Precious metals: A major copper and gold project has caused controversy

The 2011 autumn session of Mongolia’s parliament, the Grand Huraal, began with a shot heard across the globe. Prime Minister S. Batbold’s opening remarks on October 6 called for a major change to the mining agreement that had promised to put Mongolia on the map. On the advice of a group of about 20 parliamentarians, he said the country should seek a greater stake in the Oyu Tolgoi (OT) mine, a copper and gold project that is considered to be crucial to Mongolia’s long-term economic growth and for world metals supply.

CHANGE-UP: Mongolia currently has a 34% stake in the project, with Canada’s Ivanhoe Mines holding the rest. The landmark 2009 agreement that led to its development gives Mongolia the option to take a 51% stake after 30 years. Batbold’s recommendation was that the agreement be changed to allow that increase earlier, as soon as the private company had recovered its costs. The speech set off alarm bells for mining companies and emerging markets investors worldwide. If Mongolia was willing to push to reopen an already negotiated agreement, the whole project was called into question. Foreign investors wondered whether or not the government would show the same sort of commitment to other contracts it has signed.

The reactions to the prime minister’s speech are a testament to the importance of the OT project. The development will be one of the world’s five largest copper mines and the only major new one set to begin production over the next several years. Production at OT will almost certainly have a large enough impact on world copper supply to influence prices. Within Mongolia, OT is perhaps even more important. The project is expected to account for a third of the country’s GDP by 2020. It also could help prove that Mongolia is a safe place for mining firms to do business. Over the course of Mongolia’s long transition to democracy over the past 20 years some mining licences have been revoked and legislative changes have choked off exploration due to fears of excessive royalty regimes. While the government claims it has valid reasons for these decisions, they have made mining companies wary. Success at OT could help Mongolia put these episodes behind it and use its huge bounty of natural resources to kick-start a new era of economic development.

Batbold and his fellow politicians immediately backed off after the first day of the legislative session. The next day the government issued a joint statement with Ivanhoe and Rio Tinto, which owns almost half of Ivanhoe and is eager to take over the company in order to capture more of the profits from OT. In the statement the government asserted its commitment to the deal as stated. Plans for OT again look set to reach fruition.

MINE DETAILS: The mine, located in the Gobi Desert in southern Mongolia, is expected to begin production in 2013 and have a lifespan of 50 years. Projections show it yielding 650,000 troy oz of gold annually. The copper deposit is expected to produce 450,000 tonnes yearly, or 3% of global supply. About $7bn will have been spent on the mine by the time the first ore is extracted. Of that, $4bn is expected to have come from bank financing. That is double the previous global record for a mining-sector loan, according to David Paterson, Rio Tinto’s former spokesman in Ulaanbaatar.

The controversial 2009 agreement actually gives Mongolia more than just 34% of the proceeds. After taxes, fees and all other costs are factored in, Mongolia’s share of the project will provide it with somewhere between 55% and 60% of total revenues, Cameron McRae, OT’s chief executive, told OBG.

PHASE ONE: While debates rage on in the capital city, workers at OT are making progress on the mine itself. The first phase, which consists of an open-pit mine and supporting services, is currently under way. About 14,000 workers were on site as of autumn 2011, and full capacity will be reached by 2013. Ivanhoe reported spending of $2.2bn in the first nine months of 2011, slightly over the budgeted $2.1bn, and said that work was 54% complete. Work on the second phase, which has yet to begin, will include an underground mine as well as an expansion of on-site processing capabilities.