Former Rio Mongolia country manager and Oyu Tolgoi regional development and communications vice president David Paterson said the outlook for Mongolia was complex, reinforced by the government’s request this week to renegotiate the legally binding Oyu Tolgoi investment agreement.
The original investment agreement signed in 2009 gave the Mongolian government the option to increase its stake in the project from 34% to 50% but this was scheduled to take place in the mine’s 30th year of operation.
Now the government wants a bigger stake, sooner.
“There are plenty of reasons to worry,” Paterson told Mines and Money Australia in Sydney.
“Success in Mongolia is not assured.”
Paterson said there was a misconception that Mongolia was experiencing a mining boom.
“Mongolia is not undergoing a mining boom – that’s a long way off,” he said.
“It is an economic boom off the back of one world-class project.”
According to Paterson, there were a number of issues the Mongolian government needed to address to ensure its economy kept up the rapid growth seen over the past few years.
Resource nationalism was the obvious one, with the June elections seeing a rise in pro-resource nationalism minor political parties.
The country’s new Minister of Mines Davaajav Gankhuyag signed a petition on the renegotiation of the Oyu Tolgoi agreement prior to taking office and is behind the renewed push to enter talks with Rio and Turquoise Hill.
Oyu Tolgoi is on the verge of achieving first production and is expected to eventually account for up to one third of Mongolia’s gross domestic product.
Another issue that needed to be addressed was investment and resources legislation.
“Legislators are coming to terms with how to regulate a rapidly changing mining industry,” Paterson said.
The third issue was Mongolia’s relationship with China, which was often hostile due to Mongolia’s mistrust of its neighbour.
Paterson said the three recent examples of further damage to the relationship was Mongolia’s reneging on a Chinese stake in coal deposit Tavan Tolgoi, its refusal to transfer South Gobi Resources’ mining leases to Chinalco and the delay with the Oyu Tolgoi power agreement, required for the project to begin commissioning.
“Given the previous two situations, it is hardly surprising this transaction is proving problematic,” he said.
He said it was time that landlocked Mongolia learned to live with the hand it was dealt – being sandwiched between two superpowers, China and Russia.
Paterson said there was enormous potential for Mongolia if the issues could be addressed.
“We may see an extraordinary economic miracle,” he said.
But he warned that the outlook wasn’t quite as good if Mongolia continued its push for a bigger slice of the $US6.2 billion ($A6.1 billion) Oyu Tolgoi.
“If the sanctity of the investment agreement isn’t honoured, there may be other things not honoured,” Paterson said.
“The spectre of sovereign risk in Mongolia is real.”
This article first appeared in ILN's sister publication MiningNews.net.
