Mongolia to Review Copper Mine Accord, Ivanhoe Says

Ivanhoe Mines Ltd. said the Mongolian government is reviewing a June agreement to develop a $3 billion copper and gold project with partner Rio Tinto Group, delaying final approval with construction due to start next year.

Mongolia's Prime Minister Sanjaa Bayar has also proposed hiring an international financial adviser to help the government complete the agreement, Vancouver-based Ivanhoe said in an e mailed response to questions.

Ivanhoe has been trying for more than four years to seal an investment agreement with Mongolia for the Oyu Tolgoi project to benefit from copper prices that have more than doubled in the same period. Companies planning mines in the nation are facing headwinds from populist lawmakers demanding more of the country's mineral wealth be earmarked for public benefit.

"The populist push to retain greater levels of national interest in natural resources is a common theme amongst many emerging nations," said Angus Gluskie, who helps manage the equivalent of $500 million at White Funds Management in Sydney. "Debate on the project will extend over upcoming months."

Shares of Ivanhoe fell 2 cents to C$10.72 in Toronto Stock Exchange composite trading yesterday, valuing the company at C$4.02 billion ($4 billion). Rio Tinto fell A$1.67, or 1.3 percent, A$127.50 at the 4:10 p.m. Sydney time close on the Australian Stock Exchange.

"We are continuing to work with Ivanhoe and the Mongolian government to achieve a satisfactory outcome for all three parties," Rio Tinto Melbourne-based spokesman Ian Head said today by phone. Mongolian Foreign Minister Sanjaasuren Oyun did not immediately respond to e-mailed questions from Bloomberg News.

'Further Delays'

Bayar told parliament in an inaugural address Dec. 13 that his government wants to complete the accord as soon as possible. Popular unrest pushed the government to enact an excess profit tax in early 2006.

"Ivanhoe Mines and Rio Tinto have expressed concerns to Mongolia's national leaders and members of parliament about adverse impacts on the cost and timing of the Oyu Tolgoi project that would result from further delays in concluding an investment agreement," Ivanhoe said.

Ivanhoe said Sept. 11 that it may suspend development should it not win "timely" approval. Rio would consider its options should the agreement not be approved by the end of 2007, Chief Executive Officer Tom Albanese said in October after meeting lawmakers in August.

Spending Cuts

"Ivanhoe has stated that a plan prepared by the joint Ivanhoe Mines-Rio Tinto technical committee would guide an orderly curtailment of development activities and a significant reduction of expenditures at the Oyu Tolgoi project if an investment agreement with the Mongolian government is not finalized within an acceptable period," Ivanhoe said in the e-mail.

Rio called Oyu Tolgoi "the world's largest undeveloped copper-gold resource" when it agreed to buy 10 percent of Ivanhoe in October 2006. The deposit, about 80 kilometers (50 miles) north of the Mongolia's border with China, contains about 71 billion pounds (32 million metric tons) of copper and 31.3 million ounces of gold, based on measured, indicated and inferred categories, according to company estimates from 2001 through 2006.

"The worst case scenario is that this thing is not going to be resolved any time soon," Peter Arden, an analyst at Ord Minnett Ltd. in Melbourne, said today by phone.

Rio Tinto was anticipating that the investment agreement would be brought before parliament by the end of January, Bret Clayton, chief executive officer of its copper division, said in a Nov. 8 interview. At the time, Clayton said between $30 million and $40 million a month was being spent on the project.

"Should the project not proceed Rio would need to write-off sunk costs to date, however these are unlikely to be material," White Funds' Gluskie said. "The project has the potential to enhance Rio's copper and gold exposure by around 10 percent or more should the development be capable of subsequent expansion."