Mongolia to decide on Rio Tinto's Oyu Tolgoi gold, copper project before June

By Denny Kurien
Last update: 7:02 a.m. EDT April 9, 2008
SINGAPORE (MarketWatch) -- The Mongolian parliament is expected to pass amendments to its mining law within weeks, giving the state greater control over its resources sector and clearing the way for a decision on Rio Tinto Plc's (RTP) $3 billion Oyu Tolgoi copper and gold project before June elections, a senior government official said Wednesday.
A key change in the proposed amendment is a plan to give the government an option to seek a higher, 51% share in strategic projects, as opposed to 34% now, said Bold Luvsanvandan, chairman of the Mineral Resources and Petroleum Authority of Mongolia.
Strategic projects are defined as those with revenue exceeding 5% of Mongolia's gross domestic product, which currently is around $3 billion.
There could also be a possible change in the definition of strategic projects, Bold said.
When the amendment is on the statute books, investors may also have an option of offering the government a 51% stake in their projects or alternatively signing a mutually negotiated production sharing agreement with the government.
Rio's development of the Oyu Tolgoi project has been put back until 2011 from 2010 because of delays in winning over the government for an agreement.
Asked if Rio Tinto will be forced to part with 51% of Oyu Tolgoi when the law is amended, Bold said as a private project, this was a slightly different case and factors such as whether the investment has already paid off will be considered before taking a decision.
On other contentious issues such as a windfall tax in key minerals introduced by the government, Bold said while the government wants to move ahead with some changes, they are unlikely to do so until after the elections.
Mongolia has in place a 68% windfall tax on copper concentrate, on the portion of the price that is above $2,800/ton while there is a similar tax on gold when the price exceeds $500 an ounce.
On gold, for example, the country is planning to raise the base price above which the windfall tax kicks in to $800/oz, but these proposals will take time, Bold said.
Risky To Offer Investors Too Little A StakeWhile authorities are hopeful of getting the new legislation in place by the end of April, the government is aware of the risks of offering investors too little in return, Bold said.
"The main danger is if we worsen the investment climate, the only investors we are left (with) will be neighboring countries China and Russia," he said.
Bold's comments come at a time when resource-rich countries around the world are seeking greater control over their vast stores of crude oil and other minerals.
The trend - widely called resource nationalism - has seen several foreign energy firms operating in countries such as Russia, Venezuela and Kazakhstan strong-armed into agreeing to less beneficial contractual terms, like higher taxes and a lower share of oil profits.
Mongolia has large estimated reserves of minerals including copper, gold, coal and uranium that have attracted interest from mining heavyweights including BHP Billiton Ltd.

Despite the reported interest from these firms, Bold said an imbalance exists in Mongolia's resources industry. Landlocked Mongolia's only neighbors are Russia and China, and they are also its predominant investors.
"Russia is also a resource country, which means a competitor. And China is a consumer country, so if the consumer owns the resources, we will also have economic risks," he said.
"That's why our government's goal is to encourage (a diversity of) countries and larger multinational corporations to be present in Mongolia's resources industry," Bold said.
Russian, Chinese Companies Prepare GroundIn February, media reports cited Russian Prime Minister Viktor Zubkov as saying Russian companies Basic Element and Severstal JSC could compete to become strategic partners in developing the Tavan Tolgoi coal field in Mongolia, with more Russian operations eying other mineral deposits in the country.
China Shenhua Energy Co. (1088.HK), China's largest integrated coal producer by output, is in talks to buy mining assets in Mongolia, company chairman Chen Biting said on Mar. 17.
Bold said it would be hard to limit Russian and Chinese investment, and Mongolia would instead seek to attract additional foreign investment through a stable tax climate and by making improvements in the transport network and other infrastructure.
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