Repealed Tax Bodes Well For Ivanhoe

VANCOUVER — Just over three years ago, when producers and explorers operating in Mongolia were slammed with a 68% windfall tax on copper and gold profits, their share prices tanked. Ivanhoe Mines (IVN-T, IVN-N), for example, which is advancing the massive Oyu Tolgoi copper-gold project in Mongolia in partnership with Rio Tinto (RTP-N, RIO-L), saw its share price plummet 22% to close at $8.03 on news of the harsh tax.

But now, with Mongolian parliamentarians having agreed on Aug. 25 to repeal the tax, the tide has turned and buoyed some of the same companies back up by about as much as they once fell. This time around, after the Mongolian government announced it was clearing a major hurdle to the future development of copper and gold projects in the country, Ivanhoe Mines jumped 24%, or $2.30, to $11.78.

Ivanhoe and Rio, partners on what could be Mongolia’s most lucrative mine, Oyu Tolgoi, were about as jubilant as it gets in press releases. Ivanhoe president and CEO John Macken stated that the vote represented a “significant step (forward) in Mongolia’s commitment to attract foreign investment in the development of the country’s mineral resources.”

And most importantly for Ivanhoe, Macken noted that the withdrawal of the tax clears the way for conclusion of an investment agreement on the construction and operation of Oyu Tolgoi.

Using equally even-keeled language, Rio said in a statement that it welcomed the Mongolian parliament’s move to approve amendments to the country’s mining law, which includes the 68% tax on copper and gold profits when the price of copper is over US$1.18 per lb. and gold over US$500 per oz. Rio Tinto CEO Tom Albanese called the tax repeal a milestone in the process of bringing Oyu Tolgoi on-stream and noted that the mine will be a significant benefit to Mongolia’s people.

The reversal on the tax and the apparent end to what has amounted to a standoff between the Mongolian government and Ivanhoe over the investment agreement likely stems from a desire by the Mongolian government to promote growth in a stiff economic climate.

While the tax has netted income for the government from the country’s Erdenet copper-gold mine, a partnership between the governments of Russia and Mongolia, it has also snuffed out development of projects such as Oyu Tolgoi that could reap the government even greater rewards.

If all goes according to plan and an investment agreement is signed, Ivanhoe and Rio are poised to shift development of Oyu Tolgoi into high gear. In its most recent quarterly report, Ivanhoe says it has engineering and developing teams ready to start construction on the open-pit/ underground mine once an agreement is reached.

Ivanhoe is already working underground and is preparing to put in its first ventilation raise. A level has been established mid-shaft, 512 metres underground, and Ivanhoe says that it has started tunnelling on the 1,300-metre level.

Once an agreement is reached, Ivanhoe says it will update its mine and engineering plan for Oyu Tolgoi. The proposed mine, 550 km south of Ulaanbaatar, has been minimally planned as a 35-year mine and is slated to produce an average of 440,000 tonnes copper and 320,000 oz. gold a year.

Production will come from extensive resources. At last count, Oyu Tolgoi had measured and indicated resources of 1.4 billion tonnes grading 1.33% copper and 0.47 gram gold per tonne for around 41 billion contained pounds copper and 21 million contained ounces gold.

Conclusion of the investment agreement will also mean an increase of Rio’s stake in Ivanhoe. In 2006, Rio bought a 9.95% interest in Ivanhoe for US$303 million and promised to purchase a further 9.95% for US$388 million once the investment agreement is finalized.

Subsequent to inking the 2006 deal, Rio also extended Ivanhoe a convertible line of credit worth US$350 million.

As part of terms then agreed to in 2007, Ivanhoe increased Rio’s allowable share ownership in the company to as much as 46.65% from 40%, a clause that expires on Oct. 18, 2011. Ivanhoe says Rio’s investment in it could reach US$2.3 billion.

As for the Mongolian government, the pain of losing the tax will almost certainly be worth the revenues it stands to soon generate from its stake in Oyu Tolgoi.

The investment agreement being finalized stipulates, as per the original 2006 mining law, that it gets a 34% interest in Ivanhoe Mines Mongolia, the subsidiary of Ivanhoe that owns the Oyu Tolgoi project.