Mongolia text poll impact: Dust off your exploration plans

Mongolia text poll's Oyu Tolgoi impact

Oyu Tolgoi HQ in Ulaanbaatar

Mongolia’s referendum by text message that asked its three million citizens (anyone with a mobile phone could participate, not just eligible voters) to help shape country’s economic policy, is either a triumph of direct democracy, a meaningless political exercise, or both.

In new prime minister Saikhanbileg Chimed’s poll, Mongolians voted by a not so overwhelming margin of 56% to 44% for the pursuit of foreign (mainly mining) investment versus spending cuts.

Despite the tepidness of the response Saikhanbileg will likely seize the opportunity to push through an agenda that offers the prospect of an end to the impasse over the expansion of Oyu Tolgoi and kickstart investment in the country.

Rio Tinto and the government of Mongolia has been locked in robust bitter talks over how to fund the $6 billion copper and gold project that at full tilt will transform the Asian nation’s economy.

Julian Dierkes of the Institute of Asian Research at the University of British Columbia puts forth an intriguing argument on the Mongolia Focus blog saying Saikhanbileg’s
announcement appears to include a proposed amendment to legislation on strategic deposits that would “establish a legal framework to transfer state-owned shares to the special license holder in order to collect special royalty payments”:

That sounds like an offer of a deal to Rio Tinto (and others, obviously) to trade the 34% stake in Oyu Tolgoi for a higher rate of royalty payments. Presumably that would mean that the government would no longer invest in development at the mine, but would instead begin to collect a higher royalty on current and future production.

Two recent developments may have also been stepping stones along the way to this announcement.

When Gatsuurt was designated a strategic deposit recently paving the way for further development by Canadian Centerra Gold there were discussions of a lower stake (say, 20%) in exchange for a reduced investment. The new initiative might see this stake go to 0 in return for a higher royalty, it appears.

Two weeks ago there were discussions in Australia that Rio Tinto had offered to forego the royalty on a smelter that would be constructed under the Investment Agreement. Perhaps this was part of a round of negotiations about what might be traded for the 34% government stake.

Mongolian text poll's Oyu Tolgoi impact

Saikhanbileg Chimed has a point

Mongolia in late 2013 rewrote rules on foreign investment without any noticeable impact of foreign direct investment. In 2013, FDI had contracted by nearly 45%. In the first five months of 2014 only $400 million was pumped into the country, a 64% year-on-year decline.

Overall economic growth has steadily slowed from 2011’s whopping 17.3%. In 2015 depending on Mongolian policy decisions, GDP expansion may range from a high of 12% to as low as 2%. The country is now seeking assistance from the IMF for the second time since 2009.

Swopping shareholding for royalty payments and in the process transfer the development and financing risk to miners, may stem the decline.

But in an environment of falling commodity prices, shrinking budgets and general risk aversion, governments sitting on natural resource riches may not realize just how deep these concessions would have to be to persuade mining companies to risk billions.

Image of Saikhanbileg addressing Press Club in 2013 from Youtube.