Mongolia ready to grab stake in Ivanhoe mine
GEOFFREY YORK
ULAN BATOR -- In a fiery speech to mining executives, a senior Mongolian cabinet minister has left little doubt that his government will seek an ownership stake in Ivanhoe Mines Ltd.'s massive Oyu Tolgoi project.
The move could have a significant impact on Ivanhoe because a new law allows the government to acquire up to 34 per cent of private mining projects and there is no clear mechanism to ensure that the government pays a fair price.
Industry and Trade Minister Bazarsad Jargalsaikhan said the issue of state "participation" in the Oyu Tolgoi copper mine will be raised this fall when Ivanhoe meets the government to seek a 30-year investment agreement.
He argued that Ivanhoe should welcome a government stake in Oyu Tolgoi, since it would create more "security" for the Vancouver-based miner as it tries to raise money for a project that will cost an estimated $5.6-billion (U.S.) over the next 40 years. "Mongolian government participation will create even more opportunities for Ivanhoe to raise capital on world markets."
"If you have the government as your partner, you will enjoy more stability," Mr. Jargalsaikhan told the annual Mongolian mining conference yesterday. "Do not be scared of government participation . . . Governments never go bankrupt. We reduce the risks inherent in a project."
If foreign investors are unhappy with government ownership, they can simply leave the country, he told the miners.
"You can go to another corner of the world. We're not forcing anyone to stay in Mongolia. I have to work for the interests of the people, and they are demanding that Mongolia's resources be fairly distributed. They want to see government participation, so that the people can gain more of Mongolia's resources. We can't allow 100-per-cent private ownership."
As if to emphasize his point, the mining conference was picketed yesterday by banner-waving protesters who warned the foreign investors to avoid any investments that would "harm the basic interests of the people."
Pressure from protesters was a key factor in persuading the Mongolian government to pass the new mineral law this year. Thousands of people clogged the central square of Ulan Bator, throwing eggs, pitching tents, holding hunger strikes and even burning an effigy of Ivanhoe's executive chairman, Robert Friedland.
The new law allows the Mongolian government to acquire up to 34 per cent of "strategic" mineral deposits that were discovered in privately financed explorations and up to 50 per cent of publicly financed discoveries.
If the government acquires an ownership stake, the law says the government and the mining company should negotiate the purchase price. But it fails to specify what happens if there is a disagreement on the valuation of the government stake.
Layton Croft, executive vice-president of corporate affairs at Ivanhoe's Mongolia subsidiary, confirmed that there is "a chance" that the government will seek a stake of Oyu Tolgoi during its negotiations with the company this fall on the 30-year investment agreement.
"Ivanhoe will follow the law," Mr. Croft told reporters after listening to the Industry Minister's speech yesterday. "The question of valuation is of critical importance. I don't have the answer on that. But what I heard Mr. Jargalsaikhan say was that those negotiations should be businesslike."
The government is working on regulations to clarify the process for state acquisitions of equity shares in mining projects.
Some analysts believe that the government will consult an independent international expert to establish a fair purchase price for each stake, although nothing has been confirmed yet.
Mr. Jargalsaikhan said the government will not "confiscate" a share of mining projects. The stakes will be obtained on a commercial basis, he said.
The new mineral law, combined with a new 68-per-cent tax on "windfall profits" in the copper and gold industry, have caused widespread concern about Mongolia's future. Some companies have suspended their exploration activities. But others, such as Entree Gold Inc. C of Vancouver, are continuing to explore.
Gregory Crowe, president and chief executive officer of Entree, said he is optimistic that the government ownership issue and the tax issue will "sort themselves out" over the next year or two. Mongolia could rescind the laws if it sees signs of a withdrawal by foreign investors next year, he said.
Although it is still unclear whether the government will pay a fair market value for its newly acquired ownership stakes, a mining company would always have the option of a court challenge if it feels cheated by a government acquisition, Mr. Crowe said.
An independent analyst, Tom Meyer of Raymond James Ltd., said the Canadian investors -- especially Ivanhoe -- are putting too positive a spin on the situation. "I think there is a high level of misplaced optimism that Mongolia will ultimately reverse the windfall tax and provide incentives for foreign mine investment," he said. "I'm not so optimistic. In my view, Mongolia's view of the middle ground is distant from what I believe would be acceptable to Mr. Friedland or his shareholders . . . It would be hard for the country to save face if foreigners received the bulk of the benefits."
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