This is the interview with Ts. Sedvanchig,until recently Executive Director of ErdenesOyuTolgoi, that created a stir in the international media. Ts. Sedvanchigwas answering questions a few days after the first shipment from OyuTolgoi was exported.
Can you tell us the reason why there were several postponements before Oyu Tolgoi began exporting copper concentrate shortly before Naadam?
It was on 9th July that the first shipment left. There were a few reasons why the date had been pushed back. The first plan was to start the export on June 14th but that was postponed following a decision made by the investor Rio Tinto. The management at Oyu Tolgoi informed the Mongolian shareholders, our company, and the members of the board of directors by letter that they had postponed export by a week, and planned to begin on June 21st.
Then there were issues about the technical equipment, and lack of agreement among shareholders, and the start was postponed again. Matters were sorted out not long after this and right before Naadam we were able to begin loading.
Does this mean that a consensus has been reached?
All parties agreed that export should start right away so that Oyu Tolgoi would revenue. The company had yet to earn a tugrug. Once export commenced, Mongolia would at least begin collecting fees for the use of facilities and its revenue from taxes would increase. It was imperative to expedite export as we have an open mine and also because there was a glut of mined ore and concentrate in stock.
Were there issues about how Mongolian interests were not being protected, by such things as the company keeping the terms of its sales agreements secret or keeping the money from the sales outside Mongolia? The Prime Minister said something to this effect in Parliament.
Rio Tinto or the Oyu Tolgoi management certainly did not share with us the terms of the sales agreements. This was the main reason behind the first postponement. Again, there were long discussions among shareholders on which banks would handle the accounts and how the sales proceeds would be processed but we could not reach a consensus until 4th when members of the board of directors were finally presented with the opportunity to familiarize themselves with the sales contracts, without any preconditions or restraints.
So all concerns on our side were addressed?
Each member of the board of directors could now study the contracts and receive the clarifications they sought. This helped lift any doubts on the Mongolian side. The shareholding parties also reached an agreement on where the sales proceeds would be credited and who would be responsible for the processing. It was decided that the money must go through a Mongolian registered bank. Every transaction in that account will be recorded in Oyu Tolgoi’s books and, when necessary, reported to its board of directors.
Does this mean that the money from concentrate export will stay in Mongolia?
The funds will certainly go through a Mongolian registered bank. They will be shown on the accounts and included in the reports of Oyu Tolgoi LLC. An independent auditor will check the books and submit its report on income/expenses. In other words, proper and complete oversight of all transactions has been arranged. It is for OT LLC to pick the bank where it will have the account, but there is no longer any likelihood that the export revenue will not be recorded or reported.
Any attempt to conceal the income or to evade taxes will fail. Rio Tinto and the management team have clearly understood that any such acts will make them liable under Mongolian law. Oyu Tolgoi has been asked to have all its bank accounts, both domestic and international, available to the government.
Why was there all this secrecy about the sale contracts? Was there any effort to show the income as less than what actually would be received?
The Mongolian government, or Erdenes Oyu Tolgoi to be exact, owns 34 per cent of Oyu Tolgoi LLC. There is no reason to hide anything or conceal any information regarding the company from a shareholder. Indeed, it is the responsibility of the company’s executive authorities to keep us fully informed of all developments. However, the OT management used to claim that some information was protected and could not be disclosed under company laws, international competition laws and anti-monopoly laws.
The Oyu Tolgoi concentrate export contract is worth several billion USD. Our company law is clear that approval of a contract covering such a large sum can come only after members of the board of directors are in 100% agreement over it. There is no way the three board members who represent the Mongolian side could be kept in the dark about the contract. It took time to convince Rio Tinto about the validity of our demand, but once it was accepted, things moved fast. Our review of the agreements eased our doubts, and we found no major problems with them.
What is the export target this year and how much money is Oyu Tolgoi expecting to make?
