In a surprise announcement last week, the Prime Minister of Mongolia S. Batbold reported that Mongolia will cancel the auction of the exploration and mining licenses associated with the Tavan Tolgoi (TT) coal deposit in the Umnugovi province of Mongolia.  The TT deposit is located in southern Mongolia and is considered one of the largest untapped coal deposits in the world.

Previously it was understood there was going to be a 51%/49% ownership structure between the Government of Mongolia and the private company(ies) awarded licenses to exploit the TT site.  Based on the understanding that TT was to be developed as a joint venture, much like Oyu Tolgoi (OT), a number of high profile companies were in the running for receiving a license to develop a section of the TT deposit, including USA’s Peabody, China’s Shenhua, BHP Billiton, Vale of Brazil, as well as Jindal from India and consortiums from both South Korea and Russia.

It seems the Mongolian public feels as if it received very little from the OT deal, despite the fact that the agreement was signed a few short months ago and production is still years away.  So instead of the private sector bearing at least half of the risk in the TT project, the government of Mongolia, and more specifically the citizens of Mongolia, are now going to have to worry about market fluctuations, the availability of credit and all of the other associated risks of owning and running a project of this size.

To me this begs the question:  where will the money come from?  The government has already been spend-happy during the past few months with the handing out to every citizen MNT70,000 (USD50), which does not seem like much on an individual basis but when multiplied by the entire population of 3.7 million it comes out to be about USD180 million.  Add to that the MPs (there are 76) voting themselves MNT1 billion to use as they sees fit in their constituencies, and you suddenly have the makings of massive inflationary issues when the country can least afford it, during the Tsagaan Sar lunar new year holiday when spending and purchases spike.

I am all for assisting the poor and ensuring the citizens of Mongolia get their fair share of the minerals Mongolia is lucky (or unlucky, depending on your perspective) to have.  I simply think a more targeted and long-term approach to the situation should be taken,  Instead of giving each individual the same amount, whether they are walking around with a Louis Vuitton bag on their shoulder or digging through the trash for plastic bottles.  The MNT70,000 comes from the Human Development Fund.  It seems to me Mongolia would do well to upgrade its schools, hospitals, and infrastructure (especially running water, heating and electricity to the ger districts) before handing out free money, which is probably going to do very little to actually develop anything.  When the Mongolian Minster of Health goes to Korea for treatment, something is seriously awry.

As pessimistic as this may sound, I do have hopes for Mongolia.  The country is in a position to benefit enormously from its minerals as long as they are handled with care and an eye on the future.  It would be nice to see Mongolia benefit more from taxes, royalties and profit-sharing schemes instead of having an equity stake in these huge, money-intensive projects.  The people of Mongolia deserve more from its elected officials than the paltry sum they have received thus far, namely education, healthcare and safety and security.  With such a small population the benefits derived from the gold, copper and uranium underground could help support the building of world-class hospitals and universities in the country.  Here’s hoping the politicians of Mongolia focus on bettering the lives of their constituents instead of padding their own bank accounts.

The Ouy Tolgoi Investment Agreement was officially signed on the auspicious day of October 6, 2009.  The ceremony was broadcast live throughout Mongolia on Mongolian television and can be seen here:

The stars finally aligned on October 6, 2009 as senior members of the Mongolian Government hosted senior officials from Ivanhoe Mines Mongolia Inc and Rio Tinto International Holdings. October 6 was chosen as the signing day because according to Buddhist lams it is an auspicious day on the Buddhist calendar.

The Oyu Tolgoi site (Turquoise Hill in English) is predicted to be one of the largest reserves of gold and copper in the world, with an estimated mine life of 40 years.  It is also the largest development project and foreign investment in the history of the country.

On a related note, it has been reported that one of the signers of the investment agreement, Mineral Resources and Energy Minister D. Zorigt, yesterday won the by-election for the Parliament seat left vacated by the current Mongolian President Ts. Elbegdorj, who was elected in June of this year.

