FOREIGN COMPANIES, THE RIO TINTO DEAL, AND MINING AND POLITICS IN MONGOLIA

MINING AND POLITICS IN MONGOLIA

Mongolia’s mining sector has been plagued by political problems: Olga Khazan wrote in the Washington Post: Mongolia's "resource nationalists" have made it difficult for mining projects to get off the ground. Mongolia is in dispute with Anglo-Australian mining giant Rio Tinto over how it will repatriate profits from the giant Oyu Tolgoi gold and copper mine. Controversial new mining bills have been championed by Mongolia’s major parties and leaders.” [Source: Olga Khazan, Washington Post, February 4, 2013]

Sam Knight wrote in The Times of London: “Who is steering Mongolia at this critical moment? The answer is a bickering but strongly knitted generation of politicians that has been in power largely since the fall of Communism in 1990. “The parties ruling Mongolia are not really political parties at all,” said Ms Enkhzaya, the economist. “They are two groups of people interested in money and power. They are like twin brothers.” MPs from the two parties are linked to nine of the 14 Mongolian companies involved in the Tavan Tolgoi coal-mine, which, with 7.5 billion tons of deposits, is expected to be the largest in the world when it opens in 2010. [Source: Sam Knight, Times of London, July 21, 2007 |:|]

“A recent no-confidence motion split the ruling Mongolian People’s Revolutionary Party (MPRP) – the former Communist Party – and weakened the Government of President Namba-ryn Enkhbayar. But a car crash on the eve of Nadaam, in which Tsakhiagiin Elbegdorj, the popular former Prime Minister and current leader of the Democratic Party was critically injured, was a blow to reformers.” |:|

“It is into this arena that a new crowd of Mongolian environmental and civic activists is moving, pressurising the Hural – the national parliament – with protests in Ulaanbaatar’s main square. A new political movement, called the Mongolian Civic Union, which will run in next year’s elections, was also formed. It is led by Dangaas-uren Enkhbat, a former software engineer and TV host. He says that the domination by Mongolia’s two largest parties cannot last.” |:|

Mining Deals and Mongolian Politics

Olga Khazan wrote in the Washington Post: Nationalist policymakers worried about foreign influence over Mongolia's resources want to amend the agreement on Oyu Tolgoi, a massive copper mine, so that Mongolia gets a bigger share.” The Rio Tinto Group, a British-Australian mining giant that owns the majority stake in the project, responded by saying “it was considering a temporary halt to construction work at Oyu Tolgoi because of Mongolia's demands for a larger share.” [Source: Olga Khazan, Washington Post, February 4, 2013]

William MacNamara wrote in the New York Times, “In October 2009, Rio Tinto and Ivanhoe Mines, a Canadian exploration company, negotiated a deal with the Mongolian government about developing Oyu Tolgoi, the crown jewel of the country’s mining sector and the world’s biggest new source of copper. The copper and gold mine would cost more than $10 billion to build, and the potential investors wanted assurances. Under the so-called Oyu Tolgoi Investment Agreement, taxes and royalty payments to the government would be fixed for 30 years. At the time, it was considered “the initiation of a new stage in Mongolia’s history,” said Oliver Belfitt-Nash, an analyst at Monet Capital, a Mongolian investment bank. [Source: William MacNamara, New York Times, December 10, 2012 <|>]

“Rio Tinto spent billions of dollars to buy out Ivanhoe’s stake in the project and build the Oyu Tolgoi mine. Investors followed, encouraged by the cooperation between a multinational corporation and a coalition government. Some investors financed smaller mines. Others imported mining equipment or Hummers to sell to newly minted millionaires. Skyscrapers rose in central Ulaanbaatar.” <|>

Terrence Edwards of Reuters wrote: “Resource-rich Mongolia is in the middle of a mining boom that is set to transform its tiny economy, but political uncertainties have threatened to overshadow its efforts to attract the foreign investment needed to develop mines and build vital infrastructure.” Parliamentary elections in June 2012 “left more than a quarter of parliament in the hands of politicians who advocate local control of mines. Investors said the latest episode could worsen the political gridlock and increase uncertainty for foreign investors. Key decisions pending for major mining projects, such as the development of the massive Tavan Tolgoi coal mine, may also be delayed. [Source: Terrence Edwards, Reuters, August 3, 2012 *-*]

The Mongolian Democratic Party heads a coalition government keen to regulate foreign investments. Mongolian president Tsakhiagiin Elbegdorj is a free-market advocate, but his government has increasingly adopted a more "resource nationalist" approach, with laws to give the country a bigger stake in "strategic assets", such as mines. It also aims to rework a landmark 2009 investment pact to develop the massive Oyu Tolgoi copper and gold mine. [Source: Reuters, June 27, 2013]

