Ts.Elbegdorj: Oyu Tolgoi should help Mongolia prosper, not leave it with a scar
The President of Mongolia Ts.Elbegdorj has made a statement regarding the need for greater transparency and improved management of the Oyu Tolgoi Project. His statement was made at the open parliament meeting on Friday where he listened to the issues regarding Oyu Tolgoi presented by government officials.
The president noted that there are fifteen issues in relation to the Oyu Tolgoi mine that have to be addressed. He emphasized that the transparency and financing issues of the Oyu Tolgoi Project are getting out of hand, and that the company managing the project, Turquoise Hill Resources, is not informing the government of its intentions and operations.
The Mongolian government has yet to approve the spending plan for Oyu Tolgoi for 2013. The reason for the delay is because Turquoise Hill Resources, formerly Ivanhoe Mines, which owns 66 percent of Oyu Tolgoi, exceeded the initial spending plan of 5.1 billion USD by 2 billion USD, or 47 percent, in 2012.
The Executive Director of Erdenes Oyu Tolgoi, which manages Mongolia’s 34 percent stake in the Oyu Tolgoi, Ts.Sedvaanchig, informed the meeting participants that the reasons for the increased expenses were released by Turquoise Hill Resources only in December 28, 2012, after many requests for the information.
As the Mongolian government owns 34 percent of the project, it must also contribute to the costs. The Mongolian government has acquired an 8 percent interest loan to contribute its share of the project. On December 31, 2012, Mongolia made a payment of 705 million USD on the loan.
According to the government task force devoted to auditing Oyu Tolgoi, which is led by the Mining Minister D.Gankhuyag, Anglo Australian mining giant Rio Tinto, the major stakeholder of Turquoise Hill Resources, intends to raise 6.6 billion USD this year for Oyu Tolgoi. From the raised capital, 4.4 billion USD will go back to Turquoise Hill Resources on the grounds that this was the amount invested by the company in the past, while 2 billion USD will be used for the project operations. Furthermore, the company has informed the task force that they need additional capital of 5.1 billion USD.
President Ts.Elbegdorj noted that Rio Tinto shouldn’t be making such decisions and that the investment agreement does not allow this. Furthermore, even if such actions were allowed, Mongolia would have to pay its share of the raised capital of 6.6 billion USD, even if Rio takes back 4 billion USD for itself.
“The initial estimate for the underground mine’s financing was 14.6 billion USD, but the company is planning to spend 24.4 billion USD. The expenses are 9.8 billion more than the estimates, this must be addressed,” said the president. “The investment agreement is that the initial investment will be used to produce ore concentrates and the commercial profit will be used for operation expenses. There was nothing about raising around 7 billion USD more, from some other source, and the company taking back its expenses from the investment and leaving. The time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands,” said President Ts.Elbegdorj.
The president said that Mongolia must take its rightful place in Oyu Tolgoi and that it is not satisfactory that Mongolia has a 34 percent stake in the project but is excluded from the project and does not know what is taking place.
“Firstly, there needs to be someone on their managing board to represent Mongolia, as well as Mongolian representatives in all the critical departments. Secondly, the project operations need to be audited and reported – they must be transparent – but at the moment they are not. The government and parliament ask for information but the company delays its reports for months at a time. Mongolia has laws and they need to be abided by. The third issue is the participation of domestic businesses. The issue has been left unaddressed. Mongolian businesses need to participate. Besides investment, Mongolian businesses can be formed by the thousand to provide services and supplies. Mongolians need jobs and salaries,” the president said.
Furthermore, the manner in which Turquoise Hill Resources selects suppliers needs to be transparent and Turquoise Hill must report whether the suppliers are domestic or foreign, and must report the amount of money changing hands.
Another major issue noted in the meeting was the matter of management costs and resource fees. The president observed that 6 percent of the investment is used to pay the salaries of those in management positions in Oyu Tolgoi. This is 2.5 times higher than the international rate. President Ts.Elbegdorj said this is unacceptable, especially because Mongolia only gets 5 percent in resource fees.
The government approved 153 million USD for Oyu Tolgoi management expenses by January 31, 2013, but the company in fact spent 321.4 million USD on management expenses by that date. The president commented that, “Due to irresponsible management, the company’s expenses have increased. Our auditing evaluation has revealed that this is a billion dollar issue.”
Another issue raised was the matter of employment of Mongolian nationals. According to the agreement made with the government, the company promised to ensure that 90 percent of its employees are Mongolian, but at the moment the number of foreign employees exceeds the number of Mongolians by 368. Furthermore, the wages of foreign employees are almost double the wages paid to Mongolian workers in the same positions, which is against the law.
The president also said that all financial transactions of the project should go through Mongolian banks since every other company does this, except Rio Tinto. “Since they operate in Mongolia, they should contribute to the nation’s development,” he noted.
President Ts.Elbegdorj also noted the logistical issues related to the Oyu Tolgoi mine, such as transportation. Turquoise Hill has begun producing ore concentrates, and soon they will need to export it, but they do not have railways or roads to do this. The president said they need to be urged to quickly build the transport routes that are necessary.
Another issue noted by the president was the matter of the power supply to the project. Last year, Turquoise Hill made a deal with China to import power, but this is only a temporary solution. The president suggested that a power station be built in Tavan Tolgoi and that Turquoise Hill should receive its power from there. He added that, if it so wishes, Turquoise Hill could take part in the power-supply project, but own no more than 51 percent.
Other issues, such as Turquoise Hill’s promise to build a copper factory, as well as environmental issues relating to the water supply, and issues relating to the development of the town of Khanbogd were also noted by the president.
The president stated that he would include all the issues discussed at the meeting in the new draft Mineral Law. “We must learn from the mistakes of Oyu Tolgoi. Mongolia has laws and they must be upheld. They must realize that they cannot just take our wealth and go. They must realize that they are investing in a country with laws. … There are more valuable things in Mongolia than just minerals and Oyu Tolgoi. Oyu Tolgoi should help Mongolia prosper, not leave it with a scar . There is no need to spread bad reports of Mongolia. Currently, foreign investment companies have breached the law themselves.”