After continued negotiations for the better part of the decade the Oyu Tolgoi Investment Agreement has finally been signed by the Government of Mongolia, Rio Tinto and Ivanhoe Mines Mongolia.

There have been numerous false starts to finalizing the OT agreement this summer. It was rumored that it would be signed before the Naadam national holiday held each summer on July 11-13. An Extraordinary Session of Parliament was held in late August which modified or repealed several laws that paved the way for the signing of the Agreement followed by report that it would be signed by the end of September. Well, September came and went with no movement.

The stars finally aligned, literally and figuratively, yesterday, October 6, 2009 as senior members of the Mongolian Government hosted senior officials from Ivanhoe Mines Mongolia Inc and Rio Tinto International Holdings. October 6 was chosen as the signing day because according to Buddhist lams it is an auspicious day on the Buddhist calendar.

One can only guess what conditions would currently be in Mongolia if the agreement had been signed five years ago and Mongolia had been able to take advantage of the commodity boom.  Hopefully the long wait will be worth it with great changes to both the country and the people of Mongolia hopefully being realized.

I am personally very excited to see what this means for Mongolia’s business community.  With an estimated $30 billion to be generated in tax revenues over 50 years Mongolia is in an enviable position to be financially able to drastically improve the lives of the Mongolian people.  To that effect, Mongolia is setting up a sovereign wealth fund that will be run by professional managers, according to Bloomberg.  The aim of the fund is to disburse a part of the profits from mine sites to everyone in Mongolia, either through cash or non-cash means.

ULAANBAATAR, MONGOLIA – Along with the sounds of groaning children, school bells and homework assignments being handed out on this traditional first day of school in Mongolia, there can also be heard a quiet sigh of relief due to reports of the imminent signing of the Oyu Tolgoi (OT) Investment Agreement.

An unnamed government minister has said in The UB Post newspaper that he expects the Oyu Tolgoi agreement to be signed within two week’s time by both sides.  While we have all heard this time and again during the past five years of negotiations, it looks like these words may actually come to fruition this time.   In the past the Investment Agreement has sought to alter current laws in order to make the agreement more favorable to one side or the other.  The current incarnation of the agreement complies with all current Mongolian Laws, thus making it much more likely to be accepted by the Government.

Within the past week the Mongolian Parliament has passed amendments to three laws, the Corporate Income Tax Law, the Road Law and the Water Law, while annulling a fourth law, the Windfall Profits Tax Law, as of January 1, 2009.  These results make it more likely that  Ivanhoe Mines will sign the agreement, keeping their shareholders happy while giving Mongolia a steady source of income from these minerals deposits for many decades to come.  On the coattails of this news Ivanhoe’s share price soared 24% last week on the Toronto Stock Exchange.

While, as usual, we remain cautiously optimistic about the signing, it looks like the time has finally come for an end to negotiations that seemed would never-end.  The mining companies deserve the result after the millions of dollars they have invested so far and the countless hours spent in negotiations, but more importantly the Mongolian people deserve the good news.  Hopefully this will re-ignite interest in Mongolia and bring the needed jobs, infrastructure, development and training to the Mongolians.  The population is small enough that the amount of investment this will bring to Mongolia, and the amount of taxes and royalties the Mongolian Government will in turn be able to collect, should be able to dramatically improve the lives of the majority of the population.  Here’s hoping the long wait will be worth it in the end.

The basic framework for the Oyu Tolgoi Investment Agreement is now much closer to being finalized after the Government of Mongolia agreed to pass amendments to four laws, including the repeal of the controversial Windfall Profits tax, the Corporate Income Tax Law, the Water Use Law and the Road Law.

Following is the transcript of the Power Point presentation that we have posted on SlideShare.  Please note, this is for informational purposes only and may not be the final version signed.

