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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Mongolia Plans Parliament Session On Oyu Tolgoi Project

By Elena Fehrbach

Aug. 26 – The Parliament of Mongolia has made a decision to organize an extraordinary session which will take place between September 2 and September 6, ahead of the scheduled October session due to ongoing issues deteriorating economic and investment situation in the country. Some of the issues to be resolved during this session are:

  • Amendment of investment laws: Strategic Foreign Investment Law and Foreign Investment Law;
  • Financing issues related to Rio Tinto’s development of the second stage of Oyu Tolgoi project, namely, underground operation that will allow commencement of extraction of the richest copper mineralization;
  • Overall weak commodities market and steps Mongolian Government can possibly take to help local companies operate in challenging conditions Mongolia is currently facing.

Investment laws
Amendment of investment laws is a serious decision that may create an immediate effect on investment climate in Mongolia boosting the level of direct foreign investments in terms of both volume and frequency. August foreign direct investment situation in Mongolia is minus 43 percent drop compared with the same period year ago, in February this year it was minus 36 percent. Global and local Investors’ and analysts’ reaction on adoption of the Strategic Foreign Investment Law on 17 May 2012 wasn’t positive, as new regulation has created an additional approval barrier and restrictions on potential foreign ownership in the invested project.

The conditions stipulated in the Law coupled with very long time it took the Government to draft the implementation procedures caused inevitable interruption of investments. Most expected consideration to possibly abolish both Laws is expected to revitalize investment climate in Mongolia and create more favorable investment conditions for foreign investors.

Oyu Tolgoi
Recent decision of Rio Tinto to potentially cut up 1,700 jobs related to expansion of Oyu Tolgoi project into second stage, a complicated underground mining operation, caused a shock in business and political communities in Mongolia. Such decision may be treated as a “last straw” in still unsolved negotiations between Rio Tinto and the Government of Mongolia on financing amount and conditions for the underground operation, which is currently estimated to be 5.1 billion USD. Rio Tinto’s decision has been officially confirmed by the spokesman.

The Government requires Rio Tinto to finance the expansion from the cash flow from copper sales until the Government and Rio Tinto will reach a mutually beneficial financing decision. Financing challenges include taxes, royalty and costs. The Government considers that the costs specified in feasibility study are creating a significant risk for Mongolia to get less money as profit, because final cost can potentially be higher than 5.1 billion USD. Mongolia has borrowed 800 million USD from Rio Tinto to pay for its 34 percent stake in Oyu Tolgoi and is paying 7-8 percent annual interest. The Government is afraid that the amount to pay back can increase due to costs overrun.

Other than financing, the list of undecided issues includes a total share of Mongolian citizenship employees involved in the project (should be at least 90 percent) and general Government’s involvement in decision- making process related to the project. Sam Walsh, recently appointed new CEO of Rio Tinto, comments that Rio Tinto would better take a pause and settle business decisions right rather than rushing into second stage just now. He has also announced that Rio Tinto was in talks with a syndicate of banks to extend a 4 billion USD provisional financing package.

By today’s date, Rio Tinto has already fired or moved to other departments 63 employees of Oyu Tolgoi LLC and unnamed number of contractors hired to develop underground operation stage.

Analysts consider the uncertainty with further development of the biggest untapped copper mine in the world and difficulties negotiating business conditions with the Government as one of the potential reasons for a drop of foreign direct investment in Mongolia.

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