Interview with Finance Minister MP S.Bayartsogt

More problems are arising over the Oyutolgoi contract. 12 MPs have asked the Speaker to stop its implementation. They say that Mongolian income will be lower because Ivanhoe Mines reduced the deposit’s reserve amount to 24 million from 45 million tons. What is your response?

They are capitalizing ion people being under-informed. The deposit’s reserve was first calculated in terms of ore. The ore is divided into copper, gold and molybdenum. The geological reserve was approved on July 1, 2009 by the same people who are criticizing it now, such as S.Avirmed. It was approved that there is 6.45 billion tons of ore in total: copper 45 million tons, gold 1838 tons, molybdenum 157,000 tons, and silver 12049 tons. The extractable amount would be 2.6 billion tons of ore, including 25.3 million tons of copper, 1028 tons of gold, 81,600 tons of molybdenum and 6145 tons of silver.

This decrease is only to be expected. The profitable extractability is a fact of mining.

Will our 34-percents ownership change since a lesser amount is likely to be mined?

It won’t. After approving the amount of resources under the ground, the feasibility study is made and discussed by the Mineral Council. The council which held its meeting on March 25 raised the amount of the efficiency amount. 5.7 million tons from the 19.6 million tons of copper which is said to be beneficial only in certain conditions were added to the efficiency amount. Ore amount was also raised. Certain conditions means the resource will be produced by technologic development, or when metal price increases. Some MPs are saying 44 percent of the copper deposit is going to be left without using. It is not so. The deposit amount was approved fully in the scope of law.

Then why are they saying it was not registered?

They are just lying. You should see the feasibility study. The council gave duty to Oyutolgoi LC to make economic proficiency calculation on 14 million tons, which is said to be beneficial in certain condition, each time when commodity price in global market increases and the company’s expenses decrease. The company will have duty to make revision in feasibility study constantly. You can trust me. I will not lie because I will take the responsibility for the things I’m saying.

Can a revision be made in the feasibility study?

Of course. Every company makes this. MPs know this. There is efficient resource and efficient in certain circumstances resource in each company. Our Erdenet factory is the same. We did not include the 19.6 million tons in feasibility study. We only talked about the efficient resource because we are talking about the market to operate in industry. But still, some of the people are saying the 19.6 million tons were thrown away.

Wasn’t that thrown away?

No. We must understand one thing. The reserve was approved on July 1, 2009. The March 25 meeting transferred 5.7 million tons from the 19.6 million tons of copper which is said to be beneficial only in certain conditions were added to the efficiency amount. This is a common procedure. There is no violation to laws. The problem is just a pure political move to use the low information of the people.

The advance payment of USD 250 million was turned into a loan with 5 percent interest. Why?

Firstly, this is inaccurate. The interest is three percent, not five. Advance payments are of different types, such as articipation advance payment, production advance payment and tax advance payment. In this case, we just used the tax advance payment. In Tavantolgoi, it is possible to use all three advance payments because Tavantolgoi is fully owned by the Government. In Oyutolgoi, on the other hand, Mongolia is just taking the 34 percent from Ivanhoe’s possession. That’s why we are taking the advance payment of tax. The contract was signed on October 6, 2009 and the money came on the 20^th of the same month. But the mining operation will begin in 2013. So, it means we have already got USD250 million which we should be getting only after 2013. Money is valuable. There is a net present value in loan procedures. Will it be better for you to take MNT 1 million three years later or will you take MNT 800,000 today? Loan buying is the same. Taking MNT 250 million three years later and taking it today are different. Think about the bank interest. Participation payment does not call for interest. The contract will take effect on April 6 which means Ivanhoe Mines took a risk when it made the payment in October. Of course, if the contract is canceled, we should be able to pay back the money we took.

The original offer was for us to receive USD25 million without interest and USD100 million with 9.9 percent interest. I got it changed into USD 250 million at three percent interest. I do not claim any special merit as I am here to serve Mongolia’s interests.

What about not including a reference in the contract to raise Mongolian possession to 51 percent from 34 percent after the investment is mended?

