Mongolia's ownership in mines less than ideal for the nation and investors

ULAN BATOR, Mongolia: Mongolian political parties are locked in post-election squabbling, but once the dust settles a new government could finally pass deals to tap the coal, copper and uranium that sit beneath its vast deserts and grasslands.

But analysts say such deals would be less than ideal for either Mongolia or overseas investors, with the country better served by taxing its mineral wealth, rather than seeking direct government ownership in massive mines.

The current law gives the state either a 34 percent stake or a controlling 51 percent stake in mining projects. An investment agreement with Ivanhoe Mines and Rio Tinto for the Oyu Tolgoi project, still under negotiation, would be the first such deal.

"I don't think ownership stakes are a good idea," said Julian Dierkes, a specialist in resources and public policy at the University of British Columbia. "I wish the government would just collect cash and throw it in postal savings. If they make 3 percent on it, they're set."

Since Oyu Tolgoi's discovery in 2001, Mongolian laws have gone from among the most attractive in the world for overseas mining companies to increasingly protectionist, on populist fears that the country would trade its wealth for an environmental disaster.

An Oyu Tolgoi deal would probably be the template for future deals with overseas miners digging coal, zinc, gold and uranium, raising the prospect of government stakes in a host of projects.

The government is unlikely to take an active management role, but has not specified how it would manage its stakes or whether it would set up a separate body to do so.

Adrian Ruthenberg, Asian Development Bank's Mongolia director, said, "It creates a conflict of interest for the government - do you represent the people or the shareholders in a company?"

Partial ownership by the government, rather than taxation or royalties, also leaves it more vulnerable to dips in production, said D. Ganbold, president of the Mongolian National Mining Association, an industry group.

"Participation through taxation yields the most effective outcome because there are taxes that have to be paid even at times production goes down," he said.

Mongolia does not have the resources or capital required to undertake mine development on the massive scale required by Oyu Tolgoi or the $2 billion Tavan Tolgoi project to mine the world's biggest untapped coking coal deposit.

"There's a lot of infrastructure needed," said Senden Batjargal, deputy director of Baganuur Joint Stock Company, a state-run coal mine. "You're talking about railroads. Of course, the government couldn't provide that infrastructure alone."

Analysts say successive governments have failed to provide objective and realistic information about the potential deals, and exacerbate misconceptions with promises of revenues from projects still years away from production.

Before the elections, the ruling Mongolian People's Revolutionary Party was pledging 1.5 million tugkrits, or about $1,290, to each citizen once mining begins, while the Democratic Party, its rival, said everyone would get 1 million tugkrits worth of mining company stock.

"There is a deficit in terms of communication," Dierkes said. "Ignorance makes the discussion difficult, and it prepares the ground for some of the populist claims."

The last deal for Oyu Tolgoi before Parliament, which was never put to a vote, gave the government a 34 percent stake. There has since been talk of that rising to 51 percent.

In exchange, the project would be exempt from a 68 percent windfall profits tax while it built a copper smelter in the Gobi Desert.

Even at 51 percent, Rio and Ivanhoe say they could go ahead at the site, also known as Turquoise Hill, which is one of the world's largest copper deposits.

"We're totally comfortable" with a sizable government stake, said Andrew Cuthbertson, head of Rio Tinto Mongolia. "The investors are really waiting for the government to take the leadership and make a decision and move on."

Mongolia also sits on about 2 percent of the world's uranium reserves, but the government lacks regulations covering the extraction of the nuclear fuel.

Still, whatever imperfections there may be in the model the government settles on - no matter who is in power - most say the main thing is simply to get the Oyu Tolgoi deal done.