Tuesday, April 28, 2009

Mongolia's Mining Hopes Hinge On Oyu Tolgoi

Mongolia's ambition to be a mining powerhouse may be hampered if it fails to quickly approve a $3 billion copper and gold project that has become a symbol of the difficulties of investing in the landlocked, mineral-rich country.

The Oyu Tolgoi proposal, a joint project between Ivanhoe Mines and Rio Tinto and endorsed by Mongolia's cabinet and National Security Council, is now in front of the parliament. A final decision is expected during this parliamentary session following years of bureaucratic infighting.

At issue is the extent of ownership Mongolia will ultimately demand, and the precedent that demand will set for future negotiations with regional and global players such as BHP Billiton and China Shenhua Energy Co Ltd -- who are hungry for a slice of the country's vast untapped mineral deposits.

"Oyu Tolgoi has become a burden, and until Oyu Tolgoi is approved, nothing else is going to move forward," Gerald Harper, senior vice president, Mongolian operations, for uranium miner Western Prospector Group Ltd, said at a recent conference in Hong Kong.

"Mongolia is very much focused on the concern that time is money," Harper added. "Given maybe a two-year delay before we get an investment agreement, followed by a three-year construction period, there's the possibility that we'll miss the next upcycle."

Rio Tinto and Ivanhoe both declined to comment.

Government officials say the delays are a result of wanting Oyu Tolgoi to set an example for other major deals that follow.

"This contract should become an exemplar and model contract for the exploitation of other strategically important big deposits," Badamsuren Khookhor, Mongolian parliament member and a leader of the Oyu Tolgoi working group, told Reuters.

"Some issues needed to be clarified," he added, referring to a combination of ownership, taxation and infrastructure-related issues that have held up the decision. "It should be perfected and discussed and approved promptly."

Mongolia's main export is copper, and mining at its peak accounted for 40 percent of government coffers even though fewer than 2 percent of Mongolians were formally employed in the sector.

Mongolia, whose annual per-capita income is about $1,200, wants to pull its 3 million people out of poverty with the country's uranium, lead, zinc, copper, gold, and coal deposits.

And it needs investment now more than ever, analysts say.

Nearly $1 billion in foreign loans and grants are tiding Mongolia through a collapse in mineral prices as the financial crisis crushes the value of its exports.

In the short term, the loans ease budgetary pressure, making the government less dependent on revenues from mining contracts to address the country's immediate needs.

Oyu Tolgoi will be Mongolia's largest foreign investment, with development costs reaching $7.3 billion. Ivanhoe initially struck a deal to develop the mine in 2006, but that pact was withdrawn last year when Mongolia sought more favourable terms as copper and gold prices soared.

The country's contentious 2006 mining law allows the state a share of up to 34 percent of deposits found with private funds and up to 50 percent of those discovered with state funds.

Investors expect a decision to be made soon to get their own projects off the ground. But with a presidential election scheduled for May 24, the government is distracted, making another delay likely, analysts say.

"It just pushes back the start date for a new wave of investment," said Andrew Driscoll, CLSA's head of resources research.

Oyu Tolgoi is just the beginning for Mongolia's government.

Looming on the horizon is a decision on Tavan Tolgoi, known as the world's biggest untapped coking coal deposit, with a coal reserve of 6.5 billion tonnes in the Gobi desert.

Mongolia has hired JP Morgan and Deutsche Bank to sell up to a 49 percent stake in the mine, which is drawing bids from Chinese coal giant China Shenhua, Peabody and world No.1 miner BHP Billiton, among others.

Negotiations for Oyu Tolgoi and Tavan Tolgoi have dragged on for years, outlasting the commodity boom as Mongolia sought the revenues that eluded it with previous mining projects.

In the longer term, Oyu Tolgoi and Tavan Tolgoi will be vital to Mongolia's ability to repay the loans, as well as maintain its independence from its two giant neighbours, China and Russia.

Any debates about Tavan Tolgoi could be bogged down by the infrastructure needs of the deposit, sources say.

"The issue is, how many schools are they going to build?" an investment banker with direct knowledge of the deal told Reuters.

But for now, lack of an official word on Oyu Tolgoi weighs.

"People are expecting that it should become a good contract that matches with interest of Mongolian people," Badamsuren Khookhor of Mongolia's parliament said.

"The public is anticipating its implementation."

Source: Reuters

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