Miners Reel On Mongolia Tax GrabPublished by MAC on 2005-05-16
Source: Toronto Globe and Mail
Mners reel on Mongolia tax grab
Toronto Globe and Mail
16th May 2005
VANCOUVER -- Mongolia has joined a growing list of countries trying to keep more of their resource wealth, slamming foreign miners in the East Asian country with a 68-per-cent tax on gold and copper production after prices for the metals pass certain levels.
The news sent shares of Canadian miners with interests in Mongolia reeling, especially Ivanhoe Mines Ltd., which dropped 21.7 per cent to $8.03 yesterday on the Toronto Stock Exchange.
The surprise tax was approved by the Mongolian parliament last Friday evening but could still be vetoed by President Nambaryn Enkhbayar.
It caused a storm of protest among companies that have assets in Mongolia and raised the question of whether mining companies that do business in poor parts of the world could come under increasing pressure to take less wealth out of countries in which they operate.
"We are surprised and disappointed that legislation might be passed without consultation with the industry, and that a lack of openness and transparency seems to have marked the process," Ivanhoe said in a letter from the company's board to the Mongolian ambassador in Canada.
Nor were miners alone in their reaction.
"This came along as quite as a surprise," said Jim Cambon, the Vancouver-based honorary consul for Mongolia, adding that the Mongolian government has likely underestimated the potential chill its latest move could have on foreign investment.
The new law was designed primarily to wring more money for Mongolia from Erdenet Mining Corp., Mr. Cambon said. The state-run copper mining venture has been in production since 1978. Mongolia owns 51 per cent of Erdenet and Russia owns the other 49 per cent. With copper prices climbing to giddy heights in recent weeks, Mongolia wanted to realize more benefits from its share of the venture and rushed the new law into effect, he said.
Canadian companies will likely try to persuade Mr. Enkhbayar to veto the law, Mr. Cambon said.
UBS Securities Canada Inc. analyst Tony Lesiak, in a note to investors, questioned the wisdom of investing in the country.
"The key point is not the specifics of the proposed tax law but the stability of the investment climate in Mongolia -- and the Congo, Bolivia, Peru and all nations where mining is a large source of the [gross domestic product]," he wrote.
Ivanhoe founder and chairman Robert Friedland has been a vocal supporter of Mongolia and its emerging mining sector, describing the country as a Buddhist, democratic regime that just happens to be right next door to China, a voracious metals consumer.
But efforts to strike a stability agreement for its Oyu Tolgoi project have taken longer and been more demanding than expected, as the size and scope of the project have made it a flashpoint for debates and protests over what benefits Mongolia can expect from its resource wealth. In a recent regulatory filing, the company said it expects the agreement can be concluded within a time frame that will not unduly delay the development of the Oyu Tolgoi project.
Ivanhoe has spent more than a year trying to strike a stability agreement with the Mongolian government for Oyu Tolgoi.
The first phase of the $1-billion-plus copper-gold mine was expected to be in production by 2008.
Ivanhoe studies say the project could produce an annual average of more than one billion pounds of copper and 330,000 ounces of gold for at least 35 years.
The company has spent about $370-million to date on Oyu Tolgoi.
Other companies with projects in Mongolia also took a hit: shares of QGX Ltd., which has copper-gold and coal projects in Mongolia, fell 27.1 per cent to $2.55.
In a statement, QGX chief executive officer David Anderson said the company was surprised and disappointed to learn of this new law and is working closely with other Mongolian and foreign companies affected by the new law to have it repealed.