Investors Await Mongolia's New Tax, Mining Rules

Investors Await Mongolia's New Tax, Mining Rules

By James Attwood of Dow Jones Newswires

6th April 2006

SYDNEY (Dow Jones)--Under the watchful eye of global miners and investors, Mongolia's legislators this week resume debate on proposed changes to tax and mineral laws.

Although most observers expect only relatively minor changes to the investor-friendly legislation introduced in 1997, some say a more radical proposal for the state to take a greater share of foreign-owned mines is causing unease among investors.

"Nobody quiet knows how the numbers will stack up," according to one foreign diplomatic source.

Earlier this year the former communist Mongolian People's Revolutionary Party, or MPRP, formed a new government replacing a fragile power sharing arrangement resulting from a tied 2004 election.

To help shore up its position, the MPRP appointed the Republican Party's B. Jargalsaikhan as trade and industry minister, whose portfolio covers mining.

The new minister, who waged an unsuccessful campaign in the last presidential election on a populist platform of keeping the country's mineral wealth out of foreign hands, has foreshadowed significant changes to the mining law.

His proposal, which adds to two others being touted by the new government and members of parliament, is believed to contain compulsory acquisition of around 30% of all foreign owned mines and an increase in royalty rates.

"That has put the cat amongst the pigeons in a very big way," the diplomatic source said.

Support for Jargalsaikhan's proposal may be thin considering he is the Republican Party's sole parliamentary member and given the country's recent moves to open up its mineral wealth to private capital.

However, the nationalist measures may still hold sway with some more moderate MPs and their impoverished constituents.

Canada's Ivanhoe Keen Observer

The foreign investor with perhaps the keenest interest in the process is Canada's Ivanhoe Mines Ltd. (IVN), which is negotiating the development of an estimated US$1.4 billion copper-gold project in Mongolia's Gobi dessert.

Ivanhoe's Oyu Tolgoi project is being held up as an example of Mongolia's arrival as a global mining destination on the back of investor-friendly legislation, vast untapped resources and booming commodity prices.

It is also one of the few large-scale new copper development opportunities in the world, meaning copper forecasters and investors alike are paying close attention.

Inevitably, that mantle also puts Ivanhoe on center stage in the debate over how to tap the mineral wealth in the former Soviet satellite.

As parliament reconvened Wednesday, an estimated 3,000 protesters clashed with police, reportedly demanding the resignation of senior officials for their handling of negotiations with Ivanhoe over Oyu Tolgoi's operating conditions.

The Canadian company downplayed the incident saying much of the protests weren't even mining related, much less centered on Ivanhoe.

Neither is the company overly concerned by calls for a more equitable share of the country's mineral wealth, the spokesman said Thursday.

"That sentiment is nothing new and Ivanhoe is committed to negotiating a stability agreement that will ensure fair and equitable benefits for Mongolia and Mongolians as well as investors and shareholders," said Ivanhoe Mongolia's Layton Croft.

Croft's comments echo those of company president John Macken during a recent visit to Mongolia with former U.S. secretary of state James Baker, whose legal firm represents the Canadian company.

Ivanhoe is also confident any legislative changes regarding state ownership will be limited to deposits discovered with the help of state funds, which was not the case with Oyu Tolgoi.

In addition, proposals to lift the current tax holidays for foreigners are likely to be offset by the introduction of carry forward and deductibility provisions, Croft said.

He played down speculation that legislators may increase mining royalties from the current 2.5% rate. "Talk it might increase is about a year old and has really gone away to my eye and ear."

A senior Mongolian mining bureaucrat agreed the proposed royalty increase "is not going to happen again" after the country's "disastrous" hike to 10% in 1990 but local mining industry sources said the royalty could go as high 5%.

Despite Ivanhoe's confidence of a favorable outcome, the company said it will be keeping a close watch on how the parliamentary debate pans out.

Amendments To Take Months Not Weeks

Timing is also an issue as further negotiations over Oyu Tolgoi's stability agreement - and in turn the project's final go-ahead and financing - await the amendments.

The Ivanhoe spokesman declined comment on a likely timetable for the parliamentary process, while the mining departmental official said it would take months rather than weeks, meaning the stability agreement could be in place in second half of this year.

Onsite work continues at Oyu Tolgoi - billed as the world's largest copper-gold development project - ahead of an estimated mid-2008 production start.

Ivanhoe, which has hired Canadian Imperial Bank to seek an equity partner for Oyu Tolgoi, wasn't available for comment on financing options.

One possibility is a Korean or Japanese off-taker, such as Japan's Mitsui & Co. Ltd. (MITSY), with which Ivanhoe already has a relationship, while other partner possibilities are major miners Rio Tinto PLC (RTP), Companhia Vale do Rio Doce (RIO) and BHP Billiton Ltd. (BHP).

Ivanhoe inherited Oyu Tolgoi, or Turquoise Hill, from BHP Billiton in 2000. The 500,000 tons-plus of annual copper output would put Oyu Tolgoi up with the giant Grasberg mine in Indonesia, analysts say.