A former Mongolian president and fighter for greater state control of mining may be in jail, but the coalition that will rule Mongolia for the next four years is stacked with resource nationalists.
Little over two weeks ago shares in Turquoise Hill Resources (NYSE:TRQ TSE:TRQ) plummeted after the company said it received a letter from Mongolia’s mines minister asking to renegotiate a deal that gave the country 34% ownership of the massive Oyu Tolgoi mine.
Turquoise Hill (formerly Ivanhoe Mines), majority owned by Rio Tinto, rejected the “request” saying the Vancouver-based company’s nearly $6 billion already invested in the copper-gold project is legally protected under a deal signed in October 2009.
But as the red hot Mongolian economy starts to slow dramatically – by a full one third according to Mongolia’s central bank governor speaking on Hong Kong TV yesterday – from last year’s torrid pace of 17%, Oyu Tolgoi, one of mining’s most prized assets, will start to look increasingly attractive to politicians.
The country is also plagued by persistent high inflation currently at a rate of more than 15%. Standard & Poor’s yesterday also downgraded its outlook for Mongolia’s debt highlighting increased risks of volatility in the nation of fewer than three million people ranked number 155th in the world based on GDP per capita.
Mongolia is being particularly hard hit by the slowdown in China, where the bulk of its exports – 90% of which is mining related – end up. According to government stats mineral exports fell 41% in September from a year earlier to just $324 million.
Compare these paltry numbers to the scale of Oyu Tolgoi:
Turquoise Hill is planning to spend $3 billion to $4 billion to bring Oyu Tolgoi to full production in 2018 and 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.
Back of the envelope calculation puts annual revenues from the mine at some $5.4 billion.
One of the ironies of the situation is that Oyu Tolgoi is on the verge of production and the only thing that is holding up start up of operations is a breakdown in talks between Mongolia and China about the details of a power deal.
It was not the first time politicians in the country attempted to rework the deal and Turquoise Hill investors seem sanguine about the prospects for the company and Oyu Tolgoi. After a 5.9% jump today the counter, valued at $8.3 billion in Toronto, has clawed back everything it gave up since the news of the latest letter first broke.
Mongolia refuses to let Rio’s Aussie lawyer leave >>
If you’re herding animals near Oyu Tolgoi the NY Times wanna talk to you >>
Mongolia’s new rulers may put world’s richest coal deposit beyond reach >>
Oyu Tolgoi: All that’s left is for China to flip the switch >>
Rio have no choice but to re-negotiate the whole thing.
Resource nationalism will spread.Mining companies need to devise strategy to look and sound more national than foreign.Find a way out.