Recap... Mongolia has four legally approved stability agreements, an investment agreement and 15 product division agreements. The investment agreement is that of Oyu Tolgoi.
Shareholders of Oyu Tolgoi LLC held a meeting on the February 6 at Ikh Tenger. The mine operator opened its enrichment factory at the turn of the new year, and the long-awaited production date started just before the lunar new year. Meanwhile construction still continues at the Oyu Tolgoi deposit. The Khanbumbat airport has also been commissioned.
All the while, top government officials have voiced dissatisfaction with the agreement, which has caught many by surprise. They warned Oyu Tolgoi’s investors to remember what was written in the agreement.
Previously, only a small minority of parliamentarians talked about the dos and don’ts of the agreement. But now the government has made it clear where it stands. As a result, both sides made a call to sit down for further negotiations for the near term.
The shareholders’ meeting is expected to end the ongoing dispute between the Mongolian government and Rio Tinto.
“The Oyu Tolgoi investment agreement has started a great goal. However, the faults have to be corrected. The focusing points of the government should be directing the clarification of certain facts, calculating realistic evaluations and issues on building communities in those areas”, said Prime Minister Norov Altankhuyag to the State Great Khural.
Representing the Mongolian government in the sit down was Mining Minister Davaajav Gankhuyag, joined by Economic Development Minister Nyamjav Batbayar, Minister of Environment and Green Development Sanjaasuren Oyun, and Finance Minister Chultem Ulaan. The team began addressing six main grievances at the shareholders’ meeting: conflicts between the Mongolian government and the consulting company, some articles within the investment agreement that conflict with the foreign investment law, clarifications on increasing investment expenses and implementation of the technical economic analysis, the special license possessed by Entree Gold, whether activities coincide with Mongolia’s laws, and further issues on management fee payments.
The investors were asked to abide by the rules and be realistic. On the contrary, Rio Tinto responded to these with a statement that the Mongolian government should repay its USD 250 million debt through deductions from last year’s taxed income. Both parties are addressing their weaknesses, but it is too early to conclude any results.
According to the finance minister, Oyu Tolgoi did not pay any taxes in 2012 and asked the investors to strictly follow Mongolia’s laws and regulations. Oyu Tolgoi LLC, however, countered this saying the company had paid a total of USD 803 million in taxes, fees and deposits.
How Long Can Mongolia Wait?
The Oyu Tolgoi project has been at the centre of attention from the beginning. Thus it has no place to hide from the public. Although, the stakeholders have said harsh words, they have to stick to the agreement as well.
But the foul play from investors has made Mongolians lose their patience. The initial investment has increased by about USD 2 billion, or 40 percent. The original estimate of USD 5.1 billion has grown to USD 7.1 billion. To find out the reason for this, an official request was sent to the investors from the Mongolian government. Unfortunately, no reply was given to the government until now.
Some Parliament members related the added investment cost with Rio Tinto’s deficit. According to an auditory conclusions made by the National Auditory Office of Mongolia, in 2011 Oyu Tolgoi investment expanded by USD 50 million. Parliament members are now asking that Oyu Tolgoi LLC be audited for further investment and financial issues.
Increased expenses have no benefits for either side because they will result in profit losses. Additionally, Mongolians will have to wait much longer before they can benefit from the project as output would weaken. The government would have to wait until 2033 before it could receive dividends for its shares at a cost of USD 24.4 billion compared with 2019 for the original projection of 14.6 billion.
“During its commercial production, Oyu Tolgoi’s management fees could reach up to USD 80 million”, stated Oyu Tolgoi LLC.
Although management services fees will increase as expenses rise, Rio Tinto has said that it does not foresee further costs. Additional financing to the project and dividend losses could mean more bad news for Rio Tinto. To raise more money for the second stage of the Oyu Tolgoi project, investors have appealed to international banks and financial organisations.
At present, Mongolia owes USD 705 million plus interest to investors.
“We will make sure that the agreement’s implementation is monitored and executed. We want to bring development, progress and the great construction to become a reality in the Gobi”, said President Tsakhia Elbegdorj. “Oyu Tolgoi must leave behind a law abiding culture that is transparent and responsible”.
Whether or not the Mongolian government will play by Rio Tinto’s rules will become clearer in the coming days of the month. After discussions on additional changes to the Oyu Tolgoi’s investment agreement is finalised, the company is expected by the government to pay royalties based on a new sliding scale beginning next year. Furthermore, some discount and remittances could be reduced to collect an additional MNT 445.8 billion for the 2013 budget. If negotiations do not go well, Mongolia’s revenue income would fall short of what it budgeted.
Representation
Although Mongolians own the wealth beneath the ground, the truth is investors have the last word. Parliament members such as Sainkhuu Ganbaatar and B. Bat-Erdene have always been sceptical of the fact that Mongolians have only taken orders rather than make decisions. Oyu Tolgoi LLC’s board has nine members, three of whom represent Mongolia.
“Board members should not represent the country nor serve the government”, said Parliamentarian D. Erdenebat.
The president supports the need for the representation of Mongolian interests within the executive administration. He emphasised how important it was that Mongolians are involved in all possible aspects of the project, such as financing, purchasing, contracting, and establishing the jurisdictions and service departments. The four ministers who took part at the shareholders’ meeting proposed 13 issues to be communicated to the board members of Oyu Tolgoi LLC. These include, adding changes to the regulations of shareholders’ meeting and certain company policies. Other issues include increased participation by the Bank of Mongolia, domestic companies and financial organisations.
A statement from Oyu Tolgoi LLC reads, “Oyu Tolgoi’s board consists of nine members. The board is headed by Mongolian. members, including representatives from Erdenes Oyu Tolgoi, Turquoise Hill Resources and Rio Tinto; all have equal rights”. The statement explained that the administrative executives are 12 specialists who come from Mongolia, England, the United States, Australia and Japan.
The shareholders’ meeting is set to continue at the end of this month. Both the Mongolian government and Rio Tinto and its investors will sit together to discuss the future of Oyu Tolgoi.