The Mongolian Parliament has
delayed passing the proposed agreement between the government and Ivanhoe
Mines Ltd. (TSE:IVN, NYSE:IVN) to mine the country’s most important mining project at
Oyu Tolgoi, operated in cooperation with Rio Tinto (RTP: NYSE; RIO: LSX, ASX). A parliamentary working group will be established to further examine the case.
Members of parliament are questioning
whether the terms of the agreement are overly favorable to Ivanhoe as
well as other issues, including the taxing structure agreed upon and
the length of the exclusive contract being issued to Ivanhoe and their
partner in the project, Rio Tinto.
Government advocates for passage
of the agreement have repeatedly stated the importance of beginning
the project because of the enormous revenues that will raise Mongolia’s
Gross Domestic Product.
At the same time, Democratic
Party Parliament members have repeatedly questioned whether the agreement
violates Mongolian law. Of particular concern to opposition lawmakers
is wording in the agreement stating, "If this agreement somehow
contradicts Mongolian laws, both sides will follow agreement terms."
Democrat N. Batbayar insisted
on learning who in the government was responsible for the wording, however,
the government was unable to answer. Ch. Hurelbaatar, leader
of the government’s negotiating group, responded that the agreement
is very important for Mongolia’s economy and must move ahead. Hurelbaatar
also said three IMF specialists had assisted in working out the agreement.
Z. Enkhbold responded, "Ivanhoe
has great experience in making agreements, but what was the government’s
experience compared to Ivanhoe’s." Other Democrats complained
that the 80-year agreement was too long, saying the country had lived
under communism for nearly 100 years and now the country will have to
live under “Ivanhoe’s pressure for 80 years because of this agreement.”
Z. Enkhbold further reminded
Parliament that Mongolia has the world’s second largest mineral deposits,
following China, and many investors seek unfair advantage in wishing
to sign agreements with Mongolia.
Z. Enkhbold noted, “If the
IMF suggested this agreement is in favor of the Mongolian people then
I feel suspicious about them. This is a very big project for Mongolians
and we should not be hurrying. This agreement is going to be in force
for the next 80 years, and we will be choosing our next 80-year business
partner. We need more advantages in the agreement and we need to hire
foreign specialists to assist in drafting the agreement, even paying
them a million dollars a year. In the future we need to be prepared
for reaching agreements with large companies. Our government’s fault
is they sent inexperienced kids to negotiate an agreement with Ivanhoe.
The government’s agreement was made at an amateur level.”
Democratic Parliament member
N. Batbayars questioned if the agreement’s exempting Ivanhoe from
paying the windfall tax of 68 percent for five years is legal. Hurelbaatar replied that with its 68 percent
tax, Mongolia will not be able to attract any investors for the Oyu
Tolgoi project. According to Hurelbaatar, calculations using today's
copper prices of $797 per ton, Ivanhoe’s tax exemption would
be 4 billion dollars. However, according to N. Batbayar, Ivanhoe’s
investment in developing Oyu Tolgoi is only $2 billion and he feels
their tax exemption violates the law.
Adding additional pressure
to pass the agreement, local suppliers for the project believe that
Ivanhoe would suspend all contracts and purchase orders if the agreement
is not concluded during the current session of Parliament.
Nonetheless, Democrats appear
to be moving to have The Standing Committee on Economic Policy look
further into the agreement, which is sure to delay quick passage of
Oyu Tolgoi is considered to
be the largest untapped copper and gold mine in the world. 2005 estimates
put the annual yields from the mine at 450,000 tons of copper and 330,000
ounces of gold to be extracted beginning in 2010.