A recent “Development” TV program, produced by The Mongolian Mining Journal, was devoted to the Oyu Tolgoi Investment Agreement, as it is now and as it could be. Representatives of the Government and NGOs, as well as a cross section of MPs gave their views on whether the agreement needed revision to better serve Mongolia’s interests. The program turned out to be very lively and we give below a selection of questions asked and answers given, on the basis of notes taken by G.Iderkhangai.Some MPs feel Parliament resolutions have not been adequately reflected in the agreement and Mongolia’s share of ownership should be raised from 34% to 50%. What is your opinion on this? 
S.Bayartsogt, Finance Minister: Parliament resolutions 40 and 57 were very much on our mind when we signed the agreement. Article 1.6 of the agreement says “Mongolia shall claim additional 16% of equity after 30 years”. This is precisely what is in Resolution 57 as approved by the Standing Committee on Security and Foreign Policy. The third provision of the resolution says this could be done in one of three ways: by amending the Minerals Law; after the amount invested has been recovered; and with mutual consent. We did not go for amendments to the Minerals Law and, instead, told the investor we wanted 16% more equity after 30 years. And we got what we wanted.
The investment agreement is also a stability agreement. This means that the newly introduced royalty tax will not apply to OT LLC, as is the case with other companies which concluded investment or stability agreements. However, the Government was directed that negotiations should be held with these companies to allow the new tax to be applied to them. Provision 15.30 of the investment agreement also says, “Upon mutual consent recorded in writing, the parties may amend or modify this Agreement.” The investor was approached accordingly but it wanted to retain its rights under the stability agreement. Since there was no agreement, we could not press for bringing it under the new law. This was in perfect correspondence to the terms of the agreement.
OT is a global scale project and the USD4-5 billion so far invested in it is equal to Mongolia’s GDP. It would have been against the duly signed agreement to insist on amending it during the project financing stage, and against the wishes of the investor.
So do we have to wait for 30 years to press for any amendment, for that is when the investor is expected to recoup its investment?
MP R.Amarjargal: It is not possible to give a cut-off date for such recovery. This can be after two years, three years or 30 years. Copper price is always volatile and gold price changes dramatically. The picture can be very different from year to year.
Some people are using their own calculation to assert that investment in the Oyu Tolgoi project will be recovered in 4-5 years. But it is also possible that this may take 30 years. A Chilean copper mine has worked for 40 years without earning a profit. The investment agreement should have been clearer on this point but we failed to avoid the uncertainty.
I’m one of the MPs who feel Resolution 57 has not been followed and Parliament should insist that the Government implement it in full. The image of the Government has taken a hit. Why did it issue a joint statement with a foreign company, bypassing Parliament? It was sheer nonsense.
In general, is it better to have more equity or take more of the profit?
S.Bayartsogt, Finance Minister: The share percentage in Oyu Tolgoi is not the most important thing. We have to focus on what improvements, if any, can be made in the agreement. If the project doesn’t make any profit, there would be no benefit even if we had 100% equity. I personally feel we have a very good agreement. The Mongolian Government doesn’t spend a single dollar on construction of the mine. The profit starts coming only after the underground resources are economically converted. Once the resources start being sold, Mongolia will make MNT59 out of the MNT100 of sales proceeds, without having invested anything, while the investor takes the remaining 41%. People talking about 50% or 34% equity do not realize what share of the income we stand to take. Rather than focusing on 34% or 50%, it is better to think that Mongolians will get 60% of the profits once Oyu Tolgoi starts commercial operation.
OT CEO Cameron McRae has said that production costs at Oyu Tolgoi company would be among the lowest in the world and, therefore, the company would earn a profit even if the global price falls. What do you feel about this as chairman of the company board?
G.Batsukh: Cameron McRae has worked in the mineral sector for over 30 years and anything he says has to be taken seriously. It is true that commodity prices are hard to predict and there is no certainty that Oyu Tolgoi will always make a profit. We should think positive that copper and gold prices will increase and remain high until Mongolia claims 50% equity. I think Cameron McRae made the statement to show how positive he was about prospects.
