven billion or four billion. How do you borrow in how much, when and in which term and with which interest?
-It is not possible to answer fully. Because financing issue is under agreement procedures. In recent years, mining industry raise 2.2-2.3 billion USD at most from international finances. As for us, we are planning to raise a bit more than four billion USD. It is two times higher than normal amount of mining companies. It would be difficult for such country as Mongolia with no loan history. Because the banks study loan history, stability condition of the Government and its policy and possible risks associate with the loan. Current loan issuing is managed or syndicated by European Bank for Reconstruction and Development. That Bank had imbursed a set of loans to Mongolia. All know how much of loan with which interest rate. We proposed but cannot guarantee. There some pitfalls raised when we proposing the loan.
-What is it?
-The Government’s proposal of amendments on the agreement. The Bank staffs think that there will be no money for paying principles and interest rates when the Government will receive all money as royalty. Hence it is not possible to raise money for the second-phase financing until amendments on the agreement resolved. The key obstacle from this situation is that 80 percent of value from this deposit will be revealed from the second-phase of the project or underground pit. This means we are under difficult condition. The Government’s proposal on amendments on the agreements means that “Sorry, let’s stop mine extention and financing and hinder benefits of 80 percent of total value of Oyu Tolgoi.
-The Government proposed such amendments when our economists have re-estimated it. You have said that it is not possible to receive proposals. Any amendments would not be solved by one party or loan collateral. But it will be solved by parties’ consensus. If we receive the financing for the second phase, is there any burden on our share of 34 percent?
-All financing will be burden on Oyu Tolgoi Company. It means Oyu Tolgoi should repay all financing loans. The second phase of the project construction is crucially important. Investors want to raise financing from international financial organizations for construction for underground pit which contains 80 percent of total benefit of Oyu Tolgoi project. There will be no burden on Mongolian side. In order words, Investors will be fully responsible for raising financing from international financial organizations and its repayment and associated risks. Mongolian side will receive up to 71 USD of every a hundred USD in terms of profit, royalty, tax and other charges.
-Share of our 34 percent is common stock. But it is said that dividend would not be distributed to the company with loan for common stock by international rules.
-Yes. There are such rules. At first, we should pay for 6 billion USD for initial investment of Oyu Tolgoi from Rio Tinto and Ivanhoe Mines’s investors. Then we have to pay for the project’s financing.
-Initial investment increased several times. How much is it now?
-We think that initial investment will be 6.2 billion USD. In recent decades, initial investments for international projects are increasing in the world. As compared with other projects, the growth of our initial investment is relatively small. Let’s take the nearest example: cost of preliminary estimation for Tavan Tolgoi project was 850 million USD during the Discovery Mongolia of year 2009 but it soared up 5 billion USD in the last three years. Therefore it is important to study initial investment of Oyu Tolgoi in comparing with other projects of the world.
-When will initial investment end? Will it happen when the end of contraction of production or the commencement of producing concentrates?
-Initial investment will end when the company commences the concentrate production.
-Will the financing to be issued is added to initial investment?
-No. This is a separate issue.
-Why do you make consensus when you add initial investment? Is there any need?
-The Government is shareholder. Also it has three representatives in the Board of Directors of Oyu Tolgoi. We submit financial statements quarterly in the meetings of Board of Directors. During the discussion at meetings of the Board of Directors on the project’s expenditure and operational plan, these three representatives are informed and make consensus with the Government on the project’s perspectives and other related issues.
-By your estimation, when will initial investment be reimbursed? By the agreement, Mongolians will receive dividend as soon as initial investment will be reimbursed. Since what year we will receive our dividend from 34 percent.
-The reimbursement of initial investment and receiving the dividend depend on the world price tendency of copper, gold and the construction of underground pit that requires the most complex technical conditions, capabilities and responsibilities. Think about it seriously, the real benefit from Oyu Tolgoi will be realized by constructing underground buildings and construction and pipes which length is equivalent to the length from Ulaanbaatar to Darkhan or in 250 km underground. That is why we think that it takes more than 10 years. During this period, we will continue to produce and contribute to the state revenue. It is estimated that Mongolia will receive 7-8 billion USD before the reimbursement of initial investment and receiving initial dividend. For investors, it will take around 25 years to get repaid their initial investment. It started since 1996 when Oyu Tolgoi deposit firstly revealed. In reimbursement of initial investment, copper and gold prices are important. By our last estimation, total investment in Oyu Tolgoi will be reimbursed by 2021.
-We will receive dividend for our 34 percent share that is argued as small by 2021. Is it correct?
-There is need to have knowledge on how monetary cash flow is being turned and how dividend will be distributed. The Government of Mongolia will receive dividend after paying its loan and interest that is related to its own 34 percent share. But do not forget that the Government will receive all types of taxes and indirect benefit before receiving its dividend.
-Are all these things reflected in preliminary study in detailed? There is critique that first draft of preliminary study was changed and the second one is not yet finalized. Is there any finalized preliminary study?
-Of course, the agreement made on basis of preliminary study. There are no concepts of the first and second preliminary studies. With incremental occurring in initial investment, there might have some changes in the preliminary study. I cannot provide more detailed information on preliminary study.
-For Oyu Tolgoi project, water is the most essential issue. How do you solve that? There are information that water source is not clear after 2020 and from that year on water will be transported from Orkhon and Selenge basins. Is it true?
-Our company constantly provide in depth information about this issue. We will provide water sources from the underground pipe lines. Underground water source will diminish by 20 percent during 28 years of mining exploration. I would say No to the transportation water from big river basins.
-It is said that in order to get loan from the World Bank and other international financial organizations, they require that Environmental and Social Impact Assessment should be done and should be discussed by public. How many proposals did you receive from our citizens? How much money do you put aside to restoration?
-Actually it is not required from the World Bank. The International Financial Corporation which is one of the branches of the World Banks is planning to issue loan. The Environmental and Social Impact Assessment is the result and findings of the last ten years of researches done by international and Mongolian independent researchers. In the last years, every proposal has been reflected in the assessment. The receiving proposals from citizens on complex assessment on environment, particularly on biological species and social impact were open since August. Since then we have received a lot of proposals. The receiving proposals will continue to 10th of November. Anyone who interested in expressing comments and proposals go to our website and to our branches in Khan Bogd, Manlai and Dalanzadgad soums of Umnubogi aimag.
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Tags: Cameron McRae, Ivanhoe Mines, Oyu tolgoi, Rio Tinto, S Batbold, Tavan tolgoi, Turquoise Hill, Umnogovi, World Bank
One Response to “Cameron McRae says two proposals are equal to windfall tax. (Part2)”
OdNovember 1, 2012
well, he answered the all questions so smart but it sounds there are many uncertainty in his answers,