Mongolia Plans to Take Stakes in Mines With New Mineral Law

Mongolia, which is seeking overseas investment to extract gold, copper and coal deposits, passed a law giving the government the right to take stakes of as much as 34 percent in projects developed by private companies.

Mongolia also can claim as much as half of mines developed around deposits initially discovered with government funds and which would contribute at least 5 percent to the annual gross domestic product, B. Jargalsaikhan, minister for trade and industry, said today at a mining conference in Ulan Bator.

Global mining companies such as BHP Billiton and Cia. Vale do Rio Doce aim to develop raw material projects in Mongolia to meet rising demand from neighbor China, the world’s fastest growing major economy. China consumed 3.6 million metric tons of copper last year, up 9 percent against 2004.

“They attracted all of us here by saying that foreign companies can have 100 percent interest” in the mining projects, Ranjeet Sundher, president of Vancouver-based Red Hill Energy Inc., said in an interview today. The new ownership rules are “shocking and damaging,” he said. Red Hill owns coal and uranium projects in Mongolia.

An official translation of the law, which went into effect Aug. 27, will be issued later this week, Jargalsaikhan said. Details of the law, such as how the government will pay for its stakes in these mines, are being worked out, he said.

“Mongolia must create wealth,” Jargalsaikhan told delegates at the conference, organized by consulting company Mine Info LLC and the Mongolian National Mining Association. “If you don’t like the law, you may go to another corner. We are not forcing anyone to stick with Mongolia.”

Gobi Deposits

Two deposits under exploration in the Gobi desert in Mongolia may produce more than $2.5 billion of minerals a year, Mine-Info Inc. estimates.

Oyu Tolgoi, a deposit being developed by Ivanhoe Mines Ltd. less than 80 kilometers from Mongolia’s border with China. Oyu Tolgoi, also known as Turquoise Hill, may produce 1 billion pounds of copper and 330,000 ounces of gold annually for at least 35 years, according to a Sept. 30, 2005 statement from Ivanhoe.

The Tavan Tolgoi coal deposit, less than 100 kilometers north of Oyu Tolgoi, holds 6 billion metric tons, or about three year’s worth of China’s consumption of the mineral.

Land-locked Mongolia, with a population of 2.8 million, wants foreign investment in mining to help boost annual gross domestic product from about $450 per person.

In a government hearing a year ago, representatives from Ivanhoe, BHP Billiton, Vale and other mining companies asked the government in a hearing not to change the mineral law, arguing that changes to Mongolia’s mineral law would make the country less attractive for investment.

These companies began exploring in Mongolia after the country implemented an earlier version of the mining law in 1997, which aimed to lure investors with low fees and little red tape.

“The foreign investment community doesn’t know how it’s going to work in practice,” Nathan Backhouse, second secretary of economic affairs from the Australian Embassy in China, told reporters in Ulan Bator today. “It’s a bit disconcerting.”

The previous Mongolian government collapsed in January after protesters demanded it take steps to cut corruption and include more social benefits in the country’s minerals law. Domestic civil-society groups have been pressuring the government to take away guarantees accorded companies mining minerals.

`People’s Wealth’

Mongolia’s attempts to boost its people’s wealth and attract investors was a “very tough and delicate balancing act,” Tsend Munkh-Orgil, a member of parliament and chairman of the standing committee on law, told reporters. “It all boils down to how much we want the investor and how much the investor wants to invest. If the government really wants the investor in a particular project, it may not be overly stubborn.”

Red Hill’s Sundher said the Vancouver-based company will stay in Mongolia, betting that the government may water down some of the recent changes.

“We must get the others to believe as well,” Sundher said. “We’ve been here five years; for three months, it’s been tough while the rest of the time, it’s been fantastic.”