We have interviewed with Cameron McRae, the President and Chief Executive officer of Oyu Tolgoi LLC
–When does Oyu Tolgoi production kicks off, what is the exact date of production?
-We have already started production from open pit mines. We have almost done with the concentrator. Currently, we are processing the mined copper ore to produce a concentrate. In order to connect to the power plant, we are in last phase of agreement with Chinese company. Soon it will be done. The production will commence as soon as the power transmission lines are connected to Chinese power plants. Therefore it takes around 50 days to commence production.
-The Government of Mongolia invited the Investors for re-considering agreement. You refused it. It seems they repeated it again. Any response to it from Investors?
-This year, the Government has requested once but no more. We replied with negative comment.
–Why. . .
-Because this agreement has 30 years of effective date. This is not subject to any sudden changes happen in today and tomorrow. This agreement made between the Government and the Investor. All stakeholders did believe that this agreement has 30 years of effective date and during which period they promised to myriad of commitments and agreed to their responsibilities and duties when they signed on it.
-Sorry, as a journalist, I will ask the question in reverse. People do change in agreements and even do in the Constitution Law. I guess there are no provisions in the agreement are to be unamended.In order to improve the agreement the Government has proposed some amendments.
-We can consider minor amendments to the agreement. However, the Government of Mongolia has proposed two big amendments that are substantially big enough to the whole agreement. The first one is 16 percent of share should be transferred from current stakeholders to Mongolian Government and another one is to increase tax. We think these are huge changes and will impact on the whole agreement. If the Investors had known about changes like this from Mongolian Government, they would not have signed on it. That is why investors are not considering any changes on it. Obviously, international investors will be upset when the Government wants to increase its benefits from the agreed.
-But we are eligible to be upset once we are the owners of this wealth?
-It is true that Mongolians are the owners of this wealth. But it is also true that investors found out this wealth by its own investment. Also it is true that we are working under your laws and agreements. You probably saw that PR advertisement on 71 vs 29 shares. The majority of economic benefits from this deposit will be Mongolians as they are the owners of this wealth. That is why there is no reason on why Mongolians are upset in terms of economic benefit. If current amendments of royalty in this agreement will be done, the benefits will be 90 vs 10 percent.
-I will ask about the 71 vs 29 percent later. The Government proposed to increase the royalty. Is is really not beneficial for you when royalty will increase?
-It is not possible to pay the royalty. If royalty will increase, not much benefit will be left for Investors. The royalty that proposed from the Government is four times higher than the current amount. Currently, royalty is calculated five percent from sales income, but it will become 20 percent if we acquise the proposal. This amount is the tantamount to the amount of abolished windfall tax law. That kind of tax regime is detrimental not only to Oyu Tolgoi but also to Mongolia. Capital inflow would not be attractive even though you have underground wealth. Nobody will interest if there are no benefit and all risks will be only on Investor’s side. On contrary, foreign investment will fly away. If the windfall tax rate were effective, Investors would not have signed on any Investment agreement. With the implementation of Oyu Tolgoi project, the amount of foreign direct investment soared up by 13 times in Mongolia. With the signature of Oyu Tolgoi agreement, international investors have had strong signals to invest in Mongolia.
–We agree that with the implementation of Oyu Tolgoi project, foreign investment increased dramatically. However, I think that measures on attracting foreign investment and setting taxation regime are undertaken by Mongolian policy independently. Within this policy framework, an increase in royalty is not reflected in the law but only for Oyu tolgoi agreement. If you agree to the Government’s proposal, how much money will you pay for tax incremental in dollar?
-It is planned that we will pay 125 million USD in the next year. However, the Government of Mongolia requested us to pay 400 million USD instead of it. If this happens, all monetary cash flow of the company will go for it. You have said that increase in royalty is only for Oyu Tolgoi case. But for Oyu Tolgoi, sustainable tax condition was authenticated by the agreement. Therefore it is not possible for us to agree with an increase in royalty once the agreement is authenticated and protected.
–Another proposal of the Government is to increase share of the Mongolian Government to 50 percent. If it is the case, there are some precautions that investors will fly away and also it may be some PR action. What is your opinion from Investor’s side?
-In order to build big construction, Rio Tinto has been working hard for transferring needed technology and international experience solely on its own investment. What do you think, is it fair to request us 16 percent from investor just before the commencement of production? Let’s take example: I am building a new house and it is almost done. Suddenly your neighbor is asking you: you almost done with your house so I will get half of it. Is it fair? The essence of this issue is the same as ours. If I knew that half of my house will be our neighbors before two years ago, I would not have been built it or invested on it. This kind of thing is happening right now. The thing is that Government wants to own all our benefits and efforts before Oyu Tolgoi making profit. Can you continue your business if somebody gets all your monetary cash flow?
–It is just my opinion. Do you agree if Mongolians get today higher royalty and other taxes by refusing to get 34 percent of aleagatory profits instead?
