Rio Tinto and Turquoise Hills Resources last week publicly and firmly rejected a request by the Government of Mongolia to renegotiate the Oyu Tolgoi Investment Agreement (‘OT IA’), which is widely viewed as a benchmark for Mongolia’s commitment towards foreign investment and the country’s flagship mining development project. Specific details and the timing of the government”s request have not been disclosed but it is believed to be related to the topic of sliding scale royalties mentioned below.

As we highlighted in our September 25th comment on the new Government’s Action Plan, overall we view the proposed policy platform as favorable to foreign investment, putting forward vigorous reform and guideline to current policy.

However, we note mixed messages and a lack of coordinated and clear public approach from the Mongolian authorities on the OT issue. Just after renegotiation pressures were diffused by not naming OT IA specifically for amendment in the Action Plan, or so we thought, a new draft budget for 2013 proposes to increase budget revenues by 445.8 billion MNT (approximately $318 million USD) by introducing sliding scale royalties as well reducing certain tax discounts and waivers to OT. This move has been publicly supported by the Prime Minister and the Democratic Party (‘DP’) Parliament Caucus Leader.

 The proposed 2013 draft budget has been submitted to Parliament for approval and we believe it will be accepted since it has the backing of the DP Caucus. As a whole we view the proposed budget as progressive as the first budget in compliance with the landmark Fiscal Stability law that binds government structural deficit to 2 per cent of GDP. The composition and timing of the budget comes at a critical point for Mongolia as the headline Chinese economic growth has slowed, impacting associated equities and commodities.

 National statistics show revenue from coal, the country”s biggest current export, has been significantly reduced over the summer because of a drop in both price and volume. This situation has not meaningfully improved since and Foreign Direct Investment has remained subdued waiting much needed and proposed clarification or revision to the current law.

Last week the European Bank for Reconstruction and Development (‘EBRD’) announced that it would provide a direct $250 million USD loan and syndicate a further $100 million USD on the international markets to fund the ongoing development of the Tsagaan Suvarga copper mine located in the central part of the South Gobi porphyry copper belt in southeast Mongolia about 140 kilometers along trend from OT. The Tsagaan Suvarga project is privately owned by Mongolyn Alt Corporation (‘MAK’), one of Mongolia’s largest national mining companies. EBRD is owned by 63 countries, two intergovernmental organizations and has committed $846 million USD across 47 projects in various sectors in Mongolia since 2006 and mobilizing an additional $1.8 billion USD for those projects from other investors.