Mongolia's Oyu Tolgoi Copper and Gold Project: A Look Without the Rose-Coloured Glasses

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Researched by Industrial Info Resources (Sugar Land, Texas)--At last it looks like the Mongolian government will finally approve the plans of Ivanhoe Mines Limited (NYSE:IVN) (Vancouver, British Columbia) and Rio Tinto plc (NYSE:RTP) (London, England) to develop the huge Oyu Tolgoi copper/gold project. Or perhaps more correctly, Ivanhoe and Rio Tinto have finally been able to negotiate conditions under which they are prepared to commit the estimated US$1.15 billion required.

Obviously, the government's proposed 68% windfall tax on profits derived from gold and copper mining was a show-stopper. This tax, combined with the proposed requirement that the Mongolian government own 51% of the project, meant that the Oyu Tolgoi project wasn't going anywhere. However, Rio Tinto seems to have negotiated long, hard and well. The Mongolian government has cancelled the 68% windfall tax and will hold only a 34% stake in Oyu Tolgoi.

However, is all as it seems? Commentators familiar with the complicated politics of this region are not so sure. Some believe, and probably with good reason, that both Moscow and Beijing, Mongolia's immediate neighbours that account for 60% of Mongolia's export revenue, are very interested in evicting Western interests from Mongolia--or at least freezing them so that if they don't benefit, nobody benefits.

These same commentators assert that Mongolia will not be able to come up with even 5% of the capital required to construct the infrastructure needed for the project. The government may well have passed the wonderful sounding "Transit Mongolia" program last year, but the question remains: "Where is the money going to come from?" For this project alone, billions of dollars will need to be spent on road and rail development.

Is this where China enters? Is it possible that commodity-famished, cash-strong China will invest billions of dollars to create and maintain influence in resource-rich Mongolia, the country's immediate neighbour?

...Bringing us back to Rio Tinto, Ivanhoe, and their substantial investment in Mongolia. Sovereign risk is always an interesting issue. Rio Tinto is still experiencing the wrath of the Chinese dragon scorned when things don't quite go according to Beijing's plans. The company's senior China-based management are still in prison and facing trial over what the Chinese government is calling "acts against Chinese interests."

Also, have the market and even the corporate players themselves forgotten just what sort of leverage the Mongolian government is prepared to exercise in order to even up the playing field between the interests of the country and foreign investors? In the past, Mongolia has not hesitated to 'temporarily' suspend the mining licenses of foreign companies operating on its soil. Canada's Centerra Gold Incorporated (TSX:CG) (Toronto, Ontario) was left with no choice but to shut down the company's Boroo mine in Mongolia after being on the end of one such temporary licence suspension--and this at a time when the company was considering opening a second mine.

Once the surface has been scratched on the issue of mining projects in Mongolia, a very complicated web begins to emerge. Mongolia, a very poor nation, but one blessed with significant resources, wants and needs foreign investment, but has a history of wanting more than its fair share of the pie after it has been baked.

This small nation is also sandwiched between the two very powerful nations of Russia and China, both of whom are extremely interested in benefitting from, if not absolutely controlling, Mongolia's mineral wealth. It's an interesting environment in which to invest a billion dollars, but Rio Tinto and Ivanhoe are willing to take the risk.

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