A crane hovers above the site of a new shaft under construction at the Ivanhoe Mines' Oyu Tolgoi mine site in Khanbogd village, Umnugobi province, Mongolia Saturday Nov. 7, 2009.Ganbat Namjilsangarav/The Associated Press
Mongolia is backing off plans to grab a larger stake of the massive Oyu Tolgoi copper-gold project following warnings from its majority owner, Canada's Ivanhoe Mines Ltd. , that such a move would create mistrust among future international investors.
Statements from government officials put an end to weeks of speculation that the country might seek to prematurely boost its stake in the investment agreement. Investor worry spurred a sharp selloff of shares of Ivanhoe Mines, the project's 66 per cent owner, as well as Rio Tinto PLC , which owns 49 per cent of the Canadian company.
Oyu Tolgoi is key to economic growth in the country, the officials said, warning of the economic consequences of revising the existing deal that gives the country a 34-per-cent stake in the project. It has the option to increase that ownership to 50 per cent in 30 years.
The Mongolian government and Ivanhoe Mines, alongside its project partner Rio, later put out a joint statement confirming their support for the existing deal signed in 2009.
While both Ivanhoe and Rio maintained the agreement would not be altered, investors feared Mongolia would join the growing list of resource-rich nations trying to gain more profits from miners operating in their countries.
Not all nations have been successful though, as miners fight back and caution countries about the risk of losing investment if so-called resource nationalism goes too far. Australia proposed a 40-per-cent tax on miners in early 2010, which led to a backlash from some of the world's largest mining companies operating in the country. After some political fallout, Australia scaled back that amount to 30 per cent and only on certain metals.
Ivanhoe has also pushed back at possible changes to the Oyu Tolgoi agreement, noting in a series of statements over the past couple of weeks that Mongolia has benefited from construction of the $6-billion project, which is set to begin production later next year.
The point was also made in Thursday's joint statement, which noted that Mongolia "has achieved international stature as one of the countries most attractive to foreign investment ... The people of Mongolia are reaping great benefit from the construction of the Oyu Tolgoi project and stand to benefit even more when the project becomes operational."
Ivanhoe had also warned that revising the agreement, which took six years to negotiate, would "seriously undermine" investor confidence in the country, particularly when Mongolia is looking to develop the Tavan Tolgoi coal deposit and the second-largest mining investment in Mongolia after Oyu Tolgoi.
Ivanhoe shares surged 20 per cent in early trading on Thursday, after the government confirmed it would stick to the existing agreement, before closing the day up 13 per cent at $17.57 on the Toronto Stock Exchange.
While the issue of Oyu Tolgoi's ownership appears to have been settled for now, resource nationalism will always be a risk for miners. This is particularly true in emerging nations such as Mongolia, which are still finding their way when it comes to foreign investment and how to best achieve economic growth.
"This game is not over. There are real long-term issues here," Pierre Fournier, a geopolitical analyst with National Bank Financial, said in an interview. "In particular, when the mine is up and running they will be more vulnerable to geopolitical issues."
However, he noted that Ivanhoe may not be involved at that time. The company, founded by well-known mining promoter Robert Friedland, is expected to eventually sell its stake in Oyu Tolgoi.
Rio is believed to be the most willing buyer at this stage, but China is also believed to be interested as it looks to secure more copper while continuing to expand its infrastructure base.