Is Elbegdorj taking the right steppes in Mongolia?

Published by MAC on 2009-06-22

Mongolia President Elbegdorj Wants to Change Rio Agreement

By Bloomberg News

18th June 2009

Mongolian President Tsakhiagiin Elbegdorj wants to change a proposed gold and copper mining deal with Rio Tinto Group and Ivanhoe Mines Ltd. to give the government cash instead of an equity stake.

The previous government signed in 2007 a draft agreement, giving it a 34 percent equity stake in the Oyu Tolgoi project and related taxes equivalent to 55 percent of profits. That accord was scrapped because of opposition from lawmakers.

"Half of the profit can belong to the Mongolian state, and half of the profit belongs to the investor," Elbegdorj said yesterday in an interview with Bloomberg in the capital Ulan Bator. Elbegdorj was sworn in today after he defeated Nambaryn Enkhbayar in the May 24 presidential election. "An equity share is not a good proposal," he said.

Ivanhoe, based in Vancouver, has been trying for more than five years to complete an investment agreement for the Oyu Tolgoi copper and gold deposit, about 80 kilometers (50 miles) north of the border with China. Mongolia's economic growth has slumped and its budget deficit has widened, increasing the incentive for the government to attract more foreign investment.

While a profit-sharing arrangement rather than a government stake may be good news for investors, the possibility that a final deal could take years more to reach is "not so good," according to Masa Igata, chief executive officer of Frontier Securities in Ulan Bator.

"No miner wants to wait three years," he said yesterday. "If I were management of Ivanhoe or Rio Tinto, I might want to sell the stake to someone else."

‘First Priority'

London-based Rio, the world's third-largest mining company, called the deposit "the world's largest undeveloped copper-gold resource" when it agreed to buy 10 percent of Ivanhoe in October 2007.

Elbegdorj said reaching an agreement is his "first priority" on the economic front, though he gave no more specific time frame for a deal than the next three years.

"We are approaching the final moments to get a good agreement," Elbegdorj said. "I would like to say to the foreign investors: ‘Do not close the door, there are still opportunities.'"
Ivanhoe fell 8.7 percent to C$6.28 on the Toronto Stock Exchange yesteday, the biggest decline since May 25. Rio's Sydney-traded shares dropped 9 percent to A$52.52 at the close on the Australian stock exchange.

Nick Cobban, a London-based Rio spokesman, said yesterday he couldn't immediately comment. Bob Williamson, a Vancouver based media contact for Ivanhoe, declined to comment.

‘An Example'

Ivanhoe in March 2008 estimated the copper resources in the Oyu Tolgoi project at 78.9 billion pounds and the gold resources at 45.2 million ounces.

"If we make a good agreement, this will be an example for exploiting other big deposits and there is no space to make mistakes," Elbegdorj said.

The government has yet to announce who will win rights to develop Tavan Tolgoi, a metallurgical coal deposit.

Mongolia's budget deficit expanded to about 5 percent of gross domestic product in 2008, compared with three years of surplus before that, and a group of international donors including the World Bank, the Asian Development Bank, Japan and Russia are providing "multimillion" U.S.-dollar loans for a financial rescue package, according to an April report from the Singapore-based investment bank Eurasia Capital.

The nation's economic output may rise 3 percent this year, down from 8.9 percent last year and 10.2 percent in 2007, according to a March estimate from the Asian Development Bank. The country has a population of 2.6 million people.

Proposed Tax Change

The president-elect also proposed that the government consider changing a 2006 windfall profit tax that imposes a rate of 68 percent on revenue when copper prices exceed a certain amount per ton. Instead he suggested a graduated system, for example a rate of 40 percent when copper prices reach $8,000 per ton and 60 percent when they reach $10,000 per ton.

Copper prices have slumped 40 percent in the past year to around $4,930, hurting state finances and increasing the urgency of opening more mines as economic growth slows.
"One big high rate is not very wise," he said.

The new president will have to "balance" the foreign- investment interests of China, Russia, Europe and the U.S. with the interest of Mongolian citizens, said Ganzorig Ulziibayar, president of ACI Mongolia Financial Markets Association, an industry body aimed at promoting the country's financial markets.

China and Russia, Mongolia's two biggest trading partners, sandwich the land-locked nation and control its ability to export metals and energy deposits to the international market.

--Dune Lawrence, Stephen Engle. With assistance from Rob Delaney in Toronto, Brett Foley in London and Rebecca Keenan in Melbourne. Editors: Greg Ahlstrand, Teo Chian Wei.

To contact the reporters on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.net; Stephen Engle in Beijing at sengle1@bloomberg.net.

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How the financial crisis is pounding Mongolia. Call it the cashmere effect
Stalled spending, falling prices, high inflation, joblessness - times are tough for residents of this vast country

JASON SUBLER

Reuters

15th June 2009

BAYANCHANDMAN, MONGOLIA - Lyoffs in financial hubs such as London and New York are rippling deep into the grasslands of Mongolia, where herders are suffering as the price of cashmere, a wool used in luxury suits, has plunged.