Nambaryn Enkhbayar, who served as president of Mongolia from 2005 to 2009 but was jailed for corruption in 2012, called for the $13 billion Oyu Tolgoi copper and gold mine project with Ivanhoe Mines to be renegotiated to grant better terms to the government, and also wants to keep the coveted Tavan Tolgoi coal mine, potentially one of the world's biggest coal suppliers, in local hands. Rio Tinto has a majority stake in Ivanhoe and has full operational control over the Oyu Tolgoi mine, which was due to start production in 2012. *-*

Foreign Mining Companies in Mongolia

The are dozens of foreign-financing mining projects in Mongolia. Foreign companies have been attracted by large deposits, the free market economy and investor-friendly mining laws. The number of prospecting licenses issued by the government is in the thousands. In the early 2000s, mining production licences are in the hundreds, many times what they were even in the 1990s. Some say many of the planes to Mongolia are half filled with prospectors and mining engineers.

Australia-based Western Mining and South-Africa-based Anglo-Gold are also exploring possibilities in Mongolia as are a number of Canadian “juniors”—small companies that hunt for minerals and then sell the rights to bigger companies that can afford to develop them. The government has also signed cooperative agreements related to mining with the Chilean government.

Ivanhoe Mines, based in Vancouver and Singapore, was initially a big investor in the Oyu Tolgoi mine. The company called the mine the world’s largest greenfield copper and gold project. Ivanhoe purchased $50 million worth of government debt from Mongolia to keep relation rosy with Ulaanbaatar. Later Ivanhoe sold its stake to Rio Tinto.

China is heavily invested in some of mining projects in Mongolia. Shougan, the parent company of the China’s forth largest steel maker, is planing to spend $60 million to develop an iron ore mine in Mongolia. The project, 200 kilometers north of Ulaanbaatar, will include construction of a railway and refinery and is expected to produce 1 percent of the 185 millions tons of iron ore that China imports.

Jjiuquan Iron & Steel is building a 400-kilometer railroad to the Mongolian border to increase shipments of coking coal, used to make steel, from a south Gobi desert deposit. The site has been mined by a Chinese-Mongolian joint venture since 2003. The railway has tripled the volume of coal the company can use to two million ton a year. Baouou Iron & Steel, based in Inner Mongolia, is exploring an iron ore deposit near the Trans-Mongolian Railway. A subsidiary of China Nonferrous Metal Industry is investing in a zinc mine at Sukbaatar.

See Rio Tinto Below.

Restrictions on Foreign Mining Companies in Mongolia

Michael Kohn and William Mellor wrote in the Washington Post: “ After two decades of laissez faire, the government” has “introduced regulations and laws to rein in foreign investors. These include insisting that a foreign company acquiring more than a 33 percent stake in a mine or other strategic industry get approval from a government agency. Investments above 49 percent must be approved by parliament. The government has more than Rio Tinto in its sights. St. Louis-based Peabody Energy, London-based Anglo American and several smaller mining companies also operate in the country. “There’s a real doubt in the minds of Mongolians about foreign investment,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group, whose $1.5 billion Templeton Frontier Markets Fund returned 24 percent last year. His fund has only 1 percent of its money in Mongolia. “It’s very low on the totem pole,” he says. [Source: Michael Kohn and William Mellor, Washington Post, May 4, 2013 /+/]

In dozens of cases in recent years, the government rescinded in whole or in part mining licenses issued in previous years without compensating license holders for resulting financial losses. In May 2012, the Mongolian Parliament passed a new law —the Strategic Foreign Investment Law — that restricted foreign investment in the country’s mineral deposits. The law states that Parliament must approve foreign takeovers of assets in strategic sectors like mining and banking. [Source: William MacNamara, New York Times, December 10, 2012 <|>]

William MacNamara wrote in the New York Times, In Ulaanbaatar, the law was widely seen as a torpedo aimed at one deal, Chalco’s takeover of SouthGobi Resources, a coal mining company. Chalco, China’s largest state-owned mining company, agreed in April to buy a controlling stake in SouthGobi Resources, a Rio Tinto subsidiary, for $926 million. In September, Chalco walked away, citing regulatory uncertainty. <|>

“Both foreign investors and local businessmen have complained about the law’s lack of clarity. The rules set up the potential for severe regulatory delays, as politicians from all parties intervene in the deal-making. The government has not yet specified how the law would work in practice, but it has already affected transactions beyond the SouthGobi acquisition. “We haven’t made any new investments,” said an executive at an financial company with extensive holdings in Mongolia, who spoke on the condition of anonymity. It “is a horrible law. It is very menacing and unclear. At a time when investors are scared of allocating capital anyway, it’s definitely had a negative impact.” <|>

