By Elisabeth Behrmann and Jeffrey Sparshott
Mongolia's government Tuesday signed a long-awaited investment agreement for the $4 billion Oyu Tolgoi copper-gold mine, marking a significant step forward for mining investment in the country, which has some of the world's largest untapped reserves of coal, copper and other commodities.
The deal, reached after the government scrapped a windfall copper-gold tax in August, is a victory for the mine's owner, Canada-based miner Ivanhoe Mines /zigman2/quotes/207656050/delayed CA:IVN -0.17% Ltd. and Anglo-Australian mining giant Rio Tinto /zigman2/quotes/222358280/composite RTP +2.93% , which holds a stake in Ivanhoe and will help develop the project.
Like other mineral-rich but underdeveloped countries, Mongolia has struggled to attract major investment during the recent global commodity boom because of an uncertain regulatory environment and efforts to secure mining profits. A clear framework for taxation and government involvement for Oyu Tolgoi is expected to pave the way for billions of dollars of future investment.
The cost to build and commission the mining complex is expected to be about $4 billion, Ivanhoe Chief Executive John Macken said, though he cautioned that final projections are yet to be confirmed. A decision to build a coal-fired power plant for Oyu Tolgoi would require an additional capital commitment, he said.
"We believe Oyu Tolgoi will bring far-reaching benefits for employees and communities directly linked to the mine, as well as for the people and industries indirectly connected to our operations," said Bret Clayton , CEO of Rio Tinto's copper-and-diamond unit.
Rio Tinto in 2006 purchased a 9.9% stake in Ivanhoe for $303 million. That holding is set to double with the signing of the Mongolian investment agreement and an additional payment of $388 million. Rio Tinto might raise its stake in Ivanhoe to as much as 46.65%.
The mine, located in the South Gobi Desert just north of the Chinese-Mongolian border, is expected to produce 450,000 metric tons of copper, about 3% of global supply, and 330,000 troy ounces of gold, with a mine life of 45 years. Production is expected to start in 2013 and take five years to reach full output.
Credit Suisse analysts value the mine at as much as $5.4 billion and said the project could lift Rio Tinto's long-term mined copper output by about 18%.
Mongolia is targeting $10 billion to $15 billion in mining investment in the next five years.