Given the way global copper price moves, is it realistic to expect that copper and gold mining at Oyu Tolgoi will continue for 70 years?
S.Bayartsogt, Finance Minister: In the past 70 years, copper price has fluctuated between USD3,000 and USD9,000 per ton. For our calculations, we estimated the price to be USD4,408 per ton. At that price, the Mongolian Government will earn USD30 billion and the investor USD25 billion. If the price goes up, our profit will increase and that is what is likely in the long term.
Mongolia has a debt of over USD800 million against its ownership of 34% equity as a loan. Is it true that when production starts, with interest added, the debt will amount to USD1.5 billion?
S.Bayartsogt, Finance Minister: The Government doesn’t have any debt. Mongolia acquired 34% equity free of charge and has not made any capital investment. We have taken an advance payment and this will start being adjusted when the company begins commercial production. After the entire amount has been repaid, Mongolia will get in full its share of the profit. Mongolia has made a very good bargain that it would never have a debt, but will earn a profit. Mongolia will pay interest when repaying the amount it has received but the settlement will be only against profits. All financial risk is borne by the investor.
What will be Mongolia‘s income if the project does not make a profit?
S.Bayartsogt, Finance Minister: Even if there is no profit, operations will always be taxable. During negotiations, the investor had suggested profit sharing only after recovery of investment and had wanted the Erdenet model to be followed. Erdenet was exempted from paying all types of taxes from 1973 to 2003, the period when investment was still being recovered. The OT investor offered 50% profit if a similar exemption was allowed for 30 years. We did not agree.
G.Batsukh, board chairman of Oyu Tolgoi LLC: It is not good to have a negative attitude. Construction is under way without Mongolia having to pay a single dollar. Mining and exporting of copper will begin in one year. Around this time next year, it will be clear if the Government will be in debt or will be making money from OT to repay other foreign loans. We have a saying “The fox is beautiful when it is not killed”. The investment agreement promises us the fox fur but the fox is not yet killed. Let us first get the fox in the trap and then talk about increasing our share of equity. It is more encouraging for the company staff and management if the public and the Government pressure them to start mining and selling as soon as possible rather than complaining about being in debt.
MP R.Amarjargal: Batsukh talked about the fox being beautiful when it is not killed. If we kill it, then everything will be over. Once mining begins at Oyu Tolgoi, everything will be a problem. The Oyu Tolgoi agreement is not an issue that concerns just one company. There are fierce disagreements among politicians and companies on just how we want out are mining sector to proceed. The whole world is watching Mongolia and we have to take unbiased decisions.
Parliament must insist that the Government goes by its resolutions. Resolution 57 clearly says it has to be implemented “by improving the legal environment”. There is no way the Government will not do this.
There are too many knots in the Oyu Tolgoi investment agreement and they need to be unravelled as early as possible. Extreme stands do not help. MPs have differing views on the matter and it is good that the media is covering them. This is a learning experience for Mongolia. We are about to take a step, and a fumble will cost us dear.
Tavantolgoi Trans LLC was strongly critizised at one time for destroying the Gobi. Now the state has joined in the environmental rampage. Some Ministers and high officials have started freight forwarding companies there and forcing mining companies to hire their trucks. This is the real face of the Mongolian state.
S.Bayartsogt, Finance Minister: The Government has already amended certain provisions of the agreement signed with Rio Tinto. The company cannot now offer to sell its stock to anybody without prior approval from the Mongolian Government. The amended provisions have earned Mongolia at least USD1 million. These latest negotiations proved that Mongolia can hold its own at the international level and can successfully insist on others fulfilling their obligations. On its part, Mongolia has made it clear it will meet all its responsibilities set out in the stability and investment agreements. The investor has acknowledged Mongolia’s right to raise the issue of investment recovery under provision 15.30 of the agreement but has said this is not the time to discuss it. Mongolia’s share of the capital will increase duly but even before that Mongolia will keep 60% of the profit from the project. MPs probably want to increase this 60% to 70%.