-I guess we would have been considering this kind of proposal if it rose in 2009. Also the Government would have raise possible tax issues. You have said that the Government has its own policy. Within this policy, they thought they should have shares. I think that they estimated possible options on tax rates, international and domestic investments and agreed to own shares.From the 30 years of experience in mining sector, investment agreement on profit distribution between the Government and Investors is relatively beneficial to both parties. Mongolians have done great job and it is beneficial to the country. There are a lot of agreements in international arena and I think this agreement made better that others.
–During the talks of the agreement, Ivanhoe Mines Company has made efforts and signed on the agreement. At that time, Rio Tinto owned small shares and had little participation. If Rio Tinto were management during the agreement process, would you agree to the agreement that is beneficial to Mongolia?
-The team on Investment Agreement with the Government of Mongolia consists of both Ivanhoe Mines and Rio Tinto in the same number of staff. Both of them made their efforts.
-But after signing agreement, Ivanhoe Mines left and Rio Tinto came into it. Is it true that presumptively beneficial agreement to Mongolia seemed to be beneficial to Rio Tinto on the contrary and that is why Rio Tinto came into business? A lot of Mongolians think in that way.
-I think, that is your opinion.
–Recently, your company is doing campaign or PR on the project’s benefit that profit will be 71 percent to Mongolians and the rest will be the Investors. However, 71 percent is monetary cash flow of the project but you explain it as profit for us.
-First of all, the source of research on that is not ours but International Monetary Fund. They have done researches using their own modeling and methodology on monetary cash flow on mining sectors. The research shows on what percent of monetary cash flow of the company before tax belongs to whom. Also they have estimated four and five other things. There are: direct but not indirect profit from the project to Mongolian Government, the benefit of shareholders, profit after tax or dividend that is divided into 34 or 66 percent in each party and the amount of royalty, import tax, personal income tax and other taxes that deducted from before tax amount, and also the share of the Government.If the company is under loss, nobody will receive dividend including both Investors and the Government. If the profit is less and production would not start, no income and profit will be recognized. If the company continues to operate in some ways, it will pay taxes for the Government, give salaries for its employees, pay for its employee’s benefits and pay for import tax for its supplier’s or VAT. From this, the benefits of the project are enormous.
– Does the monetary cash flow that is usually in tax forms really reach to 71 percent? There are some critiques that it includes all taxes and the social insurance benefits of employees from its cooperative and non-cooperative companies of Oyu Tolgoi .
-This is not true. To repeat it, the Government of Mongolia will benefit 71 percent from the project’s monetary cash flow before tax. This 71 percent includes tax, royalty, other taxes and 34 percent of shares of dividend. The Government of Mongolia owns 34 percent of it and also benefits 71 percent from total monetary cash flow. The benefit from the project for Mongolians is much higher. As for investors, 66 percent of dividend is equivalent to 29 percent of total monetary cash flow. This calculation does not include personal income tax from employee’s salary, VAT, and income for suppliers and our service companies. I should say again that the estimation done by not ourselves but by IMF. If we include the amount of personal income tax and other business benefits from our partners, the benefit from the project for Mongolians will be much higher than 71 percent. If we do such estimation ourselves the estimation will look differently. People will criticize or will not believe in us if we do such kind of estimation ourselves that is why we sourced from IMF.
–What is the share of Mongolian employees right now in the project not including people from collaborative companies?
-The share of Mongolian employees is around 89 percent. I can’t say the exact number because it changes every day. The production has not yet started but it reached 90 percent. We estimated that the employee from Oyu Tolgoi project and also number of contract based employees’ reaches up to 90 percent in total. But it is not included employee of AeroMongolia and Khanbank and other small business entities.
-I was told that there are Chinese workers. Are they belonging to Oyu Tolgoi itself or to other collaborative business entities?
-There are three Chinese companies working with our company. On construction site, the ratio of Mongolian to Chinese workers is 60:40. The majority of foreign employees are Chinese.In addition to that; we are hiring employees from 40 countries around the world. The reason behide that is we will collect special abilities and embed them in Mongolia.
-Even though Mongolian people had not invested in real term, we own 34 percent of the company as an owner of the wealth. Because of that, why don’t Mongolian people enter into the management and control over the company?
-Currently, Rio Tinto is managing the mining. Our company made managerial contract. Rio Tinto wants Oyu Tolgoi mine to be world-class one. We made Oyu Tolgoi one of member of biggest family of Rio Tinto and benefited from it a lot. We are endeavoring to allocate the benefits between Rio Tinto and Mongolia in equal and honest manners. I think that the ratio of Mongolian employees is not limited to 90 percent but will increase further. Today we are working on to increase participation of Mongolians in higher, senior and executive levels. It will happen soon. I am 53 years old. I have not been promoted to this position at the age of 30. In our company, young people are not promoted to higher positions because of the complexity of Rio Tinto business. There is a need to have highly-skilled and experienced executive officials to manage this business. In near future, we will increase Mongolian participation and its influence in managerial levels. Currently, more than 50 percent of our branches employees are fully Mongolian. Mongolians did it in short time. Do you know that what is the percentage of Mongolian people in Erdenet enterprise?
-Maybe almost 100 percent?
-Not yet. It is 95 percent after 32 years.
-Have you been to Erdenet? Are you familiar with Erdenet?
-I have been there with three representatives from Mongolian side and spent 2 days.