Binding ArbitrationThere is nothing new under the sun. Friedland has been down this road before in Mongolia, and it was a lot worse. There, the government seized 34% of the Oyu Tolgoi project overnight, inviting themselves in as unwelcome partners. They also enacted a 68% tax on super profits called the windfall tax, on all copper over $1.18 lb and gold $500 oz. This was overturned by the courts three years later in 2009.
Compared with Mongolia, the current proposals seem almost tame. A windfall 68% tax on all copper over $1.18 lb? Yikes! Compare that with 50% at around $3.75 lb proposed in the current legislation. Funny thing is the market reaction now has been more severe than in 2006 when IVN fell 21% in response to the news.
IVN must have had this unpleasant experience in mind when they signed off on the current agreement with the Congo government. A signed commitment to binding arbitration in Paris protects the Company from arbitrary action by the government.
What should IVN tell shareholders? I'm afraid as shareholders we'll just have to suck it up while Company lawyers work diligently behind the scenes to uphold the existing agreement. They need to be firm, yet avoid unnecessarily embarrassing the government by ill advised public statements. Behind closed doors is another story. The government must honour all their commitments. If they don't, then who is to say they won't break every single agreement going forward? IVN must stand their ground. Binding arbitraration provides a powerful mechanism to ensure fair treatment.