Daily Business News Mongolia

By Lucy Hornby

BEIJING, Nov 19 (Reuters) - Mongolia is likely to try to pin down a deal including 34 percent state ownership for the giant Oyu Tolgoi copper deposit, as falling commodity prices induce the government to back away from seeking majority control for the state.

A working group studying revisions to the country’s minerals law has proposed that agreements for the Oyu Tolgoi, being developed by Ivanhoe Mines (IVN.TO: Quote, Profile, Research, Stock Buzz) and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz)(RIO.AX: Quote, Profile, Research, Stock Buzz), and the Tavan Tolgoi coal project be negotiated before the law is finalized.

An agreement to develop Oyu Tolgoi has been held up for well over a year, after high prices induced Mongolia to impose a windfall profits tax on copper and gold, and to seek to raise the state stake in strategic deposits to 50 percent or higher.

“We had expected that first there would be a minerals law and then an investment agreement. But the new proposal is to proceed on an investment agreement before the new law,” Sodontogos, an advisor to the Mongolian National Mining Association, said.

Parliament may consider that suggestion as early as Dec. 1, she said.

The proposal to treat Oyu Tolgoi and Tavan Tolgoi separately from the revised legal framework would include a recommendation for the state to hold 34 percent in Oyu Tolgoi and 51 percent in Tavan Tolgoi, Mongolian media said and sources close to the working group confirmed.

The working group had been scheduled to release its recommendations on revisions to the 2006 Minerals Law on Nov. 15, but has not, due to splits within the group over the proper role of the state and the best way for Mongolia to realise wealth from its mineral deposits.

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The 2006 law provided for the state to hold 34 percent of deposits found with private funds, and up to 50 percent of those found with state funds. But new investment has stalled as the government sought an increasingly higher stake for the state, to avoid losing control of mineral resources, while investors balked over the terms of the state’s participation.

Mongolia is now more eager to move forward and secure the Oyu Tolgoi project, since the government’s ability to meet future social spending commitments depends on continued revenue from mining.

A global economic crisis has helped drive copper prices to below $3,700 a tonne, their lowest level in three years, and well below the $6,700 included in Mongolia’s annual budget.

But the effort to move forward comes in the shadow of increased uncertainty over the miners’ intentions for developing Oyu Tolgoi.

“Ivanhoe Mines and Rio Tinto remain ready to restart the process for completion of an Investment Agreement, given a reasonable basis for negotiations,” Ivanhoe said in its quarterly report, issued this week.

“In the meantime, the company is continuing to assess the implications for the Oyu Tolgoi Project and its development schedule as a result of the delays in approval that have been experienced in Mongolia, the sharp declines in commodity prices in recent months and continuing uncertainty in the financial markets.”

Meanwhile, Rio Tinto, which bought into Ivanhoe in order to help develop Oyu Tolgoi, is facing a hostile takeover offer from rival miner BHP Billiton (BHP.AX: Quote, Profile, Research, Stock Buzz)(BLT.L: Quote, Profile, Research, Stock Buzz) which, if completed, could change investment priorities.

The state has already bought back the majority of Tavan Tolgoi from a partnership of Mongolian businessmen, but would still need to establish a framework to attract companies large enough to properly develop the world’s biggest untapped coking coal deposit. (Editing by Sue Thomas)

Source: Reuters

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