Is Mongolia’s equity in OT shrinking?

In 2009, Mongolia’s Government established an agreement with Ivanhoe Mines Mongolia Inc, Ivanhoe Mines Limited and Rio Tinto International Holdings Limited to coexploit Oyu Tolgoi, the world-leading copper deposit. Mongolia expects to gain huge profits from this deposit. However, MP N. Batbayar informed that Mongolia’s equity holding in this deposit is decreasing by a significant percentage, and there has been a condition where Mongolia’s profit  will become lower as a result of this  decrease. It is attracting the attention
of MPs and citizens. Parliament resolved that the minimum of Mongolia’s State equity holding in OT’s special
license holder OT LLC will be 34 percent and authorized the Government to establish agreements with the investor. Accordingly, the Government established agreements. However, MP N. Batbayar explained that Oyu Tolgoi’s investor side issued preferential shares at capital market, causing Mongolia’s equity to decrease
from 34 percent to 6.8 percent. He explained so why he considers  that Mongolia’s stake will decrease at Oyu Tolgoi project by much percentage. ‘Following negotiations between the Government of Mongolia and the investors, Oyu Tolgoi deposit’s exploitation was asserted to be regulated by two separate agreements. Apart from an Investment Agreement that aims at ensuring a sustainable investment environment, an agreement named ‘Agreement of shareholders’ or an agreement between Mongolia’s government and Ivanhoe Mines Company on the percentage of equity they possess at Oyu Tolgoi and the  allotment of profits the sides will receive, was established.
It is strange that the agreement of shareholders has been in ‘secret’ classification with unknown reasons and has not been open for the public until today. Very serious clause in the agreement was about preferential share of OT LLC. The Mongolian side only has the right to own 34 percent of common shares in OT LLC, and it will not have a right to purchase preferential shares in case the company issues. It reads that Ivanhoe Mines Company has a right to make a resolution alone to issue preferential shares and Mongolia’s government does not have the right to intervene in this issue. This means, in case OT LLC issues preferential shares under the resolution of Ivanhoe Mines Company, Mongolia’s equity will decrease by much volume. OT LLC works with a plan to finance all its investments in 2010-2011 by means of issuing preferential shares. If the company issues preferential shares to gain money to invest approximately the USD4 billion required by Oyu Tolgoi deposit’s exploitation, Mongolia’s equity will drop down to 6.8 percent”.
As of his estimation, OT’s present capital is around at USD 1billion and its capital will reach USD5 billion
after issuing preferential shares. It will cause common shares which previously built 100 percent of the company’s capital to decrease to  20 percent in total capital of the company. If the preferential share is issued, Mongolia’s stake in OT LLC  will decrease to 6.8 percent because Mongolian side owns 34 percent
of common shares of the company and has not right to own preferential share.
MP N. Batbayar expresses his position that issuance of rights to Ivanhoe Mines only to issue preferential shares of OT LLC under the agreement of shareholders, seriously contravenes Mongolia’s interest. He claimed that Ivanhoe Mines Company already started a work to gain money by means of issuing preferential share of OT LLC. In other words, Mongolia’s stake starts diluting and payment of dividends for Mongolian people declines.
MPs D.Gankhuyag (L) and N.Batbayar (3rd) are apprehensive about the State’s interest in OT
On the contrary, OT LLC issued an open letter in which it denied a decrease in Mongolia’s equity. In the open letter, it asserted that certain  officials are distorting facts, alleging that the Government of Mongolia’s
equity interest has been diluted from 34 percent to 7 percent and this is clearly wrong. The open letter included some critical factors as follows:
• Clause 1.6 of the IA clearly states the Government shall own 34% of the common shares of the OT LLC and this ratio will remain at this level throughout the life of the project. Indeed, there is an option in years to come that the Government can increase its stake. The dividends, taxes and royalties from the Oyu Tolgoi project to the Government and people of Mongolia will add up to over 50 percent from the revenues generated by the OT Project.
• The non-Government shareholders have already committed at least USD 4 billion (Tgs 5.2 trillion) to getting this project to first ore, and are funding 100 percent of the investment needed to do so, pursuant to its obligations under the Investment Agreement.
• If and when extra capital is required to continue the development of the project, the required funding will be raised solely by the foreign shareholders.
• There is no requirement for cash contributions from the  Government of Mongolia as Ivanhoe Mines and Rio Tinto provide a lender of last resort financing facility to the  Government. Provision of this facility insures that the Government’s equity interest is not diluted. The Government  also has the option to source its own finance.
MPs S. Erdene, B. Bat-Erdene, D. Gankhuyag, G. Bayarsaikhan, Ts. Davaasuren and Ts. Shinebayar offered some inquiries to Prime Minister S. Batbold about implementation of some clauses in the Minerals Law, and legislations and inquiries include a few questions regarding the Oyu Tolgoi deposit. The Prime Minister was requested to give detailed answers to the following questions, for example;
1. About implementations of clauses in the parliamentary resolution #57 reads: “Setting minimum of State
equity in shares of special license holder for Oyu Tolgoi deposit at 34  percent” and “Government is given a duty to resolve by negotiation with an investor on an issue to increase a ratio of State equity to not lower than 50 percent by means of establishing a legal environment after recouping the first investment”, resolution #40 “To stipulate so that the Mongolian side can directly own 34 percent of stock in the company to be established relying on the OT deposit, and that the Mongolian side can make its investment in ratio of its equity by forms of taxation, payment, royalty, dividend and credits”, “To stipulate in the agreement that a certain part of royalties and taxation will be taken preliminarily”;
2. There is still information that the price of shares in OT LLC which holds ‘A’ license of Oyu Tolgoi deposit raised by some folds at the international stock market since the establishment of the agreement and the company gained worth USD10 billion. How this money affects Mongolian side that purchases to possesses 34 percent of equity from the company and how beneficial it will be for Mongolia; 
3. Beginning January 1, 2011, the windfall tax law is going to be annulled. With this tax, Tgs500 billion has come to State Budget from the Erdenet Mining Corporation only. Also, how is implementation of instructions, given by Parliament to government, by protocol when a draft OT Investment Agreement was discussed? Government submitted a Bill to parliament on raising a rate of royalty in connection with recent years’ increase of copper price and relatively stabilizing growth of this price. Whether or not the Oyu Tolgoi project will be involved to the new tax after the Bill is adopted by parliament. How much income is planned to accumulate in the State Budget with
this royalty?
4. About Minerals Law, preparation works of establishing a  copper smelting plant asserted in the Oyu Tolgoi Agreement, names, types and quantity of outputs to be produced by the plant, as well as clauses about employment of Mongolians in constructional works and exploitation of the deposit.
MPs have been making inquiries into the OT project and investmentrelated matters, including the number of Mongolian workers being employed at the Oyu Tolgoi deposit, whether a clause of the agreement about domestic companies who work as a supplier to OT Project is being implemented or the agreement’s statement about completing recoupment of investment in 30 years meets with the parliamentary resolution. However, a decrease of Mongolia’s equity is new information never heard before. Currently, Parliament has not officially discussed this issue regarding Mongolia’s equity and the issue was touched upon during discussions of other laws.
source: The Mongol Messenger newspaper

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