Ivanhoe, Rio Reject Mongolian Bid to Change Oyu Tolgoi Deal

Oct. 4 (Bloomberg) -- Ivanhoe Mines Ltd. and Rio Tinto Group, the world's second-largest mining company, rejected an approach by Mongolia to increase the country's 34 percent stake in the $10 billion Oyu Tolgoi copper mine.

Both companies got a letter from the Mongolian cabinet last week inviting them to discuss changes to the investment agreement, which included lifting the government's stake by an additional 16 percent and changes to royalties, Vancouver-based Ivanhoe said yesterday in a statement.

The approach comes after Rio Tinto is already in dispute with Guinea over the Simandou iron ore deposit and highlights risks for investors as countries seek greater control of raw materials. So-called resource nationalism is the biggest business risk for global mining companies, Ernst & Young LLP said in August.

"It's the continuing theme of governments changing the goalposts after the investment has been made," said Prasad Patkar, who helps manage about $1.1 billion at Platypus Asset Management Ltd. in Sydney. "As an investor in these countries and these projects you have to expect and demand a higher return compensating for the higher risk that is now inherent in these things."

Ivanhoe fell 6.6 percent to C$13.49 in Toronto to close at the lowest since July 6, 2010, yesterday. London-based Rio Tinto, which owns 49 percent of Ivanhoe, dropped 0.9 percent to A$58.77 at 10:15 a.m. in Sydney after plunging 4.1 percent yesterday.

"Ivanhoe Mines expects that the parties will continue to honor and implement the terms of the agreement as previously negotiated and has asked the government to affirm its full support for the agreement," the company said.

Mozambique, Guinea

Rio Tinto is facing similar government moves in Mozambique and Guinea, where the company owns the proposed $10 billion Simandou iron ore project in a joint venture with Aluminum Corp. of China. Lawmakers in Guinea on Sept. 9 adopted a mining code that will hand the nation 35 percent of local commodity companies.

Both Rio Tinto and Ivanhoe have sent written responses to members of the government's National Security Council which includes the president and prime minister, Ivanhoe said.

"The letters also cautioned that the government's actions could seriously undermine the confidence that international investors have in Mongolia's future as a safe and stable country in which to invest," Ivanhoe said.

Copper Prices

Oyu Tolgoi, 66 percent owned by Ivanhoe, is halfway through completion and will be one of the world's five-biggest copper mines, according to Rio Tinto, which is managing development. Copper prices in London reached a record high in February this year, before declining due to concerns over demand amid sluggish global growth.

"This sort of thing prolongs the cycle a lot longer because the commitment for the investment to bring on new supply will not be there amongst the board members," said Platypus Asset's Patkar. "You don't want to sanction a $10 billion investment in a place like Guinea or the Democratic Republic of Congo when you know you may get nothing back or you may lose half the equity to the government."

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.

Oyu Tolgoi, which means "turquoise hill," will boost the country's gross domestic product by 30 percent by 2020, when it reaches full production, Andrew Harding, chief executive officer of Rio Tinto's copper unit, said at a Sept 24. briefing.

--Editors: Andrew Hobbs, Tim Smith

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

Source:Bloomberg news service