Mining News

Mongolia Swapping Equity for Royalties

Posted by Cheryl Rutledge on 2/12/2015 4:46:52 PM

By Sean Taggart, Taylor Jackson, and Kenneth P. Green

The numbers are in: 56% of Mongolians are in favour of major mining projects. Using a text message referendum system, the Mongolian government asked its people if they should pursue more foreign investment for mining as a means to development or not.

With some of the world’s largest copper reserves, and an economy that saw foreign direct investment (FDI) contract by 45 percent in 2013, it appears that some reform was necessary.

One of the country’s largest mines, Oyu Tolgoi, owned by a subsidiary of Rio Tinto, has put the brakes on a $5.4 billion underground expansion of the mine, citing cost overruns and $30 million in taxes that the government has claimed is owed to them.

Also adding tension between companies and the Mongolian government is that by law, the Mongolian government acquires a minimum of 34 percent equity in any local mining project and as a result can have significant influence over its development. Prime Minister Chimed Saikhanbileg has begun to realise this measure is only adding barriers to mining projects, leading to a shift in the law. It appears that the new law would see the government trade in its 34 percent stake and begin collecting higher royalties on production.

According to the Fraser Institute’s 2013 Annual Survey of Mining Companies, Mongolia has been experiencing a continual decline in mining executive’s perception of its policies since 2010/2011. In 2010/2011, Mongolia’s Policy Perception Index score—a measure which scores jurisdictions on policy dimensions including the legal system, socioeconomic agreements, political stability, etc.—was 35.7, giving the country a global rank of 54/79. Fast forward to the 2013 and Mongolia has experienced a sharp decline, with a score of 16.1 and a rank of 100/112. Two particular areas where Mongolia seems to be struggling are uncertainty concerning the administration, interpretation, and enforcement of existing regulations and the countries legal system. In both areas of policy, over 40 percent of respondents considered issues in these areas to be acting as “strong deterrents” to investment.

After almost five years of deteriorating scores, a significant depreciation in FDI, and a population which appears to be in favour of expanding mining, now appears to be a good time for Mongolia to continue its mining policy reforms.




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