‘OT’s 1.8 billion USD revenue will be spent on underground mining’

Trans. by B.DULGUUN

 The Prime Minister of Mongolia, state-owned Erdenes Oyu Tolgoi, Turquoise Hill Resources and Rio Tinto signed the “Oyu Tolgoi Underground Mine Development and Financing Plan” as part of the Oyu Tolgoi (OT) Project on May 18, 2015 to determine the path for the development of the underground mine at OT.

The following is an interview with CEO of Erdenes Mongol LLC B.Byambasaikhan and CEO of Erdenes Oyu Tolgoi LLC D.Ganbold, clarifying some very imported issues related to OT.

Although Mongolia could’ve addressed an arbitrary court regarding disagreements with Rio Tinto about the OT Project, it was decided that investments for underground mine would be started. Why was this choice made? 

D.Ganbold: The two parties of the negotiation mutually agreed that going to an arbitrary court was an open option. Project investment has delayed for two years without any special reason. Therefore, collaborators negotiated to make sure that both sides reached a mutual understanding to prevent future controversy. Some things that were unclear in the investment agreement established in 2009 were cleared out and made more specific. It can be understood that the choice to negotiate was chosen as it was strictly believed to be a beneficial decision for the economy of Mongolia as well as the investing company.

B.Byambasaikhan: The concept of the value of money is intertwined with time. Investment for the development of underground mine of the OT Project is beneficial to Mongolia’s economy on condition that it’s done now. The OT investment agreement was established in 2009. Development work began from 2010 and in 2011. Consequently, in economy grew by 17.3 percent. It’s essential to increase the economic growth again. It seems that the two sides saw OT from different perspectives. Mongolians used to consider OT as someone else’s. Presently, OT has become the largest company in Mongolia with 6,400 Mongolian employees. Approving the Underground Mine Development and Financing Plan has now allowed Mongolia to treat OT as its property, control its operations, and gain from its profits. 

During negotiations, the public expected changes in the investment agreement, but nothing was changed. Why weren’t there any changes? 

B.Byambasaikhan: The investment agreement becomes a device for attracting investment. Mongolia used this device successfully in 2009. We’ve realized in the past three years that broaching this device that’s working perfectly could bring danger of closing the path for future investments. It’s important to follow established agreements. If we establish an agreement today but deceive our partners the next day, who would possibly be willing to invest? 

The OT Project received investment of seven billion USD. An estimation to invest an additional six billion USD has been approved. According to the 2009 investment agreements, wasn’t only five billion USD required? 

D.Ganbold: There’s a term called initial investment. The total cost can be 20 million USD with an initial investment of five million USD. It’s impossible to execute the OT Project with five billion USD for 100 years. Five billion USD is nowhere near for mining gold and copper that’s a km deep underground. It’s true that the initial investment for the project was estimated to be five billion USD and it’s true that more money was spent than was initially estimated. That’s why it’s causing political disputes about overspending.

Depending on mining and geological conditions, technology, and financial and economic situations, the cost increased because conditions that were expected according to feasibility studies changed drastically. Mutual recognition for this was required from both sides. 

The OT Underground Mine Development and Financing Plan states that OT will repay current and future loans. The Mongolian government lent the 34 percent of OT Project from Rio Tinto. How will this loan to Rio Tinto be repaid? 

D.Ganbold: People will get confused if we talk too specifically. Let’s take Erdenet Mining Corporation (EMC) and OT as an example. EMC was co-established by Russia and Mongolia. At the time, the Mongolian side didn’t have money so its 50 percent of the company was loaned from Russia. The loan collateral was EMC’s copper mine and its future profit. Mongolia repaid its loan until 2000. In other words, Mongolia didn’t receive its 50 percent dividends from 1978 to 2000. If we took a loan, it should be repaid. Although Mongolia didn’t get its dividends, it gained money from taxes and fees, including royalties. We all know how EMC changed the image of Mongolia’s economy and financial prospect. OT is a project two times bigger than EMC. Only a year ago, it began productions and has sold a million ton of concentrates so far.