Oyu Tolgoi Investment Agreement presentation slideshow:

http://www.slideshare.net/icmcmongolia/oyu-tolgoi-investment-agreement-mongolia

Presentation Transcript

OYU TOLGOI INVESTMENT AGREEMENT

• THE GOVERNMENT OF MONGOLIA AND IVANHOE MINES MONGOLIA INC LLC, IVANHOE MINES LIMITED COMPANY, CANADA AND RIO TINTO INTERNATIONAL HOLDINGS LIMITED, UK

Legal Grounds, Purpose and Scope of Investment Agreement

Legal Grounds to conclude the Investment Agreement (“IA”) are:

• Article 29, Mongolian Law on Minerals;
• Parliament Resolution No. 40 of December 20, 2008 (approved main principles and directions to conclude the IA. This Resolution is also applicable for concluding IA on Tavan Tolgoi (TT) coal deposit); and
• Parliament Resolution No. 57 of July 16, 2009, allowing the Government to conclude the IA.

Main Purposes of the Investment Agreement

• To maintain stable environment for operation (including stable tax environment) of the Investor for specified period of time;
• To ensure the rights to sell products at international market price and disposal of income; and
• To determine the amount of investment and conditions of the Oyu Tolgoi (OT) project.

Scope of the Investment Agreement

• The IA will cover all types of the Investor’s activities related to the OT Project, including surface and subsoil minerals exploration, mining, construction of infrastructure and mining closure and environmental reclamation.
• Investment Agreement Term and Government Ownership,
• 30 years has been granted as initial term of the IA from the effective date of the Agreement
• The initial 30 year term is extendable for an additional 20 years.
• Government ownership – The Government of Mongolia take 34% of common shares of Ivanhoe Mines Mongolia, Inc. (IMMI) with the right to take 50% ownership within a year after the initial agreement expires.

Mining License and Land and Water Use Agreements

• The OT Mining License has been issued for an initial term of 30 years and is extendable an additional two times for 20 years each.
• Permits related to land use are to be obtained in accordance with the Law on Land and the Government shall support and assist the Investors in obtaining permits
• The Water Use Agreement shall be issued for 30 years and is extendable for another 20 years – any water discovered with Investor’s funding shall be allowed for the Project use and any excess water third party use will be allowed.

Infrastructure

Electricity will be allowed to be imported during the project’s construction period and up to four years after commissioning.

After this period, power can be supplied from three resources:

1. Investor-built Power plant;
2. Third party invested and built Power plant; or
3. The Power Network of Mongolia.

IMMI has been granted permission to build an auto road from the Project site to the Gashuun-Suhait border point with China at its own expense with the construction-related costs deductable from taxable income.

A License to Construct and License to Use Railroad from the project site to Mongolian-Chinese border may be issued to the Investor or a third party.

Tax Regime

Stabilized Tax Regime:

• Corporate Income Tax -10 % of annual income if between MNT 0-0.3 billion;
• if income exceeds 3.0 billion then MNT300 million plus additional 25% tax to the income over MNT3.0 billion;
• Shall not be obliged to pay “windfall” tax or similar tax;
• Dividend income is set at 10%;
• Royalty  income is 10%;
• Income from the sale of immovable property is 2%;
• Income from interest is 10%; and
• Income from sale of rights is set at 30%.

Customs Tax

• shall be imposed in accordance with Law on Customs;
• Value Added Tax 10% of products produced, sold, imported, work performed and services rendered;
• Excise Tax – in accordance with the Law on Excise Tax;
• Royalty -  5 per cent of sales value of products;
• Mining Licenses Fee – $15/ha for the licensed area.

Non- Stabilized Taxes:

• Taxes other than the above, which are defined in Article 7 of the Law on General Taxation as of the efective date of IA, shall not be stabilized.

Laws Rescinded and Amended in relation to the Investment Agreement

The Law on Rescinding of the Law on Imposition Of Price Rise Tax on Some Commodities:

• Windfall tax is to be rescinded from January 1, 2011.

Amendment Law to the Law on Corporate Income Tax:

• Any losses incurred shall be deducted from taxable income for four to eight years depending on the amount of investment.

