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http://zgm.mn/post/632/

Arnaud Soirat: OT agreements are not renegotiable (Part 1)

Agreement were negotiated in good faith with people that were mandated by the Cabinet

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http://zgm.mn/post/632/


ZGM Daily had the opportunity to sit down with Arnaud Soirat, Rio Tinto’s Chief Executive of Copper and Diamond, about the company’s stance on the current turmoil around the Oyu Tolgoi (OT) project.

-How does Rio Tinto feel about what is happening in Mongolian politics lately? The tax act, for instance.

-I have just come back from OT. I was with my whole executive team. When you go to the site, it was absolutely amazing. You can see Mongolian people being very motivated doing a top job in managing the operations and constructing some of the underground projects. Right now, we have got 14 thousand employees in OT altogether. The vast majority of those employees are Mongolians, which is 94 percent of the total employees. We also indirectly employ around 13 thousand employees through our food suppliers and contractors. We have contracts with around one thousand local companies. So, when you put everything together, we are the biggest private employer in Mongolia and we are providing to Mongolian people an opportunity to learn best practices from around the world in mining and we are deeply contributing to the economy. So, when I hear people complaining about the fact that OT is not contributing enough to the economy and to Mongolia, I thinking that they should visit the site and we should be looking at facts to be able to understand how important OT is to Mongolia. So, if i can give you just a few numbers; we have invested USD 7.5 billion in total since the beginning of the projects. We are intending to invest another USD 5 billion. We have paid USD 1.8 billion of taxes and royalties, so this money has been contributing directly to the Mongolian economy. If you look at the overall share of value, the Mongolian Government’s 34 percent of the shares is going to get more than 50 percent of the economic benefit. Overall, I know the context is difficult politically; but, if you really look at the facts, OT is an outstanding opportunity for the country.

-As it happens, politics does not regard facts. So the question is, how do you plan to solve all this political ping pong on whether or not Mongolia needs OT?

-I hear your comment but I do not do politics. I am a businessman and I am sticking to facts. I think, as you know, there are quite a lot of good deeds and reviews that are currently being done here on OT by the parliamentary working group. Actually, it proposed to look at the benefit of OT to the country and I think this is an outstanding opportunity for people in the parliamentary working group to spend some time to read the agreements. Because many people criticize the agreements, but very few of them have actually read them. Those agreements are here. They are available. We published those agreements on our website straight after we had signed them in full transparency. We have been even recognized by international NGOs for the transparency of the way we do business in Mongolia. So, we do encourage people to read those agreements and then the parliamentary working group has got a chance to have a look at the facts and to educate the whole population of Mongolia. Because, a lot of misinformation have been communicated for political reasons. Therefore, I really see the parliamentary working group as a key opportunity to correct those misperceptions and to help people understand the Investment Agreement, Amended and Restated Shareholders Agreement, and Underground Development Plan (UD P) are good agreements. They were agreements that were negotiated in good faith with people that were mandated by the Cabinet at the time to be able to do those negotiations. They have been negotiated according to best practices. Ultimately, it is a very good overall deal for Mongolia. The Mongolian Government has got 34 percent of the shares, has not invested a single penny in OT.


• Mongolian Government’s 34 percent of the shares is going to get more than 50 percent of the economic benefit.

• Mongolia is the only shareholder who had return on OT.

• Underground production of OT will come on the right time when the price would have increased and the market will need additional copper.


Yet, this is the only shareholder who had return on OT , USD 1.8 billion of taxes and fees of different sources. Other shareholders, TR Q, which is a Canadian company, and Rio Tinto have not had a single return yet. I know many people conveniently want to forget about this and rather talk about something else, but I think the parliamentary working group has got a key opportunity to put it in front of everyone. Because ultimately, one should never forget that those agreements, investment agreements and UD P are the foundation of our investment. It is very important that we operate in a country that respects the rule of law and respects agreements that have been signed. Those are the foundation. These foundations are actually what is going to support the investment and operations for many years to come. These are enabled by UD P and IA. Therefore, those agreements are absolutely critical for us to continue investing. If there were no agreement or if those agreements were to be challenged, then it would significantly jeopardize our ability to continue to invest in the country.

-Have you had meetings with the working group? How progressive has it been?

-Personally, I have had meetings with key politicians. But people in my team have had regular meetings with the working groups. We have got four working groups with the Government. One on the interest rate of the loans that Government contracted with the shareholder. One on the tax act, one on power and one on town development. We have people in my teams and OT that are so involved with the working groups of the Parliament. We have collaborated fully with the parliamentary working group. They have asked for lots of information and data. We have been transparent and given it to them. Some members of the parliamentary working group have been on site and they have had the opportunity to see by themselves. What has been built underground is one of the most complex underground project in the world. We are using a technology that only a very few mining companies in the world could master. The scale of the project is such, that once we’ve reached full production from the underground, OT will become the world’s third biggest copper mine. That does not come by luck. That comes by signing the UD P. With the UD P, we have been able to borrow USD 6 billion through 15 different reputable international agencies and we have been able to hire 7 thousand Mongolians. We have been transferring best practices for them to be able to construct and build underground projects. With that, we will be generating the equivalent of 30-40 percent of Mongolia’s GDP once we start exporting the ore coming from underground. What has been done is something to be proud of.

