Monday, September 26, 2011

NEWS: Mongolia eyes 50% stake in key Oyu Tolgoi project

Originally posted at on 26 Sept 2011

An increase in mining activity is expected
to boost Mongolia's economy
in the coming years
Mongolia is seeking greater control of one the biggest mining projects in the country, which is being developed by Rio Tinto and Ivanhoe Mines.

The government said it wants to raise its stake in the Oyu Tolgoi project to 50% from 34%.

According to the original contract signed in 2009, Mongolia can increase its stake only after 30 years.

When completed, the project is expected to account for as much as 5% of Mongolia's gross domestic product.

"At this moment the government has made the decision that we will send the proposal to renegotiate the time frame with which to increase the Mongolian portion to 50%", Dashdorj Zorigt, Mongolia's mining minister said.

Changing framework

The project, developing what is expected to be one of the world's biggest copper mines, has seen huge investment being made by Rio Tinto and Ivanhoe Mines.

Analysts believe the companies are likely to raise objections to the government's proposal.

"They developed a project based on a certain economic framework which is now going to change," Gavin Wendt of Mine Life told the BBC.

"The consequences of this will be significant," he added.

Cameron McRae of Rio Tinto said while the company was willing to hold talks with the Mongolian government, it expected the current terms and conditions to be honoured.

"What we are demonstrating is that the investment agreement is a contract, and we are going to honour our commitment and expect the government to honour its commitments," he said.

However, analysts warned that it will be a tricky situation for the mining companies.

"They don't want to jeopardise their existing investment by upsetting the government," Mine Life's Mr Wendt said.

'Resource nationalism'

Analysts said the Mongolian government's decision was not a surprising one, given that countries were looking to have a bigger control over their natural resources.

"There is a worldwide trend over the last 12 months of growing resource nationalism," said Mr Wendt.

Jonathan Barratt of Commodity Broking added that authorities were doing this to ensure that a greater share of profits from the country's resources passed into the economy.

"You can either tax them [the mining companies] on royalties or you can become their partner," Mr Barratt said.

However analysts said the government's move could backfire if companies become wary of investing in the country.

"It is concerning not only for Rio and Ivanhoe, but also for all of the major companies that are establishing mines in Mongolia," Mine Life's Mr Wendt said.

"It's going to add to uncertainty, to costs of developing projects and companies don't like that."

Word List:
  • to seek = to ask for something, or to try to get something
  • stake = the part of a business that you own because you have invested money in it
  • gross domestic product = the total value of all goods and services produced in a country in a year, except for income received from money invested in other countries. It is often simply called GDP.
  • time frame = the period of time during which something happens or must happen
  • to raise = to mention something so that it can be discussed
  • objection = a statement that shows that you disagree with a plan, or a reason for your disagreement
  • framework = a system of rules, laws, agreements, etc. that establish the way that something operates in business, politics, or society
  • consequence = a result or effect of something
  • significant = very large or noticeable, very important
  • to hold = to have something
  • terms = the conditions of a legal, business, or financial agreement that the people making it accept
  • tricky = difficult to do
  • to jeopardize = to risk damaging or destroying something important
  • trend = a gradual change or development that produces a particular result
  • to ensure = to make certain that something happens or is done
  • royalties = a payment that someone such as a writer or musician gets each time their work is sold or performed
  • backfire = if a plan or idea backfires, it has the opposite effect of the one that you wanted