Mongolia looks at equity for royalties swap in big mining projects

Thu Feb 5, 2015 8:29am EST
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By Terrence Edwards

ULAN BATOR Feb 5 (Reuters) - Mongolia is looking to revive stalled foreign investment in large mining projects by considering a reduction of its equity stake in strategic mines in exchange for higher royalties, according to a government plan due to be unveiled on Friday.

The country holds some of the world's largest copper and coal deposits but its economy has been held back by disputes with foreign investors over assets such as the $6.5 billion Oyu Tolgoi copper mine.

Anglo-Australian miner Rio Tinto has stalled a $5.4 billion underground expansion project at Oyu Tolgoi because of arguments over cost overruns and $30 million in tax that the government says it owes.

On Friday, Prime Minister Chimed Saikhanbileg will propose in parliament an amendment to the mineral resources law to allow the government to exchange state-owned equity in "strategic mines" for higher royalties, according to a spokesperson for the prime minister.

Higher royalties would help the government earn more from the mine faster than under the current scheme. With equity, Mongolia must wait until after investors recuperate their initial costs before receiving dividends for its shares.

"Without phase two there's limited value in the project to a strategic investment," said Nick Cousyn, chief operating officer for Ulan Bator-based broker BDSec. "Going forward with phase two will unlock the option for Mongolia to choose higher royalties or keep their equity."

Mongolia has 16 strategic deposits, including Oyu Tolgoi and the Gatsuurt gold deposit currently licensed to Toronto-listed miner Centerra Gold Inc. These deposits have the potential to generate at least 5 percent of the country's GDP.

The government currently takes a minimum of 34 percent equity in strategic deposits but could ask for up 50 percent if state funding was used for exploration.

Some Mongolian MPs have repeatedly demanded a larger stake in Oyu Tolgoi. Others have invoked Resolution 57, passed in 2009, which states that the government can negotiate to increase its stake to 50 percent once investors earn back their initial investment.

Rio has consistently rejected requests to renegotiate the investment agreement they signed for the mine in 2009. However, implementing the terms the prime minister has suggested may require some sort of renegotiation. (Reporting by Terrence Edwards; Editing by Jake Spring and Vincent Baby)