Our nation is poised to enter into an Investment Agreement (IA) for a uranium project, marking a significant milestone. The draft of the joint venture between the Government of Mongolia and the French company "Orano Mining SAS" has undergone negotiations, confirming pre agreed conditions outlined in a publicly reported protocol. Ariuntuya. N from Mining Insight discussed with Dorjdari. N, researcher, and manager of the Natural Resource Governance Institute in Mongolia, within the context of this disclosed information about IA.
The discourse surrounding Oyu Tolgoi IA has persisted for over a decade in Mongolia. What did we learn from this, and what decisions should guide our path forward regarding the IA of the uranium project?
The government has officially declared ongoing discussions regarding the waste management of the uranium project, with a seemingly imminent deadline. The disclosure of the protocol signed by both parties has brought to light several issues warranting attention and clarification. The Oyu Tolgoi agreement was inked in 2009, acknowledging that every contract has its finite timeline. However, it's essential to strike a balance, recognizing that excessive haste may result in incomplete resolution of various matters, thereby increasing the risk of future misunderstandings and disputes. Additionally, an observed aspect is the proposal for changes in certain laws within the framework of the protocol. The appropriateness of this should be reconsidered. While there might be a legitimate need to enhance or modify legislation, addressing this within the confines of a specific contract appears inefficient. Notably, there have been alterations to several laws during the process of signing the Oyu Tolgoi agreement. The process of amending and introducing new laws must remain distinct from the process of contract finalization.
In general, what is different about this uranium project?
The uranium project operates under the jurisdiction of the Nuclear Energy Act, distinct from the Minerals Act. Notably, a unique provision pertains to the state's entitlement to a stake in the company overseeing the project. For instance, the Mongolian government holds a 34 percent ownership in Oyu Tolgoi LLC. In cases where shareholders bear responsibility for a specific project segment, the Mongolian government is obligated to contribute 34 percent of the financing. Arrangements are in place for the government to borrow funds from partner investors for a specified period. The initial Oyu Tolgoi agreement stipulates the state's right to receive dividends once the debt, along with interest, is repaid to the other investor. Recent developments indicate an agreement to nullify the incurred debt in this context. Regarding uranium, the government possesses the right to acquire a 34% stake in the project's overseeing company without cost. This implies that if financing for the shares is necessary, the investor assumes sole responsibility for the funding, while the government retains the right to receive 34% of the dividends. This dynamic significantly influences the calculation of the investor's profit.
Additionally, considering uranium is a radioactive mineral, stringent safety requirements for the environment, population, and workforce are paramount. The adequacy of addressing these concerns within Mongolia's existing legal framework raises doubts. Consequently, the question arises: should these considerations be factored into contract negotiations?
The pivotal stipulation in the joint venture with Orano Mining is that the Government of Mongolia will acquire 10% of the preferred shares at no cost and without any investment or financial commitments. Is this the most advantageous solution? Are there alternative approaches that warrant consideration?
The ownership of preferred shares by the government raises the question of whether the entitlement to freely own 34 percent of common shares is retained. If so, this arrangement could prove financially advantageous for Mongolia. However, it is crucial to ascertain whether there are any trade-offs associated with owning preference shares. If acquiring this 10 percent comes at the expense of relinquishing the right to own 34 percent without cost, it may not be the optimal solution. Issues such as how to calculate profit per preference share, whether it is a fixed or variable amount based on profits, and the investor's assessment of the appropriateness of owning preferred shares need careful consideration.
Regarding the ownership of preferred shares, the royalty base is set at 5%. The Mongolian side's ownership is substituted by a specific percentage of the royalty, along with accumulated royalty not explicitly defined in the current law. It has been prearranged to estimate the total royalty, potentially reaching up to 19% based on market prices. What potential risks and problems could arise from agreeing to this condition?
If the right to own shares is exchanged for a special royalty, a thorough examination of the estimation comparing the two becomes imperative. As previously noted, distinctions exist between free rights and rights contingent on investment. The increase in royalty, being price-dependent, introduces complexities, including the realism of the threshold price-triggering payments. While 19 percent royalty may seem substantial, a comprehensive evaluation of the calculation methodology and the underlying assessment is crucial. In essence, questions will arise concerning the realistic development of the project's financial model, its capability to assess risks, and the comprehensive evaluation of the project's financial cash flows. The Mongolian side anticipates that these numerical aspects will be rigorously evaluated based on a sound model, taking into account risks from both perspectives and reaching a mutually agreed-upon understanding.
