Mongolia Wants to Raise Stake in Oyu Tolgoi, Minister Says

By Soraya Permatasari and Nichola Saminather

(Adds comment from analyst in fourth paragraph.)

Sept. 25 (Bloomberg) -- Mongolia wants to bring forward the raising of its stake in the Oyu Tolgoi copper project that’s being developed by Rio Tinto Group and Ivanhoe Mines Ltd. to 50 percent from 34 percent, according to the minerals minister.

“We have sent the proposal to Ivanhoe to renegotiate the timeframe for us to increase the government stake,” Dashdorj Zorigt told reporters at Oyu Tolgoi today. Such an increase is permitted after only 30 years, according to a summary of the $16 billion project agreement from London-based Rio Tinto.

Countries across Asia, Africa and Latin American are seeking greater control of the mineral and energy resources on their territories as rising commodities demand boosts prices. So-called resource nationalism is the biggest business risk to global mining companies, Ernst & Young LLP said last month.

“Alarm bells would ring, that if they change the rules here, are they going to change it again, are they going to take more than 50 percent,” Gavin Wendt, founder and director of Mine Life Pty in Sydney, said by phone today. “Rio and Ivanhoe obviously won’t be happy about it.”

The project, 66 percent owned by Ivanhoe Mines, is half way through completion and will be one of the world’s five-biggest copper mines, according to Rio, which controls Oyu Tolgoi’s management. Ivanhoe, 48.5-percent owned by Rio, spent more than six years negotiating with Mongolia before reaching an agreement in October 2009 to develop the site, which may open in 2013.

‘Unstable Environment’

“An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive,” Cameron McRae, Rio Tinto’s Mongolia country director, said in the capital, Ulan Bator, yesterday. “What we are demonstrating is the investment agreement is a contract. We’re going to honor it and we expect the government to honor it.”

A group of 20 Mongolian lawmakers wrote to Prime Minister Sukhbaatar Batbold on Sept. 7 demanding the Oyu Tolgoi accord be revised to give the country a 50 percent holding, China’s Xinhua News Agency said Sept. 20. Mongolia will seek to revise the terms for Oyu Tolgoi, Finance Minister Sangajav Bayartsogt told News.mn portal in an interview published on Sept. 20. Mongolia has appointed chief of the cabinet office Chimed Khurelbaatar to start talks with the miners, Xinhua News reported on Sept. 22.

Coal Deposit

Mongolia may also seek to change the allotment of stakes in the Talvan Tolgoi coal deposit to investors including Peabody Energy Corp., the largest U.S. coal producer. The potential ownership changes at the country’s two biggest mineral developments come ahead of parliamentary elections next year.

Oyu Tolgoi may have average annual output of 450,000 tons of copper and 330,000 ounces of gold, Rio said. World demand for copper will grow 40 percent to 27 million tons by 2020, according to a Sept. 8 presentation from the company. Calls to Ivanhoe outside office hours today were not immediately returned.

Rising demand led by China, the largest copper user, coupled with a global supply deficit pushed the price to a record $10,190 per ton on the London Metal Exchange in February. The three-month contract for the metal used to make pipes and wires ended at $7,360 per ton on Sept. 23.

“As a mining company, we are very aware of the impact our operations have on our host countries and particularly in Mongolia,” Rio Chairman Jan du Plessis said in a ceremony marking the 50 percent construction of the project in Oyu Tolgoi today. The company “will continue to develop partnerships with the government of Mongolia, communities and businesses.”

--Editors: Jake Lloyd-Smith, Rebecca Keenan
To contact the reporters on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net; Nichola Saminather in Sydney at nsaminather1@bloomberg.net
To contact the editor responsible for this story: Jake Lloyd-Smith at jlloydsmith@bloomberg.net

Source:Bloomberg news service