Ulaanbaatar mulls handing Oyu Tolgoi shares to Mongolians

By bne IntelliNews August 12, 2013

bne -

The Mongolian government is mulling a plan to list part of its stake in the Oyu Tolgoi, an official announced on August 9. As part of its fight against rising resource nationalism, Ulaanbaatar may hand a 10% stake in one of the largest and highest-grade copper and gold mines in the world to the population free of charge.

Chuluuntseren Otgochuluu, director general of strategic policy and planning at the ministry of mines told journalists that government officials are looking at a proposal to convert Ulaanbaatar's minority stake in the large mine into a public company. Under the plan, stakes in that entity would be handed to Mongolian citizens, before being sold listed on the domestic market, and possibly sold internationally.

The Mongolian government owns 34% in Oyu Tolgoi overall. The remaining 66% is held by Turquoise Hill Resources, which is controlled by international mining company Rio Tinto. The government has long been at odds with the Canadian-listed parent over the project. The pair is currently fighting over second phase development of the mine, on which Rio Tinto wants to spend around $5.1bn. However, the government has also pushed against opposition amongst the population to the involvement of foreign investors in exploiting the country's large mineral resource wealth.

"A proposed new company would hold the state's 34% interest," Otgochuluu said according to Bloomberg. "Ten percent of the company would be made available to the Mongolian public and 10% to 20% more may be sold on the domestic market."

It is hoped that handing Mongolian citizens a stake would help to reduce tensions within the country, where many are concerned that Rio Tinto and other international investors are the main beneficiaries of the country's mineral wealth. Soothing that suspicion would help pave the way for the second phase development of the mine to go ahead, following the launch of copper shipments from Oyu Tolgoi in July.

"We believe that this development is neutral for Turquoise Hill Resources, as it does not affect the company's 66% stake," Visor Capital writes in an analyst note. "As we understand from the company, the negotiations with the government are currently centred on technical questions, implying no significant changes to the Investment agreement." Neither Turquoise Hill nor Rio Tinto have made a comment on the IPO proposal.

The idea of defusing resource nationalism by handing out shares in the country's large projects is not new. It follows the blueprint of a government plan for state-owned coal company Erdenes Tavan Tolgoi, in which more than 1,000 shares will be issued free of charge to every Mongolian citizen.

Otgochuluu told Bloomberg that shares in the Erdenet copper mine could also be included in the scheme, while the government is also mulling a plan to include its 51% stake in the same public company with Oyu Tolgoi.

That company is likely to be called Mongol Copper, he added, and to be listed internationally following the IPO on the domestic stock exchange. However, details are yet to be decided, he said. By setting up a public company, the government would be able to issue bonds and shares and accrue funds, while the initial goal is to put state assets in the hands of the public.

"If we gradually change from state ownership to public ownership we can improve the efficiency and governance," Otgochuluu said. "State-owned enterprises can be controlled by government officials for their benefit."

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