-Has the tax act influenced the operation at the site?

-No. We are trying to keep things separate. The tax act, in some ways, is a shareholders’ issue. We are keeping people very focused on the site on safely and cleanly operating the open pit mine and delivering the underground projects. Our experts have discussed with the Government on tax act many times. For us, it is very clear that we have and will pay the taxes that we owe. We are convinced that the taxes that we have paid during the previous years, which have made us one of the biggest tax payers in the country, are fair and reasonable, and they are in accordance with the agreements that we have signed.

If OT agreements were to be challenged, it would jeopardize our ability to invest in Mongolia

An audit was done and came up with not over USD 155 million of additional tax. We looked at it in details. We agreed on USD 5 million, which we have paid. As for USD 150 million, we do not agree. Because they are in disagreement with the agreements that we signed with the government. Therefore, I think the best way to resolve it is to be clear. That is not unusual. You see that in many other countries. To be clear of what you do amongst good friends. When you cannot agree on the interpretation of an agreement that you have signed, you go to a third party and ask them for their independent analysis. That third party is called an arbitrator. We are in arbitration in Australia with the tax office in Australia, for example, on some aspects of interpretation of the legislation and agreements.

-So you have already gone to the arbitration?

-No, but we have noticed the Government that we could go to arbitration if we cannot come to an agreement.

-What would be the breaking point?

-We are continuing to discuss and our people are still going to meetings. Ultimately, we need to find a solution.

-I understand that the political hassle has not affected the time when OT’s underground will go into full production. Is it due on track?

-It is still on track. We are still moving first pillar head. But I think it is at risk. This project is so complex, we cannot do this on our own. We need the support of the local communities, which where we have, but of broad community in general, we need the support of the government and parliament. Currently, I think there is more work to be done for us to feel comfortable that we have got this support. So the current political environment is a concern to us.

-We have been witnessing Rio Tinto move out of some of its assets, namely coal. How important does that make copper projects, such as OT, for the company?

-Copper is very important to Rio Tinto. OT is the biggest investment we are making in copper. We believe copper is a good industry to be in. The market fundamental is good. The demand is very healthy with close to three percent growth per year. It is underpinned by some key fundamentals. There is a good growth in demand because of industrialization of many countries in the world and that industrialization requires equipment, which requires copper. It is also because of urbanization. Many people move from the country to the town and new buildings are being constructed, and those buildings need a lot of copper wiring. It is also related to clean energy, renewable energy and electrical vehicles. When you put all of these together, the demand is very healthy. Yet, what makes the copper market really interesting is actually not so much on the demand side, but on the supply side. Because from what we have seen and we are not the only one to see it, our competitors have not invested enough in new mines and new developments. In mining, you get lower and lower grades progressively. Some mines are coming to the end of their life and are shutting down. So, regularly, you need to be able to invest in new projects just to compensate for this natural decline in production. Those investments have not been done enough in the past. So, we think that in the coming years, market will be undersupplied. Therefore, the price will be sustained. If we can continue with the underground project, the production of the OT underground will come on the right time when the price would have increased and the market will need additional copper.

Second part of the interview will be published on tomorrow's (June 15th) issue of ZGM Daily.


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Land valuation methods change after two decades

​Land valuation reform to take effect starting from January 1, 2019​

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Cabinet has decided to reform land valuation /by ratings and districts/, baseline assessment, percentage and amount of payment. The resolution will take effect starting from January 1, 2019. Minister of Construction and Urban Development Badelkhan Khavdislam informed, “The intrinsic values of land were set 21 years ago in 1997. After the transaction into the market economy in 1991, several laws on land and privatization were issued. Hence, it is necessary to amend these old laws. With the land law of 1997, the land valuation was divided in four regions, namely Khangai and Altai mountains, steppe and plain regions, and were categorized in three types of cultivation, pasture and hay-field.”

Land valuation will not burden the public

He added, “Ulaanbaatar city was following a single valuation of MNT 440 million per hectare until now. The reform divides the above mentioned four agricultural regions into 31 areas in the same three categories. Ulaanbaatar city lands are divided into three categories based on location, such as central, outskirts and connection to socially infrastructures, and are split into 16 regions. Also, 17 purpose of use were determined to set land values. For instance, the price will be different depending on the purpose and for budgetary organizations and private entities in each 16 regions.” The officials informed that several surveys and consultative meetings were held with each levels of local bodies to determine the intrinsic price. Land value of some areas are expected to be halved, while more fertile areas and regions connected to social infrastructures will be much expensive. “The valuation will not burden the majority and land prices will not increase except the ones in the central area connected to the infrastructure and social services,” highlighted Mr. Badelkhan Khavdislam.

