Mongolia drops a bombshell with new mining tax

Vancouver – From left field and late on a Friday night, Mongolia’s Parliament shocked western mineral explorers by passing a Windfall Profit Tax vote calling for a 68% taxation on copper and gold operations when the metal’s prices exceed US$1.18 per pound and US$500 per oz. respectively.

The move has shocked foreign mining companies active in the North-Central Asian country where they have been awaiting a revised foreign investment and taxation policy. The legislation was rushed through with little debate and without any industry comment or contribution, catching everyone off guard.

Reportedly, only 45 of the 76 parliamentarians were in attendance for the Friday vote with a majority of those present (35 of the 45) passing the motion. Reasons for the absence of 31 members, believed mostly from the ruling Mongolian Peoples Revolutionary Party (MPRP), was not available. The measure comes after weeks of vocal protests in Ulaanbaatar’s Sukhbaatar Square by groups demanding the State retain a greater share of the country’s natural resources.

Put forward by the minority Democratic Party, the bill looks to cleave an exorbitant 68% taxation on mining revenues. Both definition and application of the tax is vague but is expected to be released within the week.

It is speculated that the tax was put forward to garner its immediate “windfall” from the operating Erdenet copper mine that is owned 51% by the Mongolian Government and 49% by the Government of Russia. The move will likely have the country’s northerly Russian neighbours quite perturbed by the cash grab. Mongolia remains strongly reliant on its former Communist-block parent for trade and energy.

The potentially disastrous political strategy may gain points from local nationalist groups, but foreign investors could very likely halt further investments pending clarification or hopeful revocation to the policy. Mongolia’s President N. Enkhbayar has five days to veto the law, currently getting polished up at the Ministry of Justice, although whether he sticks his head up against the strong nationalistic sentiment amongst Mongolians is uncertain.

Mongolia has attracted hundreds of millions of dollars in mining investment over the last several years. Ivanhoe Mines (IVN-T, IVN-N) alone has spent $370 million on exploration and development of its massive Oyu Tolgoi copper-gold deposit in the southern Gobi Desert. Ivanhoe’s capital investment only came after the Mongolian Parliament rescinded a 10% value-added tax on gold in 2001. The company has been working with the government on developing a stability agreement to move Oyu Tolgoi into production.

The Windfall Profits Tax, under its current 68% rate, would be a death blow to any new mining operation in Mongolia. At copper prices of US$3-4 per pound, the tax would equate to a net smelter return (NSR) of up to 40-50%.

The move will unfortunately hurt Mongolia dearly. Risk capital can be fickle and lack of policy stability will likely drive the dollars to other, more friendly jurisdictions. Potential development of many mineral projects in the country could be deferred for years, possibly missing the current metals cycle entirely. Additionally, the move could jeopardize Mongolia’s debt ratings with the International Monetary Fund and the World Bank, both of which having lent huge sums to the country.

Company reactions were predictable, with Ivanhoe Mines sending a letter to the Mongolian Government reviewing its “surprise and disappointment that such legislation might be passed without consultation with the industry, and that a lack of openness and transparency seems to have marked the process.”

Trading in most of the companies active in Mongolia were off significantly following the May 15th news. Ivanhoe Mines closed down 22% at $8.03 per share on TSX trading, Entre Gold (ETG-T, EGI-X) was off 24% at $1.58 per share, Erdene Gold (ERD-T) dropped 21% to $1.07, QGX (QGX-T) traded down 27% to $2.55 per share, Western Prospector Group (WNP-V) gave up 21% to $3.00 and Asia Gold (ASG-V) closed off 23% at $2.21 per share.