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.

Wednesday, August 26, 2009

According the today’s edition of The Mongol Messenger, an English-language newspaper in Mongolia, and several other sources amendments to four laws were approved yesterday by the Mongolian Ikh Khural, or Parliamnet, in a bid to increase the likelihood of the Oyu Tolgoi Investment Agreement’s passing.  An extraordinary session of Parliament was convened last Wednesday, August 19, in order to discuss these possible changes to Mongolian law.

Windfall Profits Tax Out as of 2011

54 of the 64 MPs voting have supported the annulment of the Windfall Profits tax from January 1, 2011.  Opponents of the annulment argue this will cost Mongolia billions of dollars in future revenue, but often tax revenue increases after windfall taxes are annulled because of the increased investment in these sectors.  Many MPs agree that in the long run this will increase investment in the mining sector, thereby creating jobs and increasing the tax base of Mongolia.

Once the Windfall Profits Tax is no longer in effect the overall tax burden of Erdenet Mines will decrease from 116% to 49.6% and OT’s tax burden will decrease from 72% to 46%, numbers that are much more palatable to foreign investors.  Finance Minister S. Bayartsogt has stated a bill to increase royalty payments to the Government will be introduced in the Fall Session of Parliament in order to help offset loses from the Windfall Tax.

Corporate Income Tax, Road Law and Water Law Amendments

The Law on Corporate Income Tax has also been amended.  Currently loses can be carried over for a period of two years.  The new amendment, coming into effect January 1, 2010 states that a company will be 100% exempt from corporate income tax from four to eight years depending on the amount of losses.

Unspecified amendments to the Road Law and Water Law were passed.  Changes in the Road Law were passed in an effort to further development paved roads linking Ulaanbaatar to aimag (province) centers as well as the road system overall in order to meet the demands of the equipment necessary to build, maintain and operate mine sites across the country.  Ivanhoe Mines have agreed to the maintenance of roads the company builds.  While privately built roads will be Government-owned, the builder will not be charged road-use fees for a period of time.

MPs are concerned with the amounts of water necessary to run OT and surrounding towns and settlements, and are worried that the amounts OT will use from subterranean water sources will adversely affect surface water.  Conflicts have also risen between the division of water for uses in agricultural and corporate sectors and as drinking water.

While debate will most likely continue for the foreseeable future on the issue of water and road use, the amendments to the Windfall Tax and Corporate Income tax seem to bode well for the much-anticipated finalizing of the Investment Agreement.  As the world seems to be slowly pulling out of the economic malaise, hopefully this will be the spark needed to again ignite interest in Mongolia, not just in the mining sector but in the overall economy.

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