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Government seeks dual-listing for Erdenes Tavan Tolgoi IPO

​Cabinet plans to offer 30 percent stake of Erdenes Tavan Tolgoi through a dual-listing​

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According to the Minister of Mining and Heavy Industry Sumiyabazar Dolgorsuren, the Cabinet issued a resolution on intensifying the development of Tavan Tolgoi residual deposits during its regular session yesterday. The resolution to improve economic circulation of the deposits were presented to the Parliament. The Cabinet presented the draft to the Mongolian People’s Party group in the Parliament and received its approval and was ratified by the National Security Council on June 14. If the Parliament approves the bill within two weeks, the preparatory works of Erdenes Tavan Tolgoi’s IPO, which is expected to offer 30 percent of its stakes, are in plan to be completed within 180 days. The working group, which is formed by over 40 staff of Ministry of Road and Transport Development, Ministry of Finance, Ministry of Energy, Ministry of Mining and Heavy Industry, Erdenes Mongol and Erdenes Tavan Tolgoi, is currently drafting documents on renewing the feasibility, integrated resource report, projects on water supply, electricity grid, auto road and railways of Tavan Tolgoi deposits. For instance, the resource estimation is expected to be increased by 7.4 billion tons with the JORC code. Authorities informed that the USD 5.7 billion appraisal of the deposit conducted in 2011 can be revised as a result. “Within the frames of intensifying Tavan Tolgoi residual deposits, the Cabinet is holding talks and exchanging views with international exchanges and investment banks; for example, the Hong Kong, Tokyo, New-York, London and Toronto exchanges have sent their respective offers. There are rumors that state-owned enterprises are inefficient. I think we are obliged to demonstrate the public that the Government can be a good manager. The President, Parliament Speaker and Prime Minister share the same view that the Tavan Tolgoi residual deposits have to be aggravated,” remarked Mr. Sumiyabazar Dolgorsuren. He added, “Since there is a risk that the stock price will plunge, we are being careful to launch the IPO at the domestic stock exchange. Thus, we view that it is rational to launch a dual-listed IPO.”

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EMC labour union opposes illegal appointment

Labour union demands wage raise over paying Standard Bank debt​​

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The Labour Union of the Erdenet Mining Corporation (EMC) held a press conference on the recent actions of some authorities, namely the directors responsible for the factor and social affairs, appointed by the board, which was also formed despite ban by court. According to the Head of Labour Union, for the last few months, the workers have been protesting the repayment of the loan issued by collateralizing the company’s stake, demanding the people responsible for collateralizing the EMC's stake to the Standard Bank of South Africa to pay the debt and increase the workers’ wage instead.

People appointed by the board allegedly broke into the union's office

However, the recently illegal board has started dismissing the people who issued the demand, informed the union. The board also forbid the heads of the labour union to enter the factory for about half month. Labour Union alerted that the people appointed by the board have attempted to steal the union’s stamp by breaking into their office. They have started a lawsuit against the board. Head of the union remarked that political pressure and high cost bids have been disclosed thanks to the Law on Glass Accounts, and the company’s net profit was increased as a result. However, the union criticized that the company became non-transparent and several political appointments took place since the nationalization of EMC. Earlier this year, Administrative Court revoked the Cabinet’s decision to nationalize EMC and suspended the board, which is fully formed by the Cabinet members. Nevertheless, the suspended board held meetings and decided to alter the structural organization of EMC, which is a clear violation of Mongolian law.

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Mongolia proposes to establish permanent organization for Northeast Asian mayors

​Northeast Asian Mayors' forum discuss opportunity to improve air quality in Ulaanbaatar​

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At the initiative of the Ulaanbaatar City Mayor Batbold Sundui, the third Northeast Asian Mayors’ forum is taking place under the theme Low Carbon City Development: Improving Air Quality and Reducing Greenhouse Gas Emissions between June 17 and 19. Northeast Asian cities play an important role in the world economy and are responsible for 30 percent of greenhouse gas emissions of the world. In accordance with the 2015 Paris Agreement on climate change, every countries are obliged to make effort in reducing greenhouse gas emissions. The Parliament of Mongolia approved the related documents in 2016, setting a goal to cut greenhouse gas by 14 percent by 2030. Opening the forum, the Mayor Batbold Sundui remarked, “One quarter of the world population live in the Northeast Asian region. Urban areas emit 60 percent of total greenhouse gas; thus, the best urban development policy is to adapt low-cost technologies that can reduce greenhouse gas in the short term.

Population shift from rural to urban areas is becoming the key cause for air pollution

Since Northeast Asia has been the center of technology and innovation, I have no doubts that the cutting edge technologies that minimizes natural resources consumption introduced here in Ulaanbaatar will be an ideal example for other cities. Due to the geographical location, vulnerable ecosystem and economic system that is highly dependent on weather, Ulaanbaatar is heavily affected by the climate change. As a result of desertification, drought and dzud, the population shift from rural to urban areas is becoming the key cause for unplanned expansion, environmental and air pollutions. Hence, I propose to make this forum a permanent organization and recommend to establish a Secretariat.