The mine is operating extremely well. Many things have been tried since its opening in December and we have made a lot of progress, in terms of both amount and quality of production. Our estimated output target was 100,000 tons of ore a day, and we are already doing over 90,000 tons daily. You can say we have achieved optimum production capacity.
According to the feasibility study, the mine will break even once it works at 70% of its capacity for about 2 months. It is a matter of time for the daily output to reach around 110,000 tons. The present quantity of processed concentrate in stock is around 60,000 tons, which is about what we will be exporting every month. Regarding ore, we have about a year’s output in store.
So, the mine is running at almost full capacity and there is enough stored up concentrate. Loading and transporting are in full swing. Export has started, the flow is in tide and there is no looking back.
What about the expected revenue from the project?
Barring any unforeseen obstacles we should make about $1 billion this year. Of this, an estimated $100 million will certainly be paid to the government in taxes and fees.
As revenue starts pouring in, fresh investments will be made, and customs duties and VAT will accrue to the government budget. That is why it’s vital to keep the project running at full speed. Optimal performance will raise the project’s reputation worldwide, and gain positive attention of the public and markets.
How is Oyu Tolgoi doing financially?
The company has just started to make money, after many months of only expenses. Generally, the project has been moving along smoothly. There has been no incident that stopped or slowed production. The government has a contractual obligation to support the project and has been doing so without fail and with a sense of responsibility, granting all necessary permissions without any fuss. The investors have also continued to finance the project without fail.
Will further financing require a loan?
You see, a company becomes financially secure once it begins selling its product at a good price. Yes, substantially more money will be required to develop the underground mine into an operational stage. While the investment agreement and Mongolian laws govern all work on the project, everything must also be done in a way that is profitable for all shareholding parties. That applies to the choice of the mode of financing as well. The investors have made some suggestions and we in the government are looking into them. As of now, we have not decided on anything but we shall opt for a form of financing that is best for the project, the most appropriate and efficient.
Right now, the investors say there is urgent need for more financing, while we wish them to clarify why the original estimated investment has not been enough. When do you expect a resolution of the conflict?
The three years since the agreement was signed and work began have seen many occasions when our interests as shareholder have been affected. These issues were raised at the shareholders’ meeting in February. Altogether, 22 points were made, of which five have to be decided among the shareholders and 13 by the board of directors. The remaining four relate to breaches of the terms of the agreement and/or Mongolian laws. All 22 are still outstanding.
Without doubt, the first matter that must be decided is the amount of money spent so far and the manner in which it has been spent. This has already exceeded the initial investment amount indicated in the agreement. Some 20 professional auditors named by four ministries have been examining all expenses-related documents for the last three months to help us know the actual position. This has to be ascertained before we can take up some of the other 21 problems.
The amount of the initial investment is crucial to determine the taxes and other income Mongolia will receive from this project. We represent the government which holds 34 per cent share of Oyu Tolgoi, and as such, have a responsibility to protect and further the nation’s interests. The auditing work will take time as its findings must be drawn up in a fair and responsible manner and also be good in law. The justifiability of the initial investment will directly affect the project’s long-term profitability.
How do the investors look at the exercise?
Rio Tinto supported the audit because it is connected to the very important issues of taxation and income for the life of the project. They are also having an independent audit of the expenses. Our auditors are working on their primary conclusions. When their work is finished, hopefully in the near future, the two sides will begin discussions.
Are some members of Parliament still insisting that the Mongolian government should own 51% of the project?
A clause in the agreement makes it clear that once the government repays its share of initial investment, it would gain 51% ownership. This is one of the several reasons why ascertaining the exact amount of this investment becomes so important. This is also why we must proceed soberly, thoughtfully and responsibly.
Do you wish to amend any terms of the Oyu Tolgoi investment agreement, in the light of developments following its signing?
Emotion should not dictate our wishes, but there are indeed changes very much required in that agreement. Some articles in it are not clear and are open to differing interpretations. Sometimes, the translation is amuous and results in misunderstanding.
