The Mongolian government wants to boost its stake in the massive Oyu Tolgoi copper-gold project being developed by Canadian-based Ivanhoe Mines Ltd., as it becomes the latest mineral-rich country to look for ways to squeeze more profits from its natural resources sector.
Mongolia is pushing to renegotiate the existing investment agreement to increase its stake to 50 per cent from the current 34 per cent, amid public pressure as it heads into parliamentary elections next year.
A group of 20 parliamentarians has submitted a petition to the Mongolian government asking that the agreement signed in 2009, after six years of negotiations, be revised. The current agreement states Mongolia’s interest can be raised to 50 per cent only after 30 years from the agreement taking effect.
Oyu Tolgoi, which is 66-per-cent-owned by Vancouver-based Ivanhoe, is the largest undeveloped copper mine in the world and is expected to produce an average of 450,000 tonnes of copper annually for up to 60 years. Rio Tinto PLC owns 48.5 per cent of Ivanhoe's shares and is also in charge of constructing the $6-billion project, which is now 50 per cent complete. Production is scheduled to begin late next year.
Mongolia’s push for a larger piece of Oyu Tolgoi makes it the latest government to seek more from miners through increased stakes, higher taxes and royalties. For example, several countries in Africa are looking to increase their stake in resource projects while Peru's new government is proposing a new royalties system and a windfall profits tax on the mining sector.
The rise of so-called “resource nationalism” comes as commodity prices trade near record highs.
Despite a recent slump in commodity prices amid the global market turmoil, fast-growing countries such as China, India and Brazil are expected to provide steady demand for metals such as copper for years to come. Some governments around the world see a political and economic opportunity in trying to take more profits from mining projects and use the funds to help pay off rising debts and boost economic development.
Mongolian mining minister Dashdorj Zorigt told reporters on Sunday that the government has submitted a revised agreement to Ivanhoe for consideration.
“The proposal has been sent,” Mr. Zorigt told Reuters. “At this moment the government has made the decision that we will send the proposal to renegotiate the time frame with which to increase the Mongolian portion to 50 per cent.”
An Ivanhoe spokesman said Sunday the company hasn’t received any formal notification from the government and declined to comment.
Ivanhoe founder and chief executive officer Robert Friedland could weigh in on Monday when he is expected to release a statement challenging what he says is “unauthorized and incomplete information” about Oyu Tolgoi from Rio executives last week.
Andrew Harding, the head of Rio’s copper division, told investors in London last week that there were talks to review the investment agreement with Mongolia. He also said there were issues around power supplies that threatened to delay the mine’s operations.
Rio and Ivanhoe are in a dispute over Ivanhoe adopting a shareholder rights plan last year that would allow the miner to issue new shares to block an attempted takeover.
The 2009 investment agreement was signed with great fanfare after a long and drawn-out set of negotiations between the government and Ivanhoe, and some analysts don't expect changes as a result. What's more, a change could have a negative impact on future investment in the country.
“Should the Mongolian government not honour this highest-profile contract, we would expect international investors to shy away completely from large commitments and long payback periods,” Adam Graf, an analyst with Dahlman Rose & Co. said in a recent note. “The mere suggestion of such a contract violation has already done damage to investor perception, in our view.”
Rio Tinto also said Sunday that it had not received any formal notice to alter the investment agreement for Oyu Tolgoi.
With files from Reuters