Kohn and Mellor wrote in Washington Post: Some investors who have made Mongolia a priority may be heading for the exits, says Travis Hamilton, managing director of Singapore-based Khan Investment Management, which owns stakes in Mongolian companies. “Without legislative clarity, clear leadership and a welcoming environment for investment, the government risks a flight of capital,” he says. Even the U.S. ambassador to Mongolia has joined the fray, chiding the government and investors for their hostility to one another. “The lack of respect is killing projects,” Piper Campbell told delegates at a mining conference in Ulaanbaatar. “I have been in meetings with the government and businesses where both sides accuse the other of violating laws, acting corruptly and other lapses — without thought of the impact of those kind of attacks. Both sides leave the room angry, the disputes fester, and when disaster inevitably comes, everybody acts surprised.” /+/

Impact of Restrict ions on Foreign Mining Companies in Mongolia

Michael Kohn and William Mellor wrote in the Washington Post: “Mongolia may already be paying a price for its toughening stand. After jumping 139 percent in 2010 and 47 percent in 2011, the tiny Mongolian Stock Exchange’s Top 20 Index tumbled 19 percent in 2012. It has fallen 15 percent in 2013, shrinking its market capitalization to $545 million as of April 8, 2013. For Alisher Ali, founder of Silk Road Finance, an Ulaanbaatar-based investor in frontier markets, that’s a buying opportunity. He says he’s increasing his stakes in companies such as APU JSC, a beverage maker based in Mongolia. “This period of underperformance is short-term,” says Ali, who also invests in Burma and Mozambique. “Ultimately, the Oyu Tolgoi issue will be resolved because it is in the long-term interests of both Rio Tinto and the government.” [Source: Michael Kohn and William Mellor, Washington Post, May 4, 2013]

After the the Strategic Foreign Investment Law was passed in 2012, William MacNamara wrote in the New York Times, “Now, the underlying fundamentals of the country look increasingly shaky. Mongolia faces a financing crunch, as investment dollars flowing from abroad have fallen. And revenue from coal, the country’s main export, has dropped along with Chinese demand. “There are a series of elements that have built up less-than-welcoming attitudes to Mongolia at a time when the macroeconomic situation is deteriorating,” said John P. Finigan, the chief executive of Golomt Bank, the country’s second-biggest bank. Mongolia’s star rose — and is now falling — with the fortunes of one company: Rio Tinto, the country’s largest investor. [Source: William MacNamara, New York Times, December 10, 2012 <|>]

“In the months after the law’s passage, foreign direct investment plunged. In September, investment flows from abroad dropped 44 percent compared with the same month in 2011, according to data from the central bank. The combination — the weakness in the mining industry coupled with the government actions — has hurt the country’s finances. The International Monetary Fund expects that Mongolia will face a fiscal deficit of 900 billion tugrik, or $643 million, in 2012, and several policy makers in Ulaanbaatar expect it to widen” in 2013. <|>

Mongolia-Rio Tinto Mining Deal

Mongolia is in dispute with Anglo-Australian mining giant Rio Tinto over how it will repatriate profits from the giant Oyu Tolgoi gold and copper mine. Controversial new mining bills have been championed by Mongolia’s major parties and leaders that outline how the profits should be distributed, with emphasis being giving Mongolia a larger share. Rio Tinto has cried foul, arguing the site has been very expensive to develop, the investment has been risky as mineral prices fluctuate a great deal and can suddenly drop, and the demands that Mongolian government has placed on the company go against the term of the original deal.

William MacNamara wrote in the New York Times, “In October 2009, Rio Tinto and Ivanhoe Mines, a Canadian exploration company, negotiated a deal with the Mongolian government about developing Oyu Tolgoi, the crown jewel of the country’s mining sector and the world’s biggest new source of copper. The copper and gold mine would cost more than $10 billion to build, and the potential investors wanted assurances. Under the so-called Oyu Tolgoi Investment Agreement, taxes and royalty payments to the government would be fixed for 30 years. At the time, it was considered “the initiation of a new stage in Mongolia’s history,” said Oliver Belfitt-Nash, an analyst at Monet Capital, a Mongolian investment bank. [Source: William MacNamara, New York Times, December 10, 2012 <|>]

