Mongolia downgrade bolsters Turquoise Hill in Oyu Tolgoi talks

Fourth time a charm?

Turquoise Hill Resources (NYSE:TRQ TSE:TRQ) rose 5% in afternoon trade on Tuesday, bringing gains for the operator of the Oyu Tolgoi mine since Friday to 12.5%.

There was no fresh news about the $6 billion company to trade on, and Turquoise Hill’s gains in Toronto come despite serious declines in the price of the metals being extracted from its massive mine in Mongolia.

Gold is hovering around $1,400 an ounce, down more than 15% since the start of the year, while copper on Tuesday hit fresh 18-month lows of $3.09 a pound.

Turquoise Hill’s is also outperforming other copper-gold producers including Freeport-McMoran and Newmont Mining which have not recovered from precipitous falls suffered amid the carnage among mining stocks last week.

Turquoise Hill – a favourite of resource investors – has been been on a wild ride since hitting an all time high above $28 in January 2011 affording it a peak market cap of $20 billion.

The company, which is controlled by world number two miner Rio Tinto (LON:ASX), is locked in often bitter negotiations with the government of Mongolia over the controversial Oyu Tolgoi mine.

Mongolia owns 34% of Oyu Tolgoi located in the South Gobi desert and has taken Rio to task over cost overruns pegged at some $2 billion. Rio for its part threatened to halt construction if an agreement could not be reached.

Both sides have called the ongoing talks centred on funding for expansion of the existing open pit mine, the use of Mongolian contractors and workers and a new royalty regime “constructive,” but  talks have been going on for months and still threatens to deal commercial production at the mine scheduled for the end of next month.

Rio hand in negotiations would be greatly strengthened by news on Tuesday that Standard & Poor’s credit agency has downgraded Mongolia’s rating from stable to negative  “because fiscal and external profiles could deteriorate materially over the next year or two in the absence of a significant improvement in policymaking” adding that the “policy risk for the mining sector remains elevated and hurts foreign direct investment (FDI) inflow.”

Last week Mongolia signalled a new softer line after foreign investment in the country drop 17% to $3.9 billion in 2012 amid threats about mine seizures, blocking of deals (including between a Turquoise Hill  coal subsidiary in the country and a Chinese investor) and proposed draconian new mining laws.

Ochirbat Chuluunbat, deputy minister for economic development, told a conference in London last week that a new bill governing the sector will be submitted to parliament by July that will aim to reverse the downturn in mining investment and create a more stable environment that is not dictated by bilateral agreements like the 2009 agreement on Oyu Tolgoi with the then Ivanhoe Mines.

Mongolia has long coveted a bigger slice of Oyu Tolgoi and has twice in the past couple of years floated proposals to take majority control of the mine which at full production would constitute as much as 30% of the Asian nation’s economy.

The mine is set to produce more than 1.2 billion pounds of copper, 650,000 ounces of gold and 3 million ounces of silver each year if  built to capacity.

Political infighting may be behind latest Oyu Tolgoi delay
US raises serious concerns over Oyu Tolgoi’s environmental, social impact
Mongolia working hard to avoid the mistakes of 2009 with new mining law

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