For the second time in two years, the government of Mongolia has been rebuffed on its attempts to pressure Rio Tinto into renegotiating the 2009 Investment Agreement for the US$6 billion Oyu Tolgoi copper and gold project.
On Monday, Turquoise Hill Resources, controlled by the big diversified, said Turquoise Hill, Rio Tinto and Oyu Tolgoi LLC have rejected a request from Mongolia’s Minister of Mining that the parties renegotiate the October 2009 Investment Agreement.
Little more than a year ago, Ivanhoe Mines and Rio Tinto formally told the Mongolian government that they were unwilling to renegotiate their Oyu Tolgoi Investment Agreement. The government responded by reaffirming the original investment agreement.
There is a clause in the Oyu Tolgoi agreement that would allow Mongolia to raise its stake from 34% to 50% ownership after 30 years, but only after unanimous agreement among the project’s owners. Currently, Turquoise Hill Resources, formerly Ivanhoe Mines, whose majority owner is Rio Tinto, holds a 66% share of Oyu Tolgoi.
Mongolia’s new government is in the process of approving a 2013 budget which calls for increasing taxes and royalties on the mine by US$300 million. However, the 2009 agreement froze tax rates over the life of the mine.
Last week, Mongolia’s Democratic Party caucus passed a budget proposal that called for a sliding royalty on Oyu Tolgoi that could increase to a maximum of 20% although the investment agreement set a maximum 5% rate on royalties.
The government wants to earn US$160 million from the royalty and US$163 million from corporate income tax for Oyu Tolgoi. Commercial production from the mine is anticipated to be achieved during the first half of 2013.
In a news release Monday, Kay Priestly, CEO of Turquoise Hill, said, “We have invested nearly US$6 billion, created thousands of jobs for Mongolians and are on the verge of production based on the Investment Agreement, which provides a stable legal framework and is a legally-binding document.”
“The Investment Agreement has been fundamental in building Mongolia’s reputation as an increasingly reliable and secure destination for foreign investment,” Priestly observed.
Mongolia faces a fiscal deficit this year as coal revenues plunged over the summer as China’s slowing economy hurt demand for the country’s commodities.
In an interview with the New York Times, David Wyche, economics section chief at the U.S. Embassy in Ulan Bator said, “If there appears to be an attempt at renegotiating or somehow reneging on the investment agreement that could have a possible catastrophic effect on the country.”
“It could stop the flow of foreign capital into Mongolia,” he stressed.