AMID a public relations frenzy to reassure the people of Mongolia that the largest undeveloped copper-gold project in the world is in good hands, the owners of Oyu Tolgoi have presented a united front against a
proposal by the Government to change the terms of the project’s Investment Agreement. In early October, Ivanhoe Mines and Rio Tinto released a joint announcement confirming they had received a letter from
a representative of the Mongolian Cabinet asking the companies to discuss potential changes to the Agreement, which was signed in 2006 after years of negotiations.
“The changes related to the conditions under which the Mongolian Government may negotiate with Ivanhoe Mines to acquire, on mutually agreed terms, an additional 16 per cent interest in the project and the application of a sliding-scale royalty to the project,” the companies’ statement said.
Ivanhoe holds a 66 per cent interest in the Oyu Tolgoi project; Rio has a 49 per cent stake in Ivanhoe and is managing construction of the Oyu Tolgoi mining complex. Under Mongolian law, the Government’s
right to acquire interest in the project is limited to 34 per cent, with the ability to increase this to 50 per cent only once the mine has entered its 30th year of production. The Mongolian Government did not specify a timeline for bringing forward the ownership change, but Ivanhoe and Rio proceeded with formally advising that they were not prepared to renegotiate the Investment Agreement. The companies advised that they had written to the individual member of Mongolia’s peak political authority, the National Security Council (comprising the President, the Speaker of the Parliament and the Prime Minister), requesting its assistance to ensure the Government’s full and immediate support for the standing Investment Agreement.
Ivanhoe and Rio’s statement said that the Investment Agreement, signed by senior representatives of the Mongolian Government, complied with all relevant Mongolian laws and regulations, and all parliamentary resolutions. Importantly, the statement said that the Agreement complied with Resolution 57, which authorised the Government to conclude the Agreement. Furthermore, the Agreement could only be amended by mutual written consent of all three parties. As such, Ivanhoe said it expected that, “the parties will continue to honour and implement the terms of the Agreement as previously negotiated”. The company said it had asked the Mongolian Government to “affirm its full support for the agreement”.
Media speculation noted Mongolia’s upcoming 2012 elections as a possible motivator for the Government’s move. Global backlash against the Mongolian Government was swift, and media reports were rife with suggestion that the situation had caused tensions between Ivanhoe and Rio. At the centre of the allegations were comments reportedly made by Rio to news sources that labelled the move by the Mongolian Government as “greedy”. Rio denied the claims, citing media misrepresentation, and its denial was quickly followed by a statement to the Toronto Stock Exchange by Ivanhoe founder and chief executive officer Robert Friedland.
Mr Friedland said that Ivanhoe had become aware of “the dissemination of what it considers to be unauthorised and incomplete information concerning the Oyu Tolgoi project by members of Rio Tinto’s senior
management during a briefing for investors”. He didn’t specify what information he was referring to, saying only that Ivanhoe would “provide further details in a future statement following communication directly with Rio Tinto on the specifics of its concerns”. This public rift wasn’t the first seen between the companies: earlier this year, the relationship between Ivanhoe and Rio was strained after Ivanhoe implemented a shareholder rights plan that would prevent Rio from upping its stake in the project unless it made an offer to all shareholders.
Rio disputed the plans and headed towards arbitration, and a settlement has not yet been reached. Despite growing media concerns about clashes between the companies, the united front they presented with their joint statement had the desired effect. Just days after the official joint statement, the Mongolian Government backed away from its attempt to renegotiate the Investment Agreement.
On October 6, Ivanhoe, Rio and the Mongolian Government issued a joint statement reporting that discussions had been concluded and all parties had reaffirmed their continued support for the Investment
Agreement and its implementation. According to the statement, “Ivanhoe Mines and Rio Tinto acknowledge that the Government of Mongolia acted in accordance” with a provision to amend or modify the Agreement upon mutual written consent of all parties.
“Ivanhoe Mines and Rio Tinto respect the position of the Government of Mongolia and appreciate their continued support for the Investment Agreement,” the statement said. Following the announcement, Ivanhoe shares saw a healthy increase, recovering from the plunge experienced during the period of speculation about the Agreement.
With the immediate crisis contained, Ivanhoe and Rio will now regain their focus on the construction of Oyu Tolgoi, but analysts have warned that they expect this won’t be the last time the Mongolian Government initiates discussions about the terms of the iInvestment Agreement.
Oyu Tolgoi represents the largest foreign investment in Mongolian history. It contains 81 billion pounds of copper and 46 million ounces of gold in measured, indicated and inferred resources. It will be mined until at least 2060, and in the first 10 years of production is expected to exceed 650,000oz of gold, 3moz of silver and 1.2 billion pounds of copper.
Ivanhoe and Rio recently held a Half Way There celebration, commemorating the passing of the 50 per cent completion mark. There are more than 11,000 construction workers on site, and the mine is expected to begin initial production in the third quarter of 2012.
By Rachel Seeley