Mongolian MPs post hostile letter about OT

In an open letter to Rio Tinto (RIO-N, RIO-L) published yesterday on Mongolian website medee.nn, a group of twenty parliamentarians in Mongolia reportedly accused the government of breaking the law when it concluded an investment agreement (IA) on Oyu Tolgoi and vowed to resolve the issue internally.

In comments from the letter translated and summarized by Frontier Securities, Mongolia’s pioneer boutique investment bank with a seat on the Mongolian Stock Exchange, parliamentarians 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.”

In a research note to clients on Sept. 29, Dale Choi, Frontier’s chief investment strategist, said he viewed the letter as “a highly organized attack” on Mongolia’s Coalition Government and the OT project by anti-Coalition, conservative and anti-foreign investment MPs.

But he noted that the letter was primarily aimed at destabilizing the political status quo ahead of upcoming elections, breaking up the Coalition Government and capitalizing on patriotic messages to get themselves re-elected.

Julian Dierkes of the University of British Columbia says he is less sure about the “highly organized” nature of the attack. “‘Highly to me suggests some kind of stable anti-OT cross-party coalition and I don’t think that that’s what we’re seeing here,” says the professor at UBC’s Institute of Asian Research. “Some of the signatories have not been vocal about their opposition to the OT agreement in the past, so the coming months will tell whether they’re largely posturing for the election or whether minds have changed.”

Either way, Choi of Frontier Securities says he doesn’t believe the Coalition Government will break up and says he believes that voters are supportive of OT. But he cautions that “voters are uneducated and un-empowered [and] therefore are likely to vote-in famous, well-capitalized, pork-spreading MPs–regardless of whether they are working in the interests of voters or not.”

Choi also pointed out that the current government is “aware of the situation” and “will not let it escalate out of control and derail the project.” At the same time, however, he forecasts that there will be significant pressure on the Coalition Government “and there will be some minor amendments to the OT IA before the elections and after the initial investment is recouped.”

“I do not view that the OT IA is untouchable due to the dynamics of Mongolian political life, [and] minor revisions can be made along the way,” he continued. “Therefore I expect stock volatility until the situation is resolved.”

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 (IVN-T, IVN-N, INV-Q) 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.