By Soraya Permatasari and Elisabeth Behrmann - Sep 26, 2011 10:16 AM GMT+0700
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Zorigt Dashdorj, Mongolia's minister of mineral resources and energy. Photographer: Tomohiro Ohsumi/Bloomberg
Sept. 6 (Bloomberg) -- Simon Potter, a director at Quam Asset Management, talks about investment opportunities in Mongolia. Potter speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
Mongolia wants to increase its stake in one of the world’s largest undeveloped copper mines two years after the nation agreed with Rio Tinto Group and Ivanhoe Mines Ltd. to cap government control until 2039.
The government is seeking to boost the stake to 50 percent from 34 percent, Dashdorj Zorigt, Mongolia’s minerals minister, told reporters at Oyu Tolgoi yesterday. Such an increase is permitted only after 30 years, according to a summary of the $10 billion project agreement from London-based Rio, which said the new proposal may alarm foreign investors.
Mongolia’s attempt to renegotiate follows pressure from lawmakers and highlights risks for overseas investors as countries across Asia, Africa and Latin America seek greater control of raw materials. So-called resource nationalism is the biggest business risk for global mining companies, Ernst & Young LLP said last month.
“It brings another cloud to investing in Mongolia,” Andrew Harrington, resources analyst at Patersons Securities Ltd. in Sydney, said by phone. “When it comes down to it, the government has the upper hand.”
Rio fell 0.6 percent to A$62.28 at 12:45 p.m. Sydney time on the Australian stock exchange.
Ivanhoe hasn’t received a letter from the Mongolian government proposing to raise its stake in the project, the Vancouver-based company said today in an e-mailed statement.
Six Years
“An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive,” Cameron McRae, Rio’s Mongolia country director, said on Sept. 24 in the capital, Ulan Bator. “The investment agreement is a contract. We’re going to honor it and we expect the government to honor it.”
The project, 66-percent owned by Ivanhoe Mines, is half way through completion and will be one of the world’s five-biggest copper mines, according to Rio, which controls Oyu Tolgoi’s management. Ivanhoe, 48.5-percent owned by Rio, spent more than six years negotiating with Mongolia before reaching an agreement in October 2009 to develop the site, which may open in 2013.
20 Lawmakers
A group of 20 Mongolian lawmakers wrote to Prime Minister Sukhbaatar Batbold on Sept. 7 demanding the Oyu Tolgoi accord be revised to give the country a 50 percent holding, China’s Xinhua News Agency said Sept. 20. Mongolia will seek to revise the terms for Oyu Tolgoi, Finance Minister Sangajav Bayartsogt told News.mn portal in an interview published on Sept. 20. Mongolia has appointed chief of the cabinet office Chimed Khurelbaatar to start talks with the miners, Xinhua News reported on Sept. 22.
“Alarm bells would ring, that if they change the rules here, are they going to change it again, are they going to take more than 50 percent,” Gavin Wendt, founder and director of Mine Life Pty in Sydney, said by phone. “Rio and Ivanhoe obviously won’t be happy.”
Mongolia may also seek to change the allotment of stakes in the Tavan Tolgoi coal deposit to investors including Peabody Energy Corp. (BTU), the largest U.S. coal producer. The potential ownership changes at the country’s two biggest mineral developments come ahead of parliamentary elections next year.
Oyu Tolgoi may have average annual output of 450,000 tons of copper and 330,000 ounces of gold, Rio said. World demand for copper will grow 40 percent to 27 million tons by 2020, according to a Sept. 8 Rio presentation.
‘Taken Away’
Rio is facing similar government moves in Mozambique and Guinea, where Rio owns the proposed $10 billion Simandou iron ore project in a joint venture with Aluminum Corp. of China. Lawmakers in Guinea on Sept. 9 adopted a mining code that will hand the nation 35 percent of local commodity companies.
“Big companies develop big projects, have capital costs in the billions,” said Wendt at Mine Life. “They don’t want to invest billions and find out they’re effectively having a big chunk of the project taken away.”
Rising demand led by China, the largest copper user, coupled with a global supply deficit pushed the price to a record $10,190 per ton on the London Metal Exchange in February. The three-month contract for the metal used to make pipes and traded at $7,350 a ton at 11:41 a.m. Sydney time.
“As a mining company, we are very aware of the impact our operations have on our host countries and particularly in Mongolia,” Rio Chairman Jan du Plessis said in at a ceremony to mark the 50 percent construction of the project in Oyu Tolgoi yesterday. The company “will continue to develop partnerships with the government of Mongolia, communities and businesses.”
President Tsakhia Elbegdorj, a former journalist who led the peaceful revolution that ended more than 65 years of communist rule in Mongolia in 1990, said in June he’s concerned about how to “manage” the surge of foreign investment and ensure the windfall spreads among the nation’s citizens.
Oyu Tolgoi, which means “turquoise hill,” will boost the country’s gross domestic product by 30 percent by 2020, when it reaches full production, Andrew Harding, chief executive officer of Rio Tinto’s copper unit, said at a Sept 24. briefing.
To contact the reporters on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net
To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
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