Mongolia’s PM claims agreement reached over Oyu Tolgoi expansion

By bne IntelliNews April 6, 2015

Jacopo Dettoni in Almaty -


Mongolia’s Prime Minister Chimed Saikhanbileg says that a long-awaited agreement with Rio Tinto over a massive underground expansion of flagship copper and gold mine Oyu Tolgoi has been reached.

“The two sides have reached agreement, in principle, on the main points of dispute,” he said during a televised speech republished by the government’s website on April 5.

An agreement would put an end to almost two years of negotiations that cost Mongolia much of its reputation as one of the world’s hottest economies in the frontier markets arena.

Turquoise Hill, Rio Tinto’s local subsidiary, owns a 66% stake in the mine, the remainder being in the hands of the government. The open-pit mine came online in July 2013, but its underground expansion, which is expected to bring to surface as much as 80% of the mine’s total value, got suspended a few weeks later as local authorities and Rio Tinto locked horns over a number of pending issues such as taxes and the environmental impact.

Oyu Tolgoi’s impasse cast a shadow over the county’s business climate, with foreign investors becoming increasingly hesitant to invest in the country.  Oyu Tolgoi is the largest ongoing investment in Mongolia and is considered a barometer of the country’s business climate.

Foreign direct investment (FDI) fell to $507.6mn in 2014, down from $2,139mn in 2013, according to figures published by the Bank of Mongolia. That marks the country's poorest FDI performance since 2009.

It also cost the job of former PM Norovyn Altankhuyag, who was forced to resign in November amid growing concerns over, among other things, his ability to successfully handle the negotiations with Rio Tinto.

“Soon we will officially announce these results to the international community, after bureaucratic levels finalise relevant steps,” Saikhanbileg added.

Neither Rio Tinto nor Turquoise Hill has issued any official statement yet. Turquoise Hill had already reiterated its stance in a technical report on March 24.

"Further development of the underground mine is expected to commence once the following conditions are met: successful resolution of the mine’s shareholder matters, including the tax situation; agreement of a comprehensive funding plan including project finance; approval of the 2014 feasibility study by the Oyu Tolgoi shareholders and acceptance by the Mongolian Minerals Council; obtaining all necessary permits for the mine’s operations and development."

The Mongolian Tax Authority launched a tax review into Turquoise Hill’s Oyu Tolgoi operations in 2014. That allegedly brought to light unpaid taxes, penalties and disallowed entitlements worth some $127mn. The amount, notified to the company in June 2014, was reduced to $30mn in September 2014.

With regard to the project’s funding plan, a consortium of local and international banks committed to providing $4.2bn in financing for a project, but a deadline for that expired in September and has not been officially renewed yet. Oyu Tolgoi handed local authorities an updated feasibility study for the mine’s underground expansion for final approval in September. The study put the project’s overall price tag at $4.9bn and estimated a 29% internal rate of return (IRR) after tax.

Saikhanbileg also announced a breakthrough in the negotiations of another pending and long-awaited investment in the mining sector, the development of Tavan Tolgoi, the country’s largest coking coal deposit.

“Tavan Tolgoi negotiations are getting closer to an end,” he said, pledging a final decision to come through in the next government meeting.

Located in the southern Gobi desert, about 200km from the Chinese border, the mine holds some 1.8bn tonnes of high-quality coal – with a wider resource amount put at around 7.8bn tonnes. Local authorities have struggled to fully develop the mine since a failed tender in 2011, in which the Mongolian government rescinded an agreement that would have allowed a consortium comprised of US Peabody Energy, OAO Russian Railways and China’s Shenhua Energy to operate the mine.

The government resumed the tendering process in 2014, when Shenhua Energy, alongside Japan's Sumitomo Corporation, teamed up with a mining unit owned by the Ulaanbaatar-based firm Mongolian Mining Corporation to come up with $4bn in investment to develop the mine in partnership with the state. A final decision on this is now pending.

The Oyu Tolgoi and Tavan Tolgoi expansion projects total about $9bn in investment, a game-changing figure for the Mongolia's economy, whose 2014 GDP amounted to MNT21,800bn ($11bn). Saikhanbileg’s announcements were enough to breath new life into the investors’ long gone optimism over Mongolia’s economy.

“Cheers to PM Saikhanbileg for historic OT and TT efforts, if jumping the gun, still enjoyed this,” Nick Cousyn, chief operating officer of local investment bank DBSec, wrote in a tweet attaching a picture of a freshly uncorked bottle of French champagne.

“In words of Murray Walker [famous Formula One motor racing commentator] "its GO GO GO" for #Mongolia!!!” Trevis Hamilton, founder and CEO of Mongolia-focused investment bank Khan Investment Management, wrote in another tweet, also attaching a picture of a freshly uncorked bottle – Mongolian vodka in his case.

Other commentators were more cautious though as Mongolian prime ministers have often failed to deliver on their promises. In this regard Saikhanbileg still boasts a clean reputation as he has only been in office since November. The reach of his promises, and his overall credibility, will eventually depend on how “soon” both projects will kick off.

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