A drop in demand for cashmere clothing as investment bankers, lawyers and other high-flyers have either lost their jobs or faced salary cuts has led to a 50-per-cent fall in cashmere prices, sapping the income of goat herders on the Mongolian steppes.

That is just the tip of the iceberg of the impact the global financial crisis is having on the people of this vast, landlocked country wedged between Russia and China.

Aside from plunging wool prices, the economic slowdown in countries such as South Korea means that the tens of thousands of Mongolians working there are sending less money back home to their families - or even returning home after losing jobs.

And with prices for the country's main export, copper, and other metals down relative to last year, construction and other spending have slowed, taking a toll on the government's coffers and its ability to help the poor.

Sereeter Damba, who like much of the population is a nomadic herder, is looking for new ways to support his wife and 11 children now that his 200 sheep and goats are no longer worth what they used to be.

"I'm trying to find a way to plant crops, some vegetables, because I'm not making enough from my herd. But it's hard to get land to do so," Mr. Damba, 52, said at a settlement at Bayanchandman, 70 kilometres northwest of the capital, Ulan Bator.

In the meantime, a loan of 500,000 tugriks (about $390) is helping his family to get by at a time when inflation in Mongolia is still more than 12 per cent, after peaking at 34 per cent last summer.

He is determined to hold onto his herd, which serves as collateral on the loan. "Of course I'll pay it back," he said.

Many others have not been so lucky. Pinched between double-digit interest rates and low meat and cashmere prices, more and more herders have been driven into default on their loans, forcing them to give up some or all of their flocks.

That downward spiral in turn affects people like Sambuugiin Saruul, a 43-year-old carpenter in Bayanchandman who has seen demand shrivel for his wood fences and other building materials.

"Last year, by this time, I had lots of orders and people even paid in advance," Mr. Saruul said. "This year, it's nothing like that. I've had one or two orders but no money, they want it on credit."

He and his family have had to cut back on food as a result, reduced to just one full meal a day. Like many others before him, he is considering moving to the city to find work.

Nearly half of landlocked Mongolia's roughly three million people now live in Ulan Bator, according to some estimates. Many are concentrated in the capital's outlying districts, where running water and sewerage are rare.

Sarunl Sambuu and her husband were forced to move there in 2000 when a fierce winter storm, known as a zud, killed their herd of 200 goats and sheep. They have resigned themselves to life in the city. "If we had livestock, we'd definitely go back to the countryside.
But if you don't have any, there's no life there," Ms. Sambuu said.

Most people like Ms. Sambuu and her husband face bleak prospects, said Luvsandendev Sumati, director of the Sant Maral Foundation, an organization that does surveys on economic and social issues. "The problem is that their labour skills are very low. They require a lot of retraining, vocational training," he said.

The construction industry, which experienced a boom on the back of high copper and other mineral prices of 2006-2008, has effectively ground to a halt, cutting job opportunities. The retail and service industries have also suffered.

With jobs scarce and inflation high, the real effective wages of day labourers in Ulan Bator fell by about 60 per cent between April, 2008, and April this year, the World Bank said in a recent report.

Once protected by a socialist safety net during Mongolia's days as a Soviet satellite, the poor are increasingly unable to rely on state handouts as the government's revenues have dropped by more than 30 per cent over the past year in the wake of tumbling metals prices relative to the historic highs reached last year.

That forced it to agree to a $229-million (U.S.) loan package with the International Monetary Fund in April, a program the IMF said is proceeding smoothly.

Pivotal for turning the Mongolian economy around will be an agreement with foreign miners on developing the massive Oyu Tolgoi copper and gold mine and the Tavan Tolgoi coal deposit, said Arshad Sayed, the World Bank's country manager for Mongolia.
Negotiations for the Oyu Tolgoi project in particular, set to be developed by Ivanhoe Mines Ltd. and Rio Tinto PLC, have dragged on for years as the government has sought better terms to help pull its people out of poverty.

Gross domestic product per capita was about $1,600 in 2008. The Oyu Tolgoi project alone could increase GDP by about a third, according to some estimates.

"Mongolians are looking forward to the developments as a way to, in many ways, jump start the economy," Mr. Sayed said.

But whatever happens with the mining deals or the economy, Demchigiin Dorjdavga, a herder in the countryside near Ulan Bator, expects to continue the only way of life he knows, moving with his wife from place to place with their herd.

"As long as we have some flour and rice, we are not so interested in spending on other things," the 50-year-old said. "I was born and grew up in the grasslands. I've spent all my life here, so I'll probably die here too."

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The numbers

$4.9-billion
Mongolia's 2008 GDP, in U.S. dollars

8.9 per cent
Mongolia's estimated growth rate in 2008

34 per cent
Portion of Mongolia's labour force involved in agriculture

5 per cent
Portion of Mongolia's labour force involved in industry

Source: CIA World Factbook