Mongolian mine projects face political hurdles
Standing in a yurt in the middle of the Gobi Desert, Rio Tinto Chairman Jan du Plessis faced his Mongolian colleagues and dignitaries and raised his wine glass in a toast to Oyu Tolgoi, “one of the most exciting mining projects anywhere in the world today.”
His Mongolian counterpart, however, had a different description: Building the mine is like “an elephant giving birth,” said former President N. Bagabandi, in a nod to the challenges that the Oyu Tolgoi mine has faced.
Rich in resources, Mongolia – a country of less than 3m people and GDP of just $7bn – has become a hotspot for global miners. And Oyu Tolgoi, the world’s biggest mine under construction, is seen as a litmus test for how the country will develop its resources sector.
Oyu Tolgoi, which is owned by Rio Tinto, Ivanhoe Mines and the Mongolian government, has come under increasing political pressure, highlighting the turbulence the country’s mining sector faces as elections loom next year.
Late last month, the government announced it wanted to raise its stake in Oyu Tolgoi more quickly than previously agreed under a 2009 contract.
The news sent shivers through the mining community and arrived at a time when global economic worries have been starting to impact mining houses. Rio has been warning of a slowdown in commodities demand this year and also recently reported falls in output at its biggest copper mine in Chile.
Although Mongolia has been largely immune from those global economic woes, investors are watching pre-election developments closely to see what the shifting political environment might mean for other projects – most notably the Tavan Tolgoi mine, a huge coking coal deposit in the Gobi desert. Issues such as mining rights and the environment will dominate the agenda as politicians fight for seats in elections due in June.
Rio Tinto says the government’s change of heart over the 2009 investment agreement – which was signed after years of negotiations – may scare off other investors. “An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive and uncertain,” said Cameron McRae, Rio’s country director. “Therefore the stability of this investment agreement sends a very important signal from Mongolia to the world.”
D Zorigt, mining minister, says that the discussions over Oyu Tolgoi are only focused on one aspect of the investment agreement – the timing under which the government can raise its stake in the mine from 34 per cent to 50 per cent – and have been on the table for months.
Shifting political winds in Ulan Bator could have the most immediate impact on development of the huge coal reserves at Tavan Tolgoi. The government plans to develop the mine by publicly listing one half of the deposit and selling rights to foreign miners for the other half. The multibillion-dollar listing is earmarked to take place simultaneously in London, Hong Kong and Ulan Bator by March.
Several politicians have promised to complete the listing of Tavan Tolgoi – which will distribute 10 per cent of its shares among the citizens of Mongolia – before their term ends next year. And as parliament enters its autumn session next week and works on passing a budget, the need to pay for handouts promised during the last election cycle will create pressure to speed up the licensing process for the western part of the mine.
International mining companies have been circling the western half of the deposit (The West Tsankhi block), which is set to be awarded to bidding consortiums soon. That bidding process, which began in February, has fallen victim to a political and diplomatic struggle in Ulan Bator, reinforcing broader worries about whether Mongolia is rethinking its mining policies.
Mining groups including Vale, Xstrata and ArcelorMittal have at various times courted the deal since the beginning of the year. Diplomatic issues have complicated the process, as Tavan Tolgoi lies close to the Chinese border but is also coveted by resources-poor neighbours Korea and Japan.
After an initial government decision prompted cries of foul play from Korea and Japan in July, the bidding process went back to the drawing board and is currently still in negotiation.
Today the state-owned company in charge of Tavan Tolgoi says talks are continuing with three groups left in the pool: Peabody, a Shenhua-Mitsui consortium, and a consortium of Russian Railways, Japanese and Korean companies.
His Mongolian counterpart, however, had a different description: Building the mine is like “an elephant giving birth,” said former President N. Bagabandi, in a nod to the challenges that the Oyu Tolgoi mine has faced.
Rich in resources, Mongolia – a country of less than 3m people and GDP of just $7bn – has become a hotspot for global miners. And Oyu Tolgoi, the world’s biggest mine under construction, is seen as a litmus test for how the country will develop its resources sector.
Oyu Tolgoi, which is owned by Rio Tinto, Ivanhoe Mines and the Mongolian government, has come under increasing political pressure, highlighting the turbulence the country’s mining sector faces as elections loom next year.
Late last month, the government announced it wanted to raise its stake in Oyu Tolgoi more quickly than previously agreed under a 2009 contract.
The news sent shivers through the mining community and arrived at a time when global economic worries have been starting to impact mining houses. Rio has been warning of a slowdown in commodities demand this year and also recently reported falls in output at its biggest copper mine in Chile.
Although Mongolia has been largely immune from those global economic woes, investors are watching pre-election developments closely to see what the shifting political environment might mean for other projects – most notably the Tavan Tolgoi mine, a huge coking coal deposit in the Gobi desert. Issues such as mining rights and the environment will dominate the agenda as politicians fight for seats in elections due in June.
Rio Tinto says the government’s change of heart over the 2009 investment agreement – which was signed after years of negotiations – may scare off other investors. “An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive and uncertain,” said Cameron McRae, Rio’s country director. “Therefore the stability of this investment agreement sends a very important signal from Mongolia to the world.”
D Zorigt, mining minister, says that the discussions over Oyu Tolgoi are only focused on one aspect of the investment agreement – the timing under which the government can raise its stake in the mine from 34 per cent to 50 per cent – and have been on the table for months.
Shifting political winds in Ulan Bator could have the most immediate impact on development of the huge coal reserves at Tavan Tolgoi. The government plans to develop the mine by publicly listing one half of the deposit and selling rights to foreign miners for the other half. The multibillion-dollar listing is earmarked to take place simultaneously in London, Hong Kong and Ulan Bator by March.
Several politicians have promised to complete the listing of Tavan Tolgoi – which will distribute 10 per cent of its shares among the citizens of Mongolia – before their term ends next year. And as parliament enters its autumn session next week and works on passing a budget, the need to pay for handouts promised during the last election cycle will create pressure to speed up the licensing process for the western part of the mine.
International mining companies have been circling the western half of the deposit (The West Tsankhi block), which is set to be awarded to bidding consortiums soon. That bidding process, which began in February, has fallen victim to a political and diplomatic struggle in Ulan Bator, reinforcing broader worries about whether Mongolia is rethinking its mining policies.
Mining groups including Vale, Xstrata and ArcelorMittal have at various times courted the deal since the beginning of the year. Diplomatic issues have complicated the process, as Tavan Tolgoi lies close to the Chinese border but is also coveted by resources-poor neighbours Korea and Japan.
After an initial government decision prompted cries of foul play from Korea and Japan in July, the bidding process went back to the drawing board and is currently still in negotiation.
Today the state-owned company in charge of Tavan Tolgoi says talks are continuing with three groups left in the pool: Peabody, a Shenhua-Mitsui consortium, and a consortium of Russian Railways, Japanese and Korean companies.
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