“Rio Tinto spent billions of dollars to buy out Ivanhoe’s stake in the project and build the Oyu Tolgoi mine. Investors followed, encouraged by the cooperation between a multinational corporation and a coalition government. Some investors financed smaller mines. Others imported mining equipment or Hummers to sell to newly minted millionaires. Skyscrapers rose in central Ulaanbaatar.” <|>

See the Oyu Tolgoi Mine Under COPPER, GOLD, RARE EARTHS IN MONGOLIA

Mongolian Government Tries to Revamp the Rio Tinto Deal

William MacNamara wrote in the New York Times, In November 2012, the Mongolian Parliament “approved a budget for 2013 that tries to renegotiate the Oyu Tolgoi Investment Agreement with Rio Tinto. The budget calls for 446 billion tugrik, or $319 million, of extra income from the Oyu Tolgoi mining project” in 2013. “This revenue would come from new royalty payments that are up to four times as high as in the original deal. The budget legislation refers to “when the amendment is made,” as if it were already a done deal. “We believe the recent surge in government support to renegotiate” the deal with Rio Tinto “is to meet the proposed budget deficit,” Dale Choi, an analyst at Origo Partners, a private equity investor in Mongolia, said. But revising the deal “would undoubtedly adversely impact both near- and longer-term economic growth and Mongolia’s sovereign risk profile in the global financial markets.” [Source: William MacNamara, New York Times, December 10, 2012 <|>]

“The changes in the budget could threaten Rio Tinto’s returns. Significantly higher payments to the government could make the project uneconomical, prompting the company to freeze new investment and start international arbitration. So far, Rio Tinto and its partners have spent more than $6 billion building Oyu Tolgoi, a vast complex that gleams with state-of-the-art equipment in the Gobi Desert. But the investors have not seen a dollar in profit because the mine will not start producing copper until 2013. <|>

“The two sides are in a standoff. The mining minister said at a news conference in October, “We have a strong need to renegotiate the investment agreement. If Oyu Tolgoi keep refusing, we will work until they understand and accept the changes.” But the company is unwilling to accept the tax and royalty amendments proposed in the budget, said a person with knowledge of the situation. <|>

“Mongolia faces a tough choice. The country needs the money to plug the hole in the budget. The Rio Tinto deal has also become politically toxic, and the government needs to please many members of its coalition who campaigned and won seats by opposing the agreement. But foreign investment — the lifeblood of the economy — could dry up if Rio Tinto pulls back. Even as pessimism about the economy and investment policy deepens in Mongolia, outside investors continue to buy into the country’s “blue sky” future. Last week, Mongolia sold $1.5 billion of sovereign bonds amid strong demand. In New York, Singapore and Hong Kong, a Mongolia delegation showed a PowerPoint presentation that featured photographs of the wide-open steppe. The first slide reads: “Mongolia: The Country with Unmatched Growth Potential.” But within Mongolia, some are wondering whether such claims.” <|>

Michael Kohn and William Mellor wrote in the Washington Post: “Rio Tinto, through its Oyu Tolgoi unit, says it has prepaid taxes and wasn’t obligated to make payments in 2012. The company says Phase 1 construction costs are on budget, at $6.2 billion, and in line with estimates it gave the government in December 2010. “We have always been fully transparent with all our shareholders regarding our project finances, costs and operations,” Oyu Tolgoi chief executive Cameron McRae said in a statement. Until recently, Oyu Tolgoi had billboards in the capital that touted the IMF estimate that most of the mine’s profits will benefit Mongolians, illustrating the point with a loaf of bread cut into two unequal pieces.” [Source: Michael Kohn and William Mellor, Washington Post, May 4, 2013]

Debate Among Mongolian Politicians Over the Rio Tinto Deal

Michael Kohn and William Mellor wrote in the Washington Post: “Outside, it’s minus 22 degrees as a February wind blasts across the Central Asian steppe and through the Mongolian capital, Ulaanbaatar. Inside Government House, President Tsakhia Elbegdorj delivers a televised speech that simultaneously warms his people and chills foreign investors. The country’s 76 legislators have convened to debate the future of one of the planet’s richest copper and gold mines, Oyu Tolgoi, which is 66 percent owned by the London-based Rio Tinto Group and 34 percent owned by the state. [Source: Michael Kohn and William Mellor, Washington Post, May 4, 2013 /+/]

Elbegdorj tells them Rio Tinto has let the project’s total cost balloon by $10 billion. The higher expenses, which Rio Tinto disputes, would diminish and delay profits the government shares in.“The time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands,” Elbegdorj says to cheers from the lawmakers. His demands include giving Mongolian employees more management positions on the project. Puntsag Tsagaan, the president’s chief of staff, says he doesn’t want to see his country turned into Minegolia. Mineral wealth should be exploited cautiously and benefit the people, he says: “It does not have to be unlocked in a generation.” /+/

