Mongolia Approves Law Amendments for Investments in South Gobi Copper-Gold Complex

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Mongolian government has approved amendments to four laws that clear the way for Rio Tinto Limited (ASX:RIO) (Melbourne, Australia) and Ivanhoe Mines Limited (NYSE:IVN) (Vancouver, British Columbia) to invest in a copper-gold complex in Mongolia's South Gobi region.

Amendments were made to the corporate tax code and laws regarding access to underground resources. Other provisions allow foreign companies to finance road construction. The key change was the cancellation of a proposed 68% windfall tax on profits derived from copper and gold mining. The tax had been proposed in 2006 by a government hoping to capitalize on high commodity prices, but had been a major hindrance in the development of resources in the Oyu Tolgoi region.

With the amendments to the laws almost certain to be formally approved by the Mongolian government, an agreement is likely to be signed within the next two weeks that will enable production to commence as early as 2013, with full production expected within five years of startup. The investment agreement is seen as an important step in the future development of resources in Mongolia and will pave the way for other mining companies in the region.

The copper and gold deposits in the Oyu Tolgoi region are reported to be the world's largest area of undeveloped resources. Located in the South Gobi region of Mongolia near the Chinese border, the deposits are expected to produce an average of more than 450,000 tons per year of copper and 330,000 ounces per year of gold during the expected 35-year lifetime of the project.

Under the terms of the expected investment agreement, the Mongolian government will hold a share of 34% in a new company, Ivanhoe Mines Mongolia Incorporated. In 2006, Rio Tinto secured a 9.95% stake in Ivanhoe Mines Mongolia with an investment of $303 million and committed to invest an additional $388 million for a further 9.95% stake as soon as a long-term investment agreement is reached with the Mongolian government.

The amendments to the laws are seen as a compromise between the need to encourage investment in the country and retaining a significant share of revenues to fund further domestic development. Mongolia contains some of the world's largest undeveloped reserves of copper, gold and uranium, as well as significant reserves of coal and other minerals.

Mongolia has previously been considered an isolated location, midway between Russia and China, but now the country can claim two of the world's largest markets as neighbors; Russia and China account for around 60% of Mongolia's exports. However, road and rail transport in and out of the country continues to be a problem recognized by the Mongolian government, which adopted the "Transit Mongolia" program in May 2008.

Under the program, the government plans to develop a secondary rail line, continue with electrification of the existing rail network, construct the Asian Highway routes, and facilitate trade transport through the country. Currently, the road network suffers from lack of investment and underdeveloped intercity and interstate links, while the rail network also suffers from lack of investment and provides only limited service in the country.

The major construction projects in the transport sector before 2015 include the construction of the Gobi region rail line at an estimated cost of $580 million, the construction of a second parallel rail line at a cost of $1 billion, and the construction of the eastern rail line at a cost of $825 million.

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