Oyu Tolgoi investment agreement safe…for now

Less than two weeks after a group of twenty parliamentarians in Mongolia accused the government of breaking the law when it concluded an investment agreement (IA) on the Oyu Tolgoi project, Ivanhoe Mines (IVN-T, IVN-N) issued a joint statement by management, Rio Tinto (RIO-N, RIO-L) and the Mongolian government that “all parties have reaffirmed their continued support for the investment agreement and its implementation.”

“The Government of Mongolia has once again confirmed that the Investment Agreement was signed in full compliance with all laws and regulations of Mongolia,” Ivanhoe wrote in its Oct. 6 press release, adding in a subsequent paragraph that “the people of Mongolia are reaping great benefit from the construction of the Oyu Tolgoi project and stand to benefit even more when the project becomes operational.”

According to Dale Choi, chief investment strategist at Frontier Securities in Ulaanbaatar, Unuudur, a leading Mongolian newspaper, reported last week that at a meeting attended by the president of Mongolia, Ts. Elbegdorj, Prime Minister S. Batbold, and others, the president described Oyu Tolgoi as a historic development for the country and said that creating obstacles to the project would seriously damage Mongolia’s reputation and invite comparisons with countries in Africa.

The news sent shares of Ivanhoe up $2.03 or 13.1% to close at $17.57 with 1.8 million shares changing hands. Ivanhoe shares took a hit in late September after lawmakers opposed to the project penned an open letter to Rio Tinto in which they wrote that they have “a right to say that OT is a result of exploration paid by generations of Mongolian taxpayers” and noted that with rising metal prices “it is not fair to view that investors must benefit from increased profit more than owners of resources.”

“Our Government has gravely violated [the] Constitution, Law on Foreign Investment and 57th resolution by not proposing related draft laws and introducing clauses to close off any amendments to taxes and fees on agreement with your company,” the parliamentarians wrote in their letter to Rio Tinto.

The letter continued: “We view that it is fair that by implementing [the] 57th resolution and Parliament direction to increase reserves payment at time of copper price increase, Mongolia will have a possibility to get not less than 60% of profit. Now Mongolia’s share of profit is not even 50%. Our economists view that total sales of only gold and copper at current market price is about US$400 billion and initial investment will be recouped within 2-3 years and if we view that 50% of total sales is pre-tax profit, investors will gain at least 20 times profit on initial investment.”

Under the terms of the 2009 IA, the Mongolian government has the option to increase it stake in Oyu Tolgoi to 50% once the initial 30-year term on the IA expires.

Ivanhoe Mines owns 66% of the project and spent more than six years negotiating the IA with the Mongolian government, which owns the remaining 34%. Rio Tinto is the project operator and holds a 49% stake in Ivanhoe.

At presstime Ivanhoe was trading at $16.50 per share within a 52-week range of $12.85- $30.28. The company has about 710.6 million shares outstanding.