Mongolia Scolds Rio Tinto on Mine Costs as Yurts Replaced – by Michael Kohn and William Mellor (Bloomberg Businessweek – April 09, 2013)

http://www.businessweek.com/

Outside, it’s minus 30 degrees Celsius as a February wind blasts across the Central Asian steppe and through the Mongolian capital, Ulaanbaatar. Inside Government House, President Tsakhia Elbegdorj delivers a televised speech that simultaneously warms his people and chills foreign investors.

The country’s 76 legislators have convened to debate the future of one of the planet’s richest copper and gold mines, Oyu Tolgoi, which is 66 percent owned by London-based Rio Tinto Group (RIO) and 34 percent owned by the state. Elbegdorj tells them Rio Tinto has let the project’s total cost balloon by $10 billion. The higher expenses, which Rio Tinto disputes, would diminish and delay profits the government shares in, Bloomberg Markets magazine will report in its May issue.

“The time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands,” Elbegdorj says to cheers from the lawmakers. His demands include giving Mongolian employees more management positions on the project, which is scheduled to begin exporting copper concentrate by June.

Few things matter more today in the political and economic life of this landlocked country of 2.8 million people than foreign investment to develop its mineral wealth. Mining money has spawned gleaming office towers, pricey gated communities and luxury-car dealerships in the capital. And yet, half of all Mongolians still live like their nomadic ancestors in circular felt yurts that can be dismantled and moved.

Minegolia

Minegolia, to use a nickname that’s become more common during the mining boom, remains a poor country. About 30 percent of the population lived in poverty in 2011, according to the government, although that was an improvement from 40 percent in 2010, before the start of payouts funded by mine proceeds.

Puntsag Tsagaan, the president’s chief of staff, says he doesn’t want to see his country turned into Minegolia. Mineral wealth should be exploited cautiously and benefit the people, he says. “It does not have to be unlocked in a generation.”

Mongolia’s gross domestic product expanded 12.3 percent last year to $10 billion. Economists expect 15 percent growth this year. Oyu Tolgoi, which means Turquoise Hill, will be the largest contributor to the economy once it’s fully operational. With fees, royalties and the government stake, as much as 71 percent of profits will go to Mongolians, the International Monetary Fund estimates.

“There is scope for Mongolia to vastly develop if it gets everything right,” says Vidur Jain, a strategist at Monet Capital, an investment bank based in Ulaanbaatar.

Government Complaints

At the moment, much appears to be going wrong. Instead of basking in new mineral riches, Elbegdorj is sparring with Rio Tinto. In addition to the complaint about a cost blowout, the government says the company should have paid taxes last year and needs greater financial transparency.

In his speech to parliament on Feb. 1, Elbegdorj wasn’t just bluffing. A few days later, his government briefly froze Rio Tinto’s bank accounts, according to three people familiar with the situation who asked not to be named because they weren’t authorized to speak publicly.

For the rest of this article, click here: http://www.businessweek.com/news/2013-04-09/mongolia-scolds-rio-tinto-on-costs-as-mine-riches-replace-yurts#p1

Comments are closed.