For instance, take this anomaly. The basis of the agreement is the Technical and Financial Feasibility Report. This the concerned Minister received on 31 March, 2010, but the agreement had been signed six months earlier, on October 6, 2009. So the cornerstone is laid after the structure is put up!
Now, the Feasibility Report mentions $14.6 billion as the total cost of developing the open and underground mines. From the time exports begin, from 2013 onward, the company would reinvest its income on the development but what is spent until then, known as the initial investment, would come from the shareholders. Now it seems that this amount exceeds the estimate in the feasibility report. And Rio Tinto says the future increase would be yet more substantial. This is apparently in breach of the agreement.
As a professional in the field, I feel amendments to any agreement are inevitable with time. Life is a continuous process of modification, clarification and improvement. We are just being pragmatic, not being guided by a whim.
We can also not overlook instances where articles in the agreement are against the law and rules of Parliament. The agreement claims that the government has followed the 57th Resolution of Parliament. This is untenable and ignores the rights of Parliament. This clause must be done away with immediately. No one has the right to undermine the constitutional power of Parliament.
Another important article calling for amendment concerns the grant of multiple permits in the Oyu Tolgoi field. The management service fee is too high. Yet another issue is the absence of involvement of Mongolian shareholders in the executive management team of the project.
Other things have happened that are in breach of the Mongolian Law and/or of the terms of the agreement. For instance, there have been many complaints that the salaries of Mongolian workers are too low, even though the agreement enjoins the investor to pay the same salary to all who do the same job. There are many other cases where the OT administration has not observed the law of the land and/or the terms of the agreement.
Rio Tinto appointed all the senior people who should provide leadership for the project. However, some of them have failed to make any impression at the ground level in Mongolia because of their mindset and cultural differences. I repeatedly made the point at meetings that senior executives picked by Rio Tinto must respect the other shareholders’ culture and traditions and have to obey Mongolian laws. Even though we did not invest any ready money, we are in debt to pay our share of expenses, and we have let them use our mineral wealth for free. We surely have the right to expect responsible and respectful conduct.
Exactly how much is our debt?
Our share of 34 percent of the expenses, plus interest, has reached $720 million. Our company has kept detailed accounts.
To go back to leadership and management, I am sure it will be better if more Mongolians are given executive positions. They have the necessary experience and are familiar with the ground realities. Rio Tinto made many errors of judgment in purchasing supplies and also in choosing contractors. This led to over spending as well as buying low quality products. They were ripped off on a regular basis, but we have to pay the price.
Here is an example. The concentrate is being shipped to China along roads because construction of the less than 100-km railroad from OT to the border has taken over three years. The project that was planned to be completed by August of last year is not yet 50 percent done. These mistakes could have been avoided if people who led the project understood Mongolian conditions better.
You have mentioned Mongolian grievances. What kinds of issues do the investors bring up?
The investors always want the government to show more support and complain they are losing time waiting for government permits, which is costing them a lot. In fact, however, we have always given special attention to the needs of OT. The Prime Minister set up a committee under Minister of Mining D. Ganhuyag to facilitate support for the project. The committee includes members from all the ministries that grant such permits. Minister D. Ganhuyag held several meetings to quickly dispose of issues concerning the project. Now there is almost nothing left that the government is responsible for.
What about the government paying back the $250 million it received as advance payment?
It has been agreed that this repayment will be adjusted against taxes due from OT. The Ministry of Finance, the tax office and OT will draw up the repayment schedule, but we hope the government will clear all dues on this account by 2015.
One of the three Mongolian directors of OT has left. When will the replacement be named? Will there be any other change?
The whole process must follow the Human Development Fund Law, the Company Law, and, of course, government regulations. The Government could suggest names through Erdenes MGL or Erdenes Oyu Tolgoi, or it could decide on a name and demand acceptance in its shareholding capacity. There are currently no plans to change the board members.