Oyu Tolgoi

Nov 17 • Mining, News, Politics • 1359 Views • No Comments on Oyu Tolgoi

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Oyu Tolgoi’s current known reserve is 45 million tons copper and 1838 tons gold. That’s 5 times bigger than Erdenet which feed Mongolia in the past 30 years and about 600 times bigger than Boroo which was discovered in the socialist time. In addition, it’s become clear the deposit is rich in other associated metals, such as 12.5 tons silver, 157 thousand tons molybdenum and so on. Therefore, since OT’s fate is directly related with Mongolia’s development and Mongolians’ well-being, it’s necessary for us to reconsider, debate and improve the agreement. Recently 2 months ago, 25 MPs, including B. Bat-Erdene, initiated following patriotic proposals to be reflected in the Government Action program during its Parliament approval, but it was not supported with falling short of one vote, unfortunately. It’s pity and also surprising. They blamed that Government has not reflected in the Agreement and implemented the provision of Parliament Resolution #57 reading “Mongolia shall own at least 50% after investors recovered investment costs” and thus proposed to reflect the provision in the Government Action Program.

The Agreement is of significant important that Rio Tinto – a global leader in mining and also a third-neighbor investor – is investing Mongolia, yet most importantly the Agreement has not complied with the core principle of international agreements to be “mutually beneficial”. It can be proved by several justifications, as below:

Previous authorities agreed to make Mongolia’s equity at least 50% (Ex-president N. Enkhbayar proved it in his talks and writing), but the stake reduced to 34%.

The worst humiliation is that the property owner is now to buy its own share. If wanted, it’s possible anyone can buy any percents from the international stock exchange. Despite the Constitutional provision providing “… subsoil natural resources shall be the property of people of Mongolia”, now Mongolia is supposed to buy its 34% with 1.7 billion USD and, in addition, with high-interest loan which is simply humiliation.

As a result of making Mongolia’s equity 34%, investors reduced the 6.0 billion USD (the sum of initial 2.4 billion USD reflected in the Feasibility Study and the future investment of 4.7 billion USD) which they insisted, down to 5.1 billion USD. Currently, it’s again 6.2 billion USD which might become over 10 billion USD after lending 4.0 billion USD from the IFC (of World Bank). Understandably, it’s just inflated and unrealistic figure which can be proved and supported by estimations and research. The purpose behind this is that investors’ tricky intention aiming to delay Mongolia’s dividend by claiming “investments are not recovered, and so investors will benefit dividend within their preferred shares, but Mongolia will not receive dividend with common shares. Then, it seems that this so-called high profit project – which will recover investments in 4.6 years according to their own Feasibility study report – is becoming false so that thus Mongolia will not receive any profits until 2030. Estimations suggesting Mongolia will not receive dividend has truth. If it’s not that profitable to investors, why are they so insistent?

In many other countries, the royalty is the key tax in the mining sector. In Mongolia, it’s only 5% which is also very low compared to other countries. But under the Agreement the investors will get 6% as management fees in return of royalty, besides not paying VAT and exportation tax. Thus, the criticism that Mongolia will not benefit profits from sales, but losses does seem true.

The windfall profit tax was actually annulled due to pressure from Oyu Tolgoi investors. It was not a law which scares people, as foreigners’ pawns said. The main purpose was to impose the tax for only windfall profits earned from difference between the actual price and the sudden price increase on the international market. Moreover, N. Batbayar’s proposal (2007) was right to impose the tax to raw commodities, like ore and concentrates, rather than value-added end products which was supposed to encourage domestic industries and value-added productions. Also it was a right decision by the Ministry of Finance to adopt incremental royalties when annulling the WPT. However, Rio Tinto refused to accept Mongolian Government’s proposal to enforce the royalty and to amend the Agreement by reflecting Parliament Resolution on 51%. Also Rio Tinto hired some Mongolian columnists and press outlets to distribute wrong information as if Oyu Tolgoi Agreement is very much profitable to Mongolia. Modestly speaking, it’s funny.

Any simple-minded person can separate the truth, yet let’s see their “propaganda” in 2 formats below:

Mongolia will benefit 71% of Oyu Tolgoi’s total income (cash flow in some advertisements), it says. They include all suppliers and contractors’ revenues, their income and taxes, employees’ salary and social insurance contributions which are not related and impossible to be estimated. “Profit” is the difference between revenues and costs, but it must not include own production costs and/or revenues of other client companies. Anyone who learned ABC of economics can tell that.

Oyu Tolgoi has paid over 1 trillion MNT taxes and fees. The company paid 145 billion MNT in taxes, 368 billion MNT for customs dues, 250 million USD as advance payment (325 billion MNT) that’s 838 billion MNT in total (some say 772 billion MNT). But there are official reports that Oyu Tolgoi has tax debts worth 3.0 billion USD and has not submitted their financial statements and balance sheets in the last 2 years. Out of this 1 trillion, only 513 billion MNT is tax revenues. The upfront payment of 250 million USD is not our net profit, but loan to be repaid with an interest. Also OT is not a newly discovered deposit. Even during the socialism, it was known to have minerals deposits there because of exposed outcrops and findings. Thus, it’s one of deposits licensed under the law which allows anyone could apply and pay 50,000MNT to get its license. Moreover, it’s necessary to change and strengthen legal environment weaknesses that cannot collect taxes from revenues earned from money raised through IPOs in international stock exchanges. They raise funds from the stock exchanges collateralizing our resources, but pretend as if they invest the money from own pockets. That’s beyond truth.

In terms of compliance/implementation of some provisions of the Agreement:

The Agreement provides “90% of employees shall be Mongolian”, but less than 3,000 are Mongolians out of 12,000 employees. (however, M. Cameron still insists that’s 90% which is not understandable). Those Mongolians are mostly unskilled and assistant workers. Foreigners receive monthly salary worth of 6,000-40,000USD, but Mongolians are paid in average 1.5 million MNT. It raises a question of “who are they humiliating on whose land?” It’s still strangely questionable what those 3 Mongolians sitting in the Board are talking on this and other matters.

How to understand the fact that they change their promise “to build a CHP plant on Tavan Tolgoi by 2012” with electricity poles stretching to China, and another promise “to build railway to Sainshand” with paved road towards the Chinese border?

Another concern is solution of water supply issues. It’s decided to use deepwater for production, but the deepwater will not be recovered in many thousands years. (it’s forecasted deepwater will be exhausted in 10 years only). By using up deepwater, it may cause irreversible environmental damages to the ecosystem.

No words on productions of value-added end products, such as pure copper and molybdenum, and pure gold and silver.

No significant infrastructure facilities have been constructed, in terms of mining-associated infrastructure, constructions and urban development. There is nothing except factory facilities made of sandwich-concretes and felt-ger camps. Despite their promise to invest Khanbogd soum, nothing is planned or heard of. How to understand it?

To develop this deposit with rich resources – which will develop Mongolia and improve well-beings of Mongolians – is becoming an urgent challenge nowadays.

By mentioning all this, it’s proposed:
It’s wrong for Mongolia to participate in the project through Government equity share. It’s true that some people say even Africans – whom we often criticize – will not make such deal the owner of the property shall buy its own share.

Oyu Tolgoi by B.Ochbadrakh, Leader of Mongolia’s Aspiration group.

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