MP R.Amarjargal: This shows we are not on the same page. We have different views on how to make MNT100 to MNT120. Shall we depend entirely on profit estimates? Shall we make MNT120 by increasing our 34% share to 50%? Or shall we need to add the royalty to make MNT120? The issue of ownership is a vital one, and goes beyond that of making money. Ordinary Mongolians think: “We have a mine on our land, but it is owned by a foreigner who has raised money on the international market, but we are not getting any money from these resources.” They have to be reassured. MPs rightly feel that an amendment to the Shareholder’s Agreement would not have been made without pressure from them.
S.Bayartsogt, Finance Minister: This is not true. Mr.Amarjargal is manipulating the facts to give a false impression.
MP R.Amarjargal: The fact remains that the amendments to the Shareholder’s Agreement that Minister Bayartsogt is talking would not have come about without pressure from MPs to open negotiations.
S.Bayartsogt, Finance Minister: You are talking about earlier negotiations. Before the latest round of talks MPs had made a totally different demand. We asked for a reduction in the 12% rate of interest on what Mongolia had borrowed. During the talks, MPs started claiming that Mongolia’s 34% ownership was being reduced to 6%. We were actually talking about raising funds in a way that put the risk on others, but many people did not understand this, and expressed concern that Mongolia’s equity was decreasing. To allay such misguided concerns we chose another method of project financing. This meant abandoning the proposal to issue preferential shares which would have meant less risk for us. People were confused between preferential and common shares. We planned to hold 6% of the proposed preferential shares, leaving our 34% ownership of common shares untouched, but the public did not understand this and so we decided to go for a less profitable option. This was not so good but we had to take note of people’s views, even if they were misinformed.
G.Batsukh, chairman of the Oyu Tolgoi LLC board: The recent amendments to the agreement have been advanatageous for Mongolia. I want the public to understand that opportunities for improvement are open for both parties.
This question is for Mr Batsukh. President Elbegdorj has said that Mongolian workers at the project should not be working in conditions more like those in a military base. Are working conditions for Mongolians really very harsh?
G.Batsukh, chairman of the Oyu Tolgoi LLC board: The situation on the ground needs to be explained. There are two kinds of work in Oyu Tolgoi: construction, and mining proper. The construction is scheduled to finish after one year. Work on accomodation facilities, kindergartens and schools cannot be started right now in the area. We already have a consolidated plan to address all social issues of employees and this will be taken up in the next phase. However, residential quarters, a kindergarden, a school and other facilities are coming up in Khanbogd soum. Similar facilities are also being built in soums surrounding Oyu Tolgoi.
The staff certainly don’t live like they are in a military base. Of course, improvements can be made, but currently they have accommodation with hot water, sports facilities and an entertainment center, world class meals 3 times a day and transportation. Shift staff travel from Khanbogd soum.
S.Bayartsogt, Finance Minister: The Government is responsible for providing opportunities to Mongolian small and medium businesses to benefit from the development of projects. There is also the question of imparting job skills to Mongolians and the Oyu Tolgoi project has been acting as a pioneer in this. We do not right now have enough professionals to fill positions at Oyu Tolgoi, Tavan Tolgoi, Tumurtei and other deposits once they start working. The present proactive approach to training professionals is very important. Also, the Oyu Tolgoi project needs a huge amount of goods and services. As of last year, USD800 million worth of purchases was made and it is imperative that Mongolian vendors supply the demand.
All our resources are located in the Gobi region, where there is not enough surface water. Problems will arise once mining goes on full steam and water demand increases. We shall insist on all companies to introduce technology that consumes minimal water. Otherwise, the state will regulate the use of water. A project has to be seen not just from an economic perspective. The social, environmental and many other aspects are no less important. The Government’s task is to ensure that all this is properly observed.
MP R.Amarjargal: Earlier in the discussion, there was mention of the case of a Chilean mine that did not make a profit for 40 years. That mine was a foreign invested company. We shall support and encourage all foreign companies which work with professional sincerity, going beyond short-term commercial interests. We would wish them to work in Mongolia for many years and be our partners in development. At the same time we should have no truck with those whose interests are purely selfish, focused on making money when commodity prices are high and disappearing thereafter. We have to be clear on what we expect from investors. There is no need to be polite and pleasant to our own detriment. We don’t need to give tax preferences. We need to apply our laws and regulations, insisting that foreign investors fit themselves in that framework.
