Oyu Tolgoi deal is a win for Mongolia but no game-changer for 2015

By bne IntelliNews May 19, 2015

Terrence Edwards in Ulaanbaatar -


Mongolia's prime minister has triumphed with a landmark agreement to expand the giant Oyu Tolgoi copper mine that will help fulfill his promise to use the mining sector as a catalyst to lift Mongolia's weak economy. But the benefits may not come soon enough to make a definitive impact this year.

Prime Minister Chimed Saikhanbileg received lukewarm backing from voters in a text referendum in February to push through planned expansion projects for the country's largest mines, as a means of getting the economy moving again amid falling foreign investment and a soft commodities market. Analysts say the premier has until Mongolia's traditional summer festival in July, called Naadam, to settle affairs before politicians will be too focused on pandering to the nationalist segments of the electorate to allow any possibly controversial mining agreements to be signed. 

Mongolian officials on May 18 finally inked an agreement to expand the Oyu Tolgoi mine with representatives of its joint venture partner, global miner Rio Tinto, after nearly two years of wrangling. “Mongolia is now well positioned to attract and welcome new flows of foreign capital into its economy,” read a press release from the Mongolia government under the header, “Mongolia is Open for Business”.

Rio Tinto owns 66% of the mine indirectly through majority-owned Turquoise Hill Resources. The Mongolian government owns the remaining 34%.

The agreement signals that both parties are ready to move forward with the launch of construction of an underground mining complex for Oyu Tolgoi, which could extend the mine's life by more than three decades. It also settles the question of $30mn in tax arrears the government claims Rio owes. “Oyu tolgoi will pay a quantum of $30mn,” Rio's copper chief, Jean-Sébastien Jacques, told bne IntelliNews over the phone.

Jacques lauded Mongolia's government for helping to reach an amicable conclusion. “I think what we've done today is taken good and proper steps,” he says, while noting that “no change whatsoever” was made to the original investment agreement signed in 2009, which some critics of Rio had been calling for.

No change overnight

Andrew Fennell, an analyst at Fitch Ratings, says the deal will put Mongolia on the road toward economic stability. “We believe this deal will provide relief to many of Mongolia's key credit weaknesses, principally its strained external liquidity and mounting refinancing risks,” he says. In past notes Fitch has observed that Oyu Tolgoi could deliver some sorely needed foreign investment, while encouraging investors to look again at the opportunities in the country's mining sector.

But any effect won't be instantaneous. The Oyu Tolgoi mining unit must still submit a feasibility study for the project – last estimated to cost $5.4bn – to a Mongolian panel for approval. It will also have to return to lenders such as the World Bank's lending arm, the International Finance Corporation, to renegotiate terms for a $4bn project financing package that expired last year while the dispute was ongoing.

The Asian Development Bank has projected just 3% GDP growth for Mongolia this year, and it doesn't believe Oyu Tolgoi can change that, according to its outlook for 2015. Instead, it predicts that consensus on the mine could lift growth to 5% in 2016.

While 5% growth in GDP is considered a lot for a developed country's large economy, for Mongolia's relatively minescule economy of about $12bn it leaves plenty of missed potential. It's also a far cry from growth during the boom years in 2011 and 2012 of 17.5% and 12.3%, respectively.

Victory for the premier

While it may not mean any immediate relief for the economy, the deal is a feather in the cap for the relatively new prime minister. Saikhanbileg's appointment in November followed the forced exit of Norov Altankhuyag, who lost a confidence vote in the parliament because he was seen as ineffective in stopping the economic deterioration.

It also may build some momentum for other mining projects in the pipeline before the coalition government inevitably fractures again. Lawmakers will likely begin fighting amongst themselves again this fall to capture the public's attention in the lead-up to 2016 parliamentary elections.

The Tavan Tolgoi coking coal mine is the next main project to attend to. A deal for a management takeover of the state-owned mining unit that holds the licenses to the country's largest coking coal resources was put on ice by the legislature the same day that a signing ceremony was expected. Parliament Speaker Zandaakhuu Enkhbold took on the government plan directly by calling it a violation of Mongolian law, even though he belongs to the same party as Saikhanbileg. He demanded a parliamentary review of the proposed deal. China's Shenhua Energy and Japan's Sumitomo have partnered with Hong Kong-listed Mongolian Mining Corporation for the proposed takeover and have been asked to invest as much as $4bn into expanding the mine.

Another potential money-spinner is the Gatsuurt gold project owned by Canada's Centerra Gold. Although the mine has reserves of 1.1mn ounces of gold contained in ore, it has been heavily criticized by local and international groups who say it threatens sites where graves and artefacts from the ancient Hunnu Empire of the Mongols have been found. Centerra, for its part, argues that the grave sites are 7km away from the mining site and has promised to respect those areas. “If successful, Gatsuurt project would be flagship transaction advancing foreign direct investment,” reads a January note from Independent Mongolian Metals and Mining Research.

Although it may be too late to turn the economy around this year, with Oyu Tolgoi and perhaps some other mining projects due to restart, Prime Minister Saikhanbileg has set the stage for a stronger economy in the crucial election year of 2016.

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