Mongolia reaffirms support for Oyu Tolgoi mine
After several days of negative backlash from around the world, the Government of Mongolia got the message. On Thursday, it backed away from its attempt to re-negotiate the investment agreement on the giant Oyu Tolgoi copper-gold deposit. Instead, it issued a joint statement with Ivanhoe Mines Ltd. and Rio Tinto Ltd. in which all three parties upheld the original pact, signed exactly two years ago. The move came after a series of events that battered investor confidence in Mongolia.In September, 20 members of the Mongolian parliament petitioned the government to re-negotiate the deal. Mongolia currently owns 34% of Oyu Tolgoi, and cannot move up to 50% until 2039. The dissident politicians wanted to fast-track that timeline, and with an election looming next year, their views got traction. Within days, Mongolia’s resources minister said he wanted to speak to Rio Tinto and Vancouver-based Ivanhoe about potential changes to the deal (Ivanhoe owns 66% of Oyu Tolgoi, while Rio owns 49% of Ivanhoe). The reaction from investors was very negative, as Ivanhoe’s share price plunged.
Sources said the government engaged with the investment community and neighbouring countries in recent days. It got the message that its attempt to re-negotiate Oyu Tolgoi — the biggest foreign investment in Mongolian history — would threaten future investment in the country. “The international fallout from this was gathering steam,” said one source familiar with the situation. “So there was a coming together of the political forces there.” Mongolia’s president and prime minister, who represent different political parties, agreed that the debate over Oyu Tolgoi was causing instability for the country. They quickly re-affirmed the investment agreement to try and end the damage to Mongolia’s reputation.
Investors were reassured and Ivanhoe shares jumped as much as 21% on Thursday, and shares of other foreign companies in Mongolia rallied.
Oyu Tolgoi is expected to remain a hot-button political issue in Mongolia ahead of next June’s election, but with the immediate crisis out of the way, Ivanhoe and Rio Tinto can re-focus on getting the US$6-billion mine into commercial production in 2013.
One key issue overhanging the project is money. Ivanhoe chief executive Robert Friedland is trying to put together a US$4-billion financing package for the project, and that could be an easier task now that the political situation is calming down.
Ivanhoe and Rio Tinto also have issues with each other. The relationship, which has always been a bit tense, got more complicated last month after Ivanhoe reacted harshly to comment from a Rio Tinto executive, who said that Oyu Tolgoi could be delayed if power is not secured from China. Rio Tinto felt it was just stating the obvious, while Ivanhoe said the power deal is progressing as expected.
As all this was going on, Rio Tinto was increasing its stake in Ivanhoe from 48.5% to 49%. It is forbidden from buying more shares until Jan. 18 of next year, unless it makes an offer for the whole company. Rio Tinto is building the mine, and would prefer to have a direct stake in it.