B.Byambasaikhan: The OT Project is a mining business joint ventured by two owners. People do business to profit. The majority of OT’s resources are deep underground. The company will profit more if those resources are mined and processed before marketing to the global market. Rio Tinto accepted the duty to execute this project efficiently and signed an agreement with Mongolia. In accordance with this agreement, we’re holding the principle to work with more profit. Mongolia’s started receiving revenues from all types of taxes, fees and charges. At the recent negotiation, we agreed to charge five percentage of royalty without cutting costs from fees for the use of mineral resources. People misunderstood this as OT cutting its costs. Companies that have given partial payment will repay their remaining sums. 

People are interested in the Mongolian side’s yield from the project that’s become 54.9 percent. Why was Mongolia’s yield increased by 1.9 percent? 

B.Byambasaikhan: The main factor was copper price. Mongolia’s yield was estimated at 54.9 percent by calculating with current copper prices. The investment agreement didn’t state about project yields. Both sides had verbally agreed that the Mongolian government would take 53 percent and Rio Tinto 47 percent. Yield ratio was issued in the new plan for the underground mine. We’ve made financial modeling according to international standards for mining. This made Mongolia’s yield increase to 54.9 percent. 

How much is this in USD? 

B.Byambasaikhan: 45 to 54 billion USD is estimated to accounted to the Mongolian side. This approximation was made while considering fluctuations in costs.

D.Ganbold: Mongolia’s yield from the project can increase and slightly lower the counterparty’s yield depending on the market price, technology, other situations and ore contents. We don’t know what could happen in 100 years. The principle for accounting yield will remain the same. We’ve written this on paper, and have mutually agreed and signed the paper.

B.Byambasaikhan: Mongolians will gain its share of the profit from OT if the mine works proficiently. Mongolia has to run a good government within the scope of its legislations and investment agreement. The feasibility study will manage OT’s operations and the government will implement. Our government has been taking measures to increase OT’s efficiently though its representatives in the board of directors. Now, an even more specific measure will be taken. Sales and audit of OT will be monitored by Mongolian representative members in the board in accordance with the recently approved plan. 

How will financing for the underground mine be raised? 

B.Byambasaikhan: There’s an estimation stating that investment of 5.7 billion USD is required for the underground mine development. We’ve planned to have 4.2 billion USD lent from banks and get the remaining balance from OT’s revenue and money inflow. 

What conclusion has been reached for tax related issues? There were some conflicts about differences in accounting method. Was Mongolia’s method acknowledged? 

B.Byambasaikhan: We’ve reached a mutual understanding. We’ve agreed in the investment agreement that we’ll create conditions for sustainable operations for OT. The 2009 investment agreement is a document that was established within the framework of all legislations that were effective in Mongolia at the time. The Tax Law was amended in 2011. A Mongolian tax inspector inspected OT against the amended Tax Law of 2011 and charged a penalty from the company. We’ve negotiated to have all inspection and checkups done according to tax laws that were issued in the 2009 investment agreement. 

Who will be in charge of raising the investment of 4.2 billion USD? 

B.Byambasaikhan: The board of directors of OT has been given that responsibility. If they work well, Mongolia will get a loan of 4.2 billion USD and begin development work. Certain permissions and licenses are necessary for constructing development works. Mongolia’s licensing agencies should work quickly. This way, development of the project will progress quickly, create 3,000 jobs, and improve the economic circulation. 

Besides attracting funds, what other works need to be done? 

D.Ganbold: Political policy decision has been made. Now, the company works are starting. Land and water approvals need to be acquired, the feasibility study have to be approved, and human resources need to be found and trained. Daily operations will begin now.

B.Byambasaikhan: Economists made estimation that the Mongolian economy suffered a loss worth three billion USD due to the delay of the OT Project. Still, we’ve prevented further loss and laid a foundation for increasing jobs and raising profits. Mongolia knows extremely well that it’s impossible to attract investment if Mongolia hasn’t got credibility on international markets. People started looking at Mongolia from a positive perspective when it announced that it’ll work consistently to the investment agreement that was initially established with our partners. This shift in views can be seen from the improvement of evaluations for bonds released by the Mongolian government and the private sector at international markets. We’ll continue to do bigger negotiations in the future. The global market is open to Mongolia if we can be more responsible. 

Source: Unuudur

Short URL: http://ubpost.mongolnews.mn/?p=14749

Posted by on May 28 2015. Filed under Prime Interview. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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