That reference is very much there in Clause 1.6. It says after 30 years, when the contract is extended, 16 percent more will be added to Mongolia;s share. The Parliament protocol on the other hand sets no clear time limit, when it says ownership share will have to rise when investment costs have been recouped. Maybe that will take 100 years. Indicating 30 years in the agreement has made things much better for Mongolia. We will take the tax for 30 years and take the dividends of the 34 percent. Afterwards, we will be able to own 50 percent of Oyutogloi.

It is alleged that the contract’s reference to “Certain constant expenses and management service payments related to the project will be excluded from that year’s tax income” violates the law?

I have to say those who are saying that don’t know the law. The company income tax law indicates it clearly.

Erdenet is paying 68 percent tax. The windfall tax law will be cancelled only in 2011. Why does the agreement  make no mention of the tax?

The tax applies to all companies. If Oyutolgoi was producing copper today, it will have to pay the 68 percent tax before it stops paying in 2011.

Have the investors met the 10 requirements from the Mongolian side? Will the implementation be monitored by external organizations?

All the requirements were fulfilled. As for external monitoring, this contract was made by two sides: Mongolian Government and Oyutolgoi Company. It is like a promise given to each other. Who will make the monitoring? It was agreed that the Government fulfilled its five requirements and Oyutolgoi fulfilled its five. Oyutolgoi sent a letter on 29^th to the Government saying all the requirements were fulfilled by the company and the company agrees that Mongolian Government fulfilled its. The Government will talk about it on 31^st.

What about the two percent royalty?

It is not there. There is no such thing in Mongolian laws and we did not agree that during the contract. BHP Billiton took the exploration license of Oyutolgoi. Then it sold it to Ivanhoe Mines. They made a contract to enable BHP take two percent of the revenue if Ivanhoe Mines finds natural resource. Company royalty is an understanding of foreigners, not Mongolians. It is the issue of the two companies, not the Government. If we had the royalty law, we would have paid it.

What if  BHP or Ivanhoe files in court?

Let them. It will not change the fact that it is the issue of two companies.

There is also suspicion that the amount of deposit reserve has been reduced because the feasibility study was not made before the contract was made? Is it necessary to make the feasibility study beforehand?

In order to build a house, you have to buy the land, and calculate the cost of everything like wood, nails and bricks. This is a feasibility study. What will happen if crisis happens and construction material prices increase? You go to the salesman and say “I calculated the price of a nail as MNT 1”. What will the salesman say? Of course he will ask for the new price of MNT 3. This means you have to change the feasibility study. Especially in mining sector, many changes occur depending on the reserve. When there is bad technology, people leave out part of the reserve because they can’t excavate it. Today, gold companies started using the ground which they left unused before because they have better technology now. That is why the feasibility must be changed constantly. For example, if copper price reaches USD 10,000 per ton, the companies will try to produce it because it is expensive now.

When will the USD 50 million come?

Within 14 days after the contract takes full effect. But it is probable to take it during the Parliament’s session start because the investors have earned money. Rio Tinto has to take 19 percent of Ivanhoe within this period as indicated in the contract. But it has already taken 22 percent. It is being planned that it will raise it to 46 percent within 18 months.

You mean from the 66 percent of Ivanhoe Mines?

Yes. Ivanhoe’s possession will decrease and world’s biggest mining company Rio Tinto will have the biggest role to execute this project.

MP N.Batbayar said Ivanhoe is a small company and Mongolia should have shares from the bigger Rio Tinto. Even PM agreed that the contract was not beneficial to Mongolia.

I wasn’t present in that meeting. If I was, I would have explained to them how matters are. Ivanhoe Mines is a company registered in Toronto. When taking Oyutolgoi, it approached the Natural Resource Affairs Authority by establishing a company registered in British Virgin Islands. According to our laws, investment contracts must be made only with license holders. Many international companies operate through their small companies registered in no-tax area in order to evade from taxes. We have to make contracts with that company only. That is why we can’t make contracts with Rio Tinto because the license holder is Ivanhoe Mines. It is true that Rio’s shares are becoming expensive in New York and Toronto. It earned USD 6 billion from trading shares. MP N.Baybayar seemed to have assumed that if Mongolia made contracts with Rio Tinto, then Mongolia would have earned USD 2 billion from the 34 percent. They are just making dramatic gestures. It has nothing to do with the contract actually.