All sides join animated debate on OT agreement

A recent “Development” TV program, produced by The Mongolian Mining Journal, was devoted to the Oyu Tolgoi Investment Agreement, as it is now and as it could be. Representatives of the Government and NGOs, as well as a cross section of MPs gave their views on whether the agreement needed revision to better serve Mongolia’s interests. The program turned out to be very lively and we give below a selection of questions asked and answers given, on the basis of notes taken by G.Iderkhangai.

Some MPs feel Parliament resolutions have not been adequately reflected in the agreement and Mongolia’s share of ownership should be raised from 34% to 50%. What is your opinion on this?

S.Bayartsogt, Finance Minister: Parliament resolutions 40 and 57 were very much on our mind when we signed the agreement. Article 1.6 of the agreement says “Mongolia shall claim additional 16% of equity after 30 years”. This is precisely what is in Resolution 57 as approved by the Standing Committee on Security and Foreign Policy.  The third provision of the resolution says this could be done in one of three ways: by amending the Minerals Law; after the amount invested has been recovered; and with mutual consent. We did not go for amendments to the Minerals Law and, instead, told the investor we wanted 16% more equity after 30 years. And we got what we wanted.
The investment agreement is also a stability agreement. This means that the newly introduced royalty tax will not apply to OT LLC, as is the case with other companies which concluded investment or stability agreements. However, the Government was directed that negotiations should be held with these companies to allow the new tax to be applied to them. Provision 15.30 of the investment agreement also says, “Upon mutual consent recorded in writing, the parties may amend or modify this Agreement.” The investor was approached accordingly but it wanted to retain its rights under the stability agreement. Since there was no agreement, we could not press for bringing it under the new law. This was in perfect correspondence to the terms of the agreement.
OT is a global scale project and the USD4-5 billion so far invested in it is equal to Mongolia’s GDP. It would have been against the duly signed agreement to insist on amending it during the project financing stage, and against the wishes of the investor.

So do we have to wait for 30 years to press for any amendment, for that is when the investor is expected to recoup its investment?

MP R.Amarjargal: It is not possible to give a cut-off date for such recovery. This can be after two years, three years or 30 years. Copper price is always volatile and gold price changes dramatically. The picture can be very different from year to year. 
Some people are using their own calculation to assert that investment in the Oyu Tolgoi project will be recovered in 4-5 years. But it is also possible that this may take 30 years. A Chilean copper mine has worked for 40 years without earning a profit. The investment agreement should have been clearer on this point but we failed to avoid the uncertainty.
I’m one of the MPs who feel Resolution 57 has not been followed and Parliament should insist that the Government implement it in full. The image of the Government has taken a hit. Why did it issue a joint statement with a foreign company, bypassing Parliament? It was sheer nonsense.

In general, is it better to have more equity or take more of the profit?

S.Bayartsogt, Finance Minister: The share percentage in Oyu Tolgoi is not the most important thing. We have to focus on what improvements, if any, can be made in the agreement. If the project doesn’t make any profit, there would be no benefit even if we had 100% equity. I personally feel we have a very good agreement. The Mongolian Government doesn’t spend a single dollar on construction of the mine. The profit starts coming only after the underground resources are economically converted. Once the resources start being sold, Mongolia will make MNT59 out of the MNT100 of sales proceeds, without having invested anything, while the investor takes the remaining 41%. People talking about 50% or 34% equity do not realize what share of the income we stand to take. Rather than focusing on 34% or 50%, it is better to think that Mongolians will get 60% of the profits once Oyu Tolgoi starts commercial operation.

OT CEO Cameron McRae has said that production costs at Oyu Tolgoi company would be among the lowest in the world and, therefore, the company would earn a profit even if the global price falls. What do you feel about this as chairman of the company board?

G.Batsukh: Cameron McRae has worked in the mineral sector for over 30 years and anything he says has to be taken seriously. It is true that commodity prices are hard to predict and there is no certainty that Oyu Tolgoi will always make a profit. We should think positive that copper and gold prices will increase and remain high until Mongolia claims 50% equity. I think Cameron McRae made the statement to show how positive he was about prospects.

Given the way global copper price moves, is it realistic to expect that copper and gold mining at Oyu Tolgoi will continue for 70 years?

S.Bayartsogt, Finance Minister: In the past 70 years, copper price has fluctuated between USD3,000 and USD9,000 per ton. For our calculations, we estimated the price to be USD4,408 per ton. At that price, the Mongolian Government will earn USD30 billion and the investor USD25 billion. If the price goes up, our profit will increase and that is what is likely in the long term.

Mongolia has a debt of over USD800 million against its ownership of 34% equity as a loan. Is it true that when production starts, with interest added, the debt will amount to USD1.5 billion?

S.Bayartsogt, Finance Minister: The Government doesn’t have any debt. Mongolia acquired 34% equity free of charge and has not made any capital investment. We have taken an advance payment and this will start being adjusted when the company begins commercial production. After the entire amount has been repaid, Mongolia will get in full its share of the profit. Mongolia has made a very good bargain that it would never have a debt, but will earn a profit. Mongolia will pay interest when repaying the amount it has received but the settlement will be only against profits. All financial risk is borne by the investor.

What will be Mongolia‘s income if the project does not make a profit?

S.Bayartsogt, Finance Minister: Even if there is no profit, operations will always be taxable. During negotiations, the investor had suggested profit sharing only after recovery of investment and had wanted the Erdenet model to be followed. Erdenet was exempted from paying all types of taxes from 1973 to 2003, the period when investment was still being recovered. The OT investor offered 50% profit if a similar exemption was allowed for 30 years. We did not agree.

G.Batsukh, board chairman of Oyu Tolgoi LLC: It is not good to have a negative attitude. Construction is under way without Mongolia having to pay a single dollar. Mining and exporting of copper will begin in one year. Around this time next year, it will be clear if the Government will be in debt or will be making money from OT to repay other foreign loans. We have a saying “The fox is beautiful when it is not killed”. The investment agreement promises us the fox fur but the fox is not yet killed. Let us first get the fox in the trap and then talk about increasing our share of equity. It is more encouraging for the company staff and management if the public and the Government pressure them to start mining and selling as soon as possible rather than complaining about being in debt.

MP R.Amarjargal: Batsukh talked about the fox being beautiful when it is not killed. If we kill it, then everything will be over. Once mining begins at Oyu Tolgoi, everything will be a problem. The Oyu Tolgoi agreement is not an issue that concerns just one company. There are fierce disagreements among politicians and companies on just how we want out are mining sector to proceed. The whole world is watching Mongolia and we have to take unbiased decisions.
Parliament must insist that the Government goes by its resolutions. Resolution 57 clearly says  it has to be implemented “by improving the legal environment”. There is no way the Government will not do this.
There are too many knots in the Oyu Tolgoi investment agreement and they need to be unravelled as early as possible. Extreme stands do not help. MPs have differing views on the matter and it is good that the media is covering them. This is a learning experience for Mongolia. We are about to take a step, and a fumble will cost us dear.
Tavantolgoi Trans LLC was strongly critizised at one time for destroying the Gobi. Now the state has joined in the environmental rampage. Some Ministers and high officials have started freight forwarding companies there and forcing mining companies to hire their trucks. This is the real face of the Mongolian state.

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