Terrence Edwards in Ulaanbaatar -

Mongolia is reconsidering its insistence on keeping big stakes in its mining industry and instead is looking to maximise revenue for the state budget.

Mongolia's hesitance to hand over its mineral wealth to foreign investors has been a point of frustration for miners. What investors see as “resources nationalism”, to Mongolians is the protection of their homeland from foreign invaders. The cost, however, is that its multi-billion dollar coal and copper mines have suffered from poor management by the government and stifled economic growth.

That's why Mongolia's prime minister is perhaps thinking equity is not all it's cracked up to be. On February 6 the mining minister submitted an amendment that, if passed by the parliament, would allow Mongolia to negotiate with joint venture partners a trade of equity for higher royalty rates for strategic mines.

Miners typically pay a percentage of sales as royalties to countries such as Mongolia, in addition to taxes and other fees, in recognition of that country's ownership of its natural resources.

“When you have a stake in a big project, you have to know all the details about operations. If you only care about royalties, you don't have to bother with the inner workings of the project,” says Batdelger Tuvshintugs at Mongolia's Economic Research Institute.

Recently the public was asked its opinion in an unconventional referendum that asked voters by text message how they thought the government should act to pull itself out of the current period of slow growth. Although turnout was weak, there was a majority in favour of asking the government to do whatever it takes to get assets such as the $6.5bn Oyu Tolgoi copper mine working again to drive economic growth.

Growth in 2014 was depressed compared with previous years largely because of a 74% decrease in foreign investment last year from the year before.

Oyu Tolgoi is one of 16 “deposits of strategic importance” that the government can take a minimum of 34% ownership. The government can ask for up to 50% if it at any point it provided funding for exploration.

The swap of equities for royalties will be a hard sell to the parliament, however. The issue of ownership is a sensitive one for Mongolians because of their strong bonds to their motherland. Also, many remember how mines during the Soviet era from 1921 to 1991 were used to pay for the public welfare. “There's remnants of that era still lingering in people's mind,” said Tuvshintugs.

But for Oyu Tolgoi, the prime minister's plan could ease some of the dissatisfaction felt by the Mongolian public.

Many have grown impatient waiting for the economic benefit they expected to come right away from what is one of the world's largest copper deposits. Mongolia can only collect on dividends for its shares of the mine once Anglo-Australian miner Rio Tinto earns back its investment. So, when the first phase of construction turned out more expensive than expected, Mongolians got angry.

President Tsakhia Elbegdorj publicly called out Rio Tinto, which owns 64% of the mine, for what it saw to be gross misspending.

Rio has denied the claims, saying that the 13.8% margin between projected costs and spending on the first phase of the mine was “well within the accuracy threshold typically assigned to a feasibility study estimate (plus or minus 20%) by international standards".

In 2009, when Mongolia's politicians were negotiating its investment agreement with Rio Tinto, it negotiated the  royalty agreement in return for a 34% equity in the mine. That may have been a mistake, says Tuvshintugs. “When Oyu Tolgoi was negotiated, a lot of the public wanted an equity stake in the project. But, at the end of the day, we have to understand that investment agreements are not done for the general public.”

Investors may prefer to pay up front for the royalties rather than manage the political risk, as Mongolia has been an unreliable joint venture partner for not only Rio Tinto. Another example is the Canadian uranium explorer Khan Resources, which is seeking $350mn in damages from the government because it was cut out from a joint venture in 2009.