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 An Extraordinary Session of Parliament was held in late August which modified or repealed several laws that paved the way for the signing of the Agreement followed by report that it would be signed by the end of September.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

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.

]]> http://icmc-mongolia.net/mongolia-inches-closer-to-oyu-tolgoi-deal/feed 1 http://icmc-mongolia.net/light-at-the-end-of-the-tunnel-for-oyu-tolgoi http://icmc-mongolia.net/light-at-the-end-of-the-tunnel-for-oyu-tolgoi#comments Thu, 13 Aug 2009 04:46:10 +0000 Bobby http://icmc-mongolia.net/?p=360

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.