Clare Nuttall in Almaty -
Mongolia's parliament voted in favour of four draft laws on August 25 that will almost certainly lead to the signing of the long-awaited investment agreement on Oyu Tolgoi, the world's biggest undeveloped copper and gold deposit. As well as making it possible for international mining companies Ivanhoe Mines and Rio Tinto to develop the deposit, this agreement is also likely to pave the way for other companies to exploit Mongolia's rich trove of mineral resources.
Oyu Tolgoi, which is located in the South Gobi region near Mongolia's border with China, is expected to produce an average of 400,000 tonnes of copper and 300,000 ounces of gold over a 35-year period.
The key decision by Mongolia's parliament, the Great Hural, was to cancel the planned 68% windfall tax on profits tax from copper and gold extraction. This had been adopted in 2006, when the government hoped to benefit from high global commodities prices to boost its revenues. However, it had proved a major sticking point to reaching agreement on the development of Oyu Tolgoi. Three other laws - an amendment to the corporate tax code, and laws concerning access to underground resources and allowing foreign investors to finance road construction - were also passed. All four laws had the backing of over 80% of the parliament. The investment agreement now only needs to be approved by the Mongolian government, which has already approved it in principle. Speaking on Mongolian national television, Finance Minister Sangajav Bayartsogt has said it could be signed within two weeks. Once the agreement is signed, production could begin by 2013, according to Rio Tinto.
In a statement issued after the parliament session, Tom Albanese, chief executive of Rio Tinto, said the passing of the four laws was "an incredibly important milestone in bringing on stream one of the finest undeveloped copper-gold projects in the world. The investment agreement is also a landmark for the future development of Mongolia's resources industry."
Ivanhoe has been trying unsuccessfully to close the deal since 2003, and the company's share price soared by over 20% the morning after the news was announced. Ivanhoe's president John Macken confirmed that the company was would be able to sign the Oyu Tolgoi investment agreement in the near future. "This expression of confidence in Mongolia's future clears the way for finalization of an agreement with the government for the construction and operation of Ivanhoe's Oyu Tolgoi copper-gold complex," he said.
Mongolia has some of the world's largest deposits of copper, gold and uranium, as well as abundant resources of coal and other minerals. Its location, between China and Russia, in the past contributed to its isolation but now means it has two of the world's largest markets on its doorstep. Today, its two neighbours consume around 60% of Mongolia's exports.
High commodities prices in recent years spurred on international companies - in particular Ivanhoe and Rio Tinto - to look for ways to exploit the country's largely untapped resources. Meanwhile, the government sought to strike a balance between encouraging investment and keeping a large enough share of any revenues to support the country's development.
The international economic slowdown, and in particular the fall in commodities prices, has put pressure on Ulaan Bataar to strike a deal that would allow production to start at Oyu Tolgoi. Mongolia has already had to raise funds from the International Monetary Fund and other international financial institutions, after GDP growth slowed dramatically and the budget deficit widened. Revenues from Oyu Tolgoi are expected to be in the region of $2.3bn a year, which will go a long way towards solving the country's financial difficulties.
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