Amendment Law on the Law on Auto Road

• Allows private investment into State Category Auto Roads

Amendment Law on the Law on Water

• Water discovered with Investor funding will be allowed for Project use and any excess water shall be allowed for third party use

Here is again the link to the slide presentation: http://www.slideshare.net/icmcmongolia/oyu-tolgoi-investment-agreement-mongolia

August 13, 2009

There has been an update in the Mongolian media on the latest in the on-going saga that is the Oyu Tolgoi Investment Agreement.

According to news outlets in Mongolia the Cabinet and National Security Council have approved the latest changes that have been forged during the last round of negotiations.  These include:

• Project investment reduced to US4 billion from a previous US5 billion;
• Mongolia’s investment for its 34% shares will be US816 million, half the amount of previous discussions;
• There will be a prepayment loan to the Government of Mongolia in the amount of US250 million, with 5% annual interest rate, which is a lower interest rate than in previous negotiations; and
• No exemption from Customs Tax or refund of VAT already paid by the companies.

There have also been proposed amendments to four laws, including the rescinding of the Windfall Profits Tax on January 1, 2010; allowing losses incurred by a company to be carried forward for eight years instead of the current two years; and unspecified changes to the Road Law and the Law on Water.

These are from early reports in the Mongolian media and have been translated from the original Mongolian language by a colleague.  The new changes will be handed over to the Speaker today and the Government is expected to request a special session of Parliament in order to continue discussions.

These developments signal the Government of Mongolia is perhaps becoming a bit more serious about passing the Investment Agreement (IA) .  After years of IA negotiations it looks as if this summer is the make-or-break moment for everyone involved.  Rio Tinto and Ivanhoe have certainly grown weary of continuing to invest millions of dollars in a project on which in was becoming increasingly unclear they would ever see returns.  And Mongolia, through continued delay, lost untold amounts in revenues and taxes during the previous commodity boom.

Hopefully there is reason to be cautiously optimistic that the IA will, at last, be finalized within the next few months.  It will be the shot in the arm Mongolia needs as well as a boost for both companies involved.

]]> http://icmc-mongolia.net/light-at-the-end-of-the-tunnel-for-oyu-tolgoi/feed 2 http://icmc-mongolia.net/oyu-tolgoi-finally-moving-forward http://icmc-mongolia.net/oyu-tolgoi-finally-moving-forward#comments Mon, 27 Jul 2009 08:20:51 +0000 Bobby http://icmc-mongolia.net/?p=202

July 27, 2009  Ulaanbaatar, Mongolia

Government Given the Go-ahead to Negotiate

The current business environment in Mongolia is very exciting; in no small part due to recent developments in the Rio Tinto/Ivanhoe Mines negotiations.    After over five years of negotiating the Oyu Tolgoi (OT) Investment Agreement with Mongolian officials, the Parliament last week (July 16) passed a resolution giving the Government the right to conclude the Investment Agreement.  This marks the furthest the negotiations have reached since they began.  While obstacles remain, most notably the 68% Windfall Profits tax on gold and copper, most remain quietly optimistic the Investment Agreement is on the verge of moving forward.  Finally!

The OT site is located in the South Gobi region of Mongolia, 80 km north of the Mongolian-Chinese border.   It is claimed by investors to be the largest copper-gold development project in the world, with an estimated 35 year life-span with yield estimates of 440,000 tons of copper and 320,000 ounces of gold.  The over USD7 billion that will be invested over the life of the mine makes it one of the largest, if not the largest, development projects in Mongolian history.

Massive Changes Could be Just Around the Corner

All this adds up to a development that will have a huge impact on Mongolia and its government, institutions, and most importantly, its citizens.  Wise use of taxes, royalties and other fees from the mine can potentially bring about a sea change for the 2.7 million population of Mongolia.  This money will allow the government to significantly invest in the lagging healthcare and education sectors in Mongolia, as well as build badly needed roads, bridges and power stations throughout the country.

In addition to the money that will come directly from the project, OT has the potential to bring thousands of jobs to the country and build the capacity of the Mongolian workforce, thus reducing its reliance upon foreign workers for more technical positions.   OT itself will lead to approximately 3000 additional jobs, not to mention the countless jobs created to construct power plants, roads, water systems and other necessary infrastructure.