February 2010
The Government of Mongolia has started revealing the rules of the game that will bring the Tavan Tolgoi coal deposit into commercial production. Reports of the Prime Minister’s meeting with the working group on the project have shown some of the cards to the public and investors. The meetings signalled that the Government of Mongolia may opt for a product sharing agreement on Tavan Tolgoi, one of the three methods used globally in the mining sector.
Before this meeting, there was widespread expectation that the Government would make a joint production agreement with investors, with the Government keeping 51% ownership and the investor(s) successful in the international bid controlling the remaining 49%. The Oyu Tolgoi investment agreement had been based on the same principle of joint production, tough the ratio of ownership was different. Mongolia’s success story, the Erdenet Mining Corporation, alsoworks as a joint venture in joint production. Besides product sharing and joint production, there is the License Agreement model, as made with Boroo Gold in Mongolia. Its benefits are low and that is why it has attracted constant public criticism.
The Prime Minister asked the working group to carefully examine the pros and cons of going for a product sharing agreement in Tavan Tolgoi. Mongolia has so far tried this only in the oil sector where its experience has been both bad and good. Therefore, every care has to be observed before finally choosing this method. The common perception that Mongolia has been the loser in product sharing in oil is difficult to confirm or refute in the absence of tangible data. This lack stems from the way these agreements were made. There is no compulsion for figures to be disclosed and there is no monitoring of operations. The Government worked hard in August 2007 and also later to revise certain conditions of the product sharing agreement to make them more profitable for Mongolia, and I can only hope that when the agreements with the Chinese companies extracting oil in Dornod basin come up for renewal, Mongolia will manage to get at least some of what it wants.
Now that a Mongolian State-owned company would own 100% of the Tavan Tolgoi deposit, while a foreign investor manages it and extracts the coal, the choice is likely to fall on the bidder with the best and most successful management record. Needless to say, the profit sharing formula has to be transparent. The best manager of Tavan Tolgoi would be thecompany with the best technology, experience and financial capability. A preliminary evaluation of the 11 companies and consortiums in the running for Tavan Tolgoi, following these criteria, would put the U.S. firm, Peabody Energy, ahead of most others.
A Russian paper wrote in the early days that companies from there could easily invest US$2 billion but this was when several Russian billionaires were believed to be seriously interested in the deposit. That belief disappeared when the economic crisis hit Russian aluminum tycoons hard. Russian State-owned companies have also seen their stock value get depleted, so a big question mark hangs over whether the Russian consortium will have the wherewithal to invest in Tavan Tolgoi. The Russian hard sell for its favored railway route to carry Tavan Tolgoi coal has to be seen in this perspective. Putin’s goal is to make money from the transit freight to pay for Russia’s outdated enterprise Russian Railway. The aluminum tycoons, looking for ways to recover some of their losses, have their eyes on some new projects in Mongolia. The administration of the Russian Railway recently told media that the Russian Government should allot US$1.5 billion from its budget to a railway project in Tavan Tolgoi. The Russian oligarchs are hard workers. Olyeg Deripaska managed to track down the Mongolian President in Davos and spend some quality time with him.
Enough has been written on how foreign countries have been expressing their interest in Tavan Tolgoi, so I shall not touch on them. The working group had a series of meetings with the interested parties in February last year and again in the autumn to confirm that they were still serious bidders.
Now that the Government has made its priorities clearer, the working group has been asked to review all proposals afresh, this time against the demands of a product sharing agreement.
During the most intense days of the debate on the Oyu Tolgoi investment agreement, when the hot winds of April whistled along the landscape, E.Bat-Uul and four other MPs proposed a product sharing agreement. Any hope of a serious consideration wasdispersed by the July 1 riot. Then a new Government was formed and when the draft agreement was submitted to Parliament, the initiator MPs took it back. One of them, B.Batbaatar, had also not been re-elected.
As I remember, that proposal justified the choice of the product sharing model by referring to “the foreign appetite for the minerals being very strong and the conditions being very complicated”. This sounds so very relevant even today, when different interest groups are exerting powerful pressure as they pounce on Tavan Tolgoi. Our two neighbours have the added expectation of transporting the Tavan Tolgoi coal through their territory. S.Batbold’s suggestion of a product sharing agreement could very well be the best option for Mongolia, taking everything into account. Researchers and analysts are welcome to give their views. One thing is clear. Holding 100% of the prize deposit gives Mongolia a special advantage when negotiating terms with the different interests.
The Prime Minister seems to have learnt a lesson from the convoluted progress that finally led to the Oyu Tolgoi investment agreement. He clearly feels that there is no reason to be content with holding only 51% of what is actually Mongolian national wealth. This is the simple fact of the matter and should not be negotiable. Talks can be held with all investors who accept this principle on how transparently and amicably an agreement on sharing the profits can be reached. There are issues that need to be ironed out and conditions that need to be stressed. The Prime Minister has given five broad directives. We shall be writing on them in forthcoming issues.