Ivanhoe, Rio Tinto Jostle as Mongolia Presses for Higher Oyu Tolgoi Stake

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--Resource nationalism has become a worldwide phenomenon, with national governments looking for ways to keep larger slices of income from mined resources for local development. This is causing revisions of understandings and contracts between the governments and international mining companies, which are providing project development capital and experience-based technical input. For a related story, see August 9, 2011, article - Resource Nationalism Tops Mining and Metals Sector Business Risks.

The $6 billion Oyu Tolgoi metals mining project in Mongolia is scheduled to begin production from an open pit in 2013, with underground production starting in 2015. In the first 10 years of operation, the mine is expected to exceed an annual production of 650,000 ounces of gold, 3 million ounces of silver and 1.2 billion pounds of copper.

Now it appears that the Mongolian government is discussing changes in the 2009 agreement in which Ivanhoe Mines Limited (NYSE:IVN) (Vancouver, British Columbia) took a 66% stake in the project, with the Mongolian government holding the 34% balance. In August, Rio Tinto plc (NYSE:RIO) (London, England) increased its holdings in Ivanhoe by 2%, giving it a total 48.5% interest in the Canadian miner.

S. Bayartsogt, Mongolia's finance minister, has said that the government's standing committee on security and foreign policy has been discussing changes to the terms and the period of the agreement. There is pressure on the government to raise the national stake in the project to a minimum of 40% and trim Ivanhoe's profits. The opportunity for grandstanding among politicians is present in the current scenario, as national elections are set for 2012.

Ivanhoe has said that the project will represent about 33% of the country's economy by 2020; at the same time, it will have created an increase in the size of the economy by the same amount.

The pressures coming from the government have created a hostile atmosphere between Ivanhoe and Rio Tinto, with the former saying that Rio has been speaking out of turn on the project and in relations with the government. Rio has revealed concerns that the lack of an adequate power supply could delay commercial operations at the mine and has highlighted the current and future wealth generated for the country by the project.

Ivanhoe has said that it will provide further details on the current issues in a future statement, following direct communications with Rio Tinto on the specifics of its concerns.

Both companies are waiting for the result of arbitration proceedings on a dispute arising from Ivanhoe's adoption of a shareholder rights plan in 2010, known as the "poison pill" option, which would allow the company to issue new shares to block an attempted takeover. For related information, see November 6, 2009, article - Mongolia's Oyu Tolgoi Copper and Gold Project: A Look Without the Rose-Coloured Glasses.

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