“At the moment, much appears to be going wrong. Instead of basking in new mineral riches, Elbegdorj is sparring with Rio Tinto. In addition to the complaint about a cost blowout, the government says the company should have paid taxes last year and needs greater financial transparency. In his speech to parliament on Feb. 1, Elbegdorj wasn’t just bluffing. A few days later, his government briefly froze Rio Tinto’s bank accounts. “I’m concerned by recent political signals within Mongolia calling into question some aspects of the investment agreement,” Sam Walsh, Rio Tinto’s chief executive, said in a webcast. “This undermines the partnership we’ve built.” /+/

“For many Mongolians, national pride may count for more than investment dollars. For many Mongolians, national pride may count for more than investment dollars. Eight centuries ago, Mongol rulers were the world’s most powerful men . Genghis Khan’s empire stretched from the Mediterranean to Korea. His grandson Kublai Khan declared himself emperor of China, ruling from a fabled summer palace at Xanadu. /+/

Stalled Rio Tinto Mining Deal

The Economist reported: “The biggest emblem of Mongolia’s stalled development is the Oyu Tolgoi (OT) copper and gold mine in the Gobi desert. Rio Tinto, a mining giant, has invested more than $6 billion in the project but has been frustrated by repeated, highly politicised efforts by the Mongolian authorities to restructure the terms of their investment agreement with Rio’s subsidiary. Twice in recent weeks the government has delayed the mine’s inaugural shipment of copper. Moody’s, a large ratings agency, warns that the delay “lowers investor confidence and underscores institutional weaknesses” in Mongolia. [Source: The Economist, June 29, 2013 ^*^]

“Olivier Descamps, a managing director of the European Bank for Reconstruction and Development with responsibility for Mongolia, sees hopeful signs that the country is improving transparency but says the OT mine “is the ultimate test” of Mongolia’s ability to prove itself a reliable long-term partner for foreign investors. “Hopes run high that the DP’s victory will put an end to political squabbling over such projects. A new foreign-investment law has long been stalled. But, as he voted, Mr Elbegdorj predicted that its progress will be quicker after the election. “In the coming autumn session of parliament,” he said, “I hope you will have that law.”“ ^*^

The Financial Times reported: ““In November 2014, Rio Tinto replaced two of the most senior executives in its Mongolian operations. Kay Priestly and David Klinger were chief executive and chairman respectively of Turquoise Hill, the Canadian-listed subsidiary that controls two-thirds of Oyu Tolgoi. Priestly also headed coal miner SouthGobi Resources, which delayed payment of $8.1 million in interest on a convertible debenture owed to China Investment Corp, the sovereign wealth fund. CIC already owns 16.5 per cent of the company.” [Source: Lucy Hornby, Financial Times, November 21, 2014]

Mining Slumps and Efforts to Revive the Mongolian Economy

In 2013, Mongolia’s export income slipped 2.6 percent amid a decline in shipments of coal, the nation’s biggest earner. Michael Kohn wrote in Bloomberg, “Earnings were $4.27 billion in 2013, compared with $4.38 billion a year earlier, the National Statistics Office said. Coal shipments declined 41 percent by value. The slump in earnings underscores the challenges facing Mongolia as economic growth cools, foreign investment declines and the nation’s mineral boom slows amid protracted disputes with key investors. China accounted for 87 percent of exports” in 2013. Coal exports fell to $1.12 billion in 2013, from $1.9 billion a year earlier. [Source: Michael Kohn, Bloomberg, January 13, 2014]

The Financial Times reported: “Mongolia’s economic problems are increasing its dependence on China, and to a lesser extent Russia, despite attempts during the commodities boom to forge new ties by attracting investment from further afield. Neither the MPP or DP have an easy fix for Mongolia’s economy. Previous promises to increase social spending and government salaries are running up against budget limits, while the banking sector is heavily exposed to mining and related industries. Foreign investment has plummeted thanks to falling prices for Mongolia’s main exports, copper and coal, as well as a longstanding dispute between the government and mining group Rio Tinto over the terms of investment in the $5 billion underground stage of the Oyu Tolgoi mine.[Source: Lucy Hornby, Financial Times, November 21, 2014]

In December 2014 the government awarded a deal to develop the massive Tavan Tolgoi (TT) coal field to a consortium comprising Energy Resources/MCS (Mongolia), Shenhua (China), and Sumitomo (Japan); talks continue to hammer out the financing and the operating details. [Source: CIA World Factbook =]

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Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated April 2016

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