In the event of a successful deal, this marks the inaugural application of a special royalty arrangement for Orano. Mongolia is venturing into the utilization of special royalty for the first time. Are there potential risks and challenges in implementing this law, and what considerations should be prioritized?
Special royalty is stipulated in the Minerals Law. I acknowledge that this law might not be applicable. Consequently, if the contract lacks explicit clarification, there is a potential risk of disputes. Additionally, the evaluation will hinge on whether the special royalty surpasses or falls short in comparison to the 34 percent free stock or the project's 34 percent dividend. As of the available data thus far, no such comparison has been evident.
In the protocol, there is an agreement to "Conclude an Investment Agreement after making amendments to the Law on Nuclear Energy and the Law on Minerals." Is it appropriate for us to continually find ourselves in a situation where laws need modification each time an agreement is signed? Is there any rationale suggesting that the law cannot remain unchanged in this context?
As stated earlier, this is not the most ideal scenario. However, there could be instances where making certain changes to the law becomes unavoidable. The crucial aspect is to ensure that the legislative process is adhered to, exercising caution against violating it. It is imperative not to overlook seeking public opinion and to avoid making overly hasty changes when passing laws under emergency conditions.
The protocol encompassed comprehensive stabilization measures within the IA, aiming to stabilize the tax and operational environment of the project-implementing company. This pertains to activities encompassing mine construction, extraction, production, product sales, rehabilitation, and mine closure. What are the potential future consequences and risks associated with such extensive stabilization of predetermined conditions? In a broader context, under what circumstances is such far-reaching stabilization employed, beyond considerations related to taxes?
The significance of this matter is evident when considering the example of Oyu Tolgoi. In a recent interview, a government representative highlighted that tax disputes have arisen due to varying interpretations of the scope of stabilization. In essence, I believe it is suboptimal to stabilize any aspect beyond the rate and amount of taxes. Moreover, within the realm of taxes, it is prudent to stabilize only a select few fundamental taxes. Legal frameworks related to environmental concerns, mine closure, and rehabilitation should not be subject to stabilization. It is appropriate for all parties to adhere to the laws in effect at the time, following the principle of non-discrimination, as environmental protection standards are dynamic and subject to change. Regulating nature protection issues with laws from decades ago is not optimal.
From an economic standpoint, what is your perspective on the proposal for royalty to accept 2 percent of marketing expenses and 4 percent of operating and capital expenses as Know how fees? What potential problems does this arrangement pose?
This seems connected to the foundational assessment for determining royalty rates. I anticipate that a company with long-standing history like Orano, particularly as a state-owned French company with substantial uranium demand, might not allocate significant funds to marketing. If the fees for know how are not explicitly defined, they could become a source of future contention. Additionally, excluding royalties from the calculation basis is generally deemed inappropriate. However, upon reviewing the protocol, it appears that there isn't sufficient information to fully comprehend the intricacies of the matter.
What impact will the establishment of the IA have on the Oyu Tolgoi Agreement if it is formed within the framework of the primary conditions agreed upon in the protocol?
The Orano agreement will not impact the Oyu Tolgoi agreement since these matters fall under the jurisdiction of two distinct laws. However, alterations in legislation related to tax and other issues before the Orano Agreement's signing may have repercussions for Oyu Tolgoi. Generally, any changes to tax laws in the future necessitate careful consideration of their implications on Oyu Tolgoi's stabilization. This underscores the drawback of forming a contract and establishing a special tax regime through it. In the long run, it would be optimal to enhance laws to a degree where mining projects can operate with minimal reliance on contracts.
Mongolia holds a 34 percent ownership stake in Orano Mining's Badrakh Energy LLC, a Mongolian-registered entity. Regarding strategic deposits, the state is expected to possess a minimum of 51 percent ownership for deposits discovered through exploration funded by the state budget and at least 34 percent for those found through exploration financed by the private sector. Nevertheless, the legal requirement sets the threshold at not less than 34 percent, making this the minimum acceptable ownership level in our country. Generally, why can't it exceed 34 percent, and what is the rationale behind this position?
In response to that question, the answer should rely on precise calculations and financial models. If the project proves to be highly profitable, owning a greater share could be financially beneficial. However, if there is a risk of project losses, the question arises about the appropriate course of action. Owning more than 34 percent implies a commitment to invest an amount exceeding that threshold, making it not within the category of free shares. The consideration of whether taxpayers' funds should be invested in mining projects becomes a pertinent question in this context.
Mining Insight Magazine, December 2023, №12 (025)