S.Bayartsogt, Finance Minister: I would like to mention one thing in this context. The Oyu Tolgoi agreement was the first of its kind and the company has been paying all applicable taxes. I see this is as a promising start.
G.Batsukh, chairman of the Oyu Tolgoi LLC board: The conclusion of the Oyu Tolgoi Investment Agreement gave a message to the world that Mongolia was a democratic, developed and stable country. It also reaffirmed that the Mongolian Government could be relied upon to fulfil its commitments.
The next round of the discussion sought the views of NGO representatives on how the Oyu Tolgoi Investment Agreement could or should be improved.
S.Ganbaatar, President of The Federation of Trade Unions of Mongolia: Mongolia needs to earn money from OT, so the idea of increasing its 34% ownership to 50% is very right. However, it is very probable that the company will find ways of showing that no profit is made for 30 years and it will make no difference whether Mongolia owns 34% or 50%.
It is an empty gesture to have 3 Mongolians on a 9-member board. The 3 don’t have any power. Behind the facade, OT belongs 100% to two foreign companies. That being the reality, it is pointless to get excited over the extent of shareholding. We are most unlikely to make any profit, whether we own 0% or 100%.
Mongolia has had to take foreign loans at high interest to meet the financial obligations stemming from its 34% ownership. It is better to raise the current royalty rates. Production will generate cash flow if the royalty is 30%. It will be Mongolia’s decision how the money is spent.
It may all be that we are screaming after being tricked. I spent 3 years of my life to explain to Mongolians that the OT agreement was bad. The 20 MPs who are now calling for the agreement to be amended are on the right path. Finance Minister S.Bayartsogt and Minerals Minister D.Zorigt, however, have all along been saying that the agreement is “excellent”.
I have always been demanding a study by independent analysts of the merits of the investment agreement. Unbiased professional opinion on whether the agreement was bad or good is what the people want and not pontification from S.Bayartsogt, D.Zorigt and L.Gansukh. What expertise did they possess to sign an agreement that determines Mongolian fortunes for 100 years? Their standard answer is that they followed the advice of international consultants. What were the credentials of those who gave the advice? Did our Government seek the views of the IMF, the World Bank, the Asian Development Bank or any other international financial institution?
The matter is not closed. The projected income from the project is USD200 billion and the issue could end up in an international arbitration court. However, the agreement says, “The operation should not stop.” Arbitration takes at least 5-6 years and the OT investor can make sure this case carries on for 10-20 years. Mining will not stop. Then again arbitration court fees are USD100,000 per day of hearing. This is the trick, putting Mongolia at a disadvantage in getting a fair deal. I hope our OT experience is not repeated in the case of TT.
D.Sukhgerel, Executive Director, Oyu Tolgoi Monitoring NGO: Parliament resolutions 40 and 57 say Mongolia should claim 50% equity when OT recovers its investment but the agreement fixes the stability term at 30 years. This contradiction restricts Mongolia’s options.
International experience shows that investment in the mineral sector is usually recovered in around 10-15 years. During this period Mongolia can claim up to 50%, but once the stability term ends after 30 years, Mongolian equity share will be increased to 51%. This goes against the two resolutions, and the provision to extend the stability term 2-3 times is neither according to international norms, nor profitable for Mongolia.
The OTIA protects the company’s interests while imposing several restrictive conditions on the Government. Balance is lacking. The inequality is most evident in how water will be used. The company is allowed exclusive rights over the water from any source it discovers on its own, but the agreement is silent about protecting already known water resources in regions surrounding Oyu Tolgoi. Thus the company is now taking as much water from the Khanbogd soum central well as it wants. The13,000 people living in Khanbogd soum are threatened but they can do nothing as the agreement calls for use of low water consumption technology “only when production starts”. This is very dangerous.