September 25, 2011 – By David Stanway
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OYU TOLGOI, Mongolia (Reuters) - The Mongolian government will seek to accelerate the timetable to increase its stake in the country's giant Oyu Tolgoi copper-gold project to 50 percent, Mining Minister Dashdorj Zorigt said on Sunday.
A landmark 2009 investment agreement on the multi-billion dollar Oyu Tolgoi project in Mongolia's South Gobi region gave 66 percent of the project to Canadian miner Ivanhoe <IVN.TO>, with the rest remaining in the hands of the Mongolian state.
The agreement says the government's stake in the project can be raised to 50 percent after 30 years.
A group of 20 parliamentarians has submitted a petition to the government asking it to reopen negotiations to increase Mongolia's stake.
The government has submitted a revised agreement to Ivanhoe Mines which will change the timeframe in which the government's share is increased to half, Zorigt told reporters.
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"The proposal has been sent," Zorigt said. "At this moment the government has made the decision that we will send the proposal to renegotiate the timeframe with which to increase the Mongolian portion to 50 percent."
Earlier on Sunday, global mining giant Rio Tinto <RIO.L><RIO.AX> said it would respond to any request from the Mongolian government to discuss its investment in the Oyu Tolgoi copper-gold deposit, but it expected the original 2009 agreement to be honored.
Rio Tinto owns 48.5 percent of Ivanhoe's shares and is also in charge of constructing the Oyu Tolgoi mine.
Cameron McRae, Rio Tinto's Mongolia country manager and chief executive of Oyu Tolgoi LLC, the entity running the mine, said on Sunday that he had not yet received any formal notification that the government will seek to modify the investment agreement.
"I think what we are demonstrating is that the investment agreement is a contract, and we're going to honor our commitments and we expect the government to honor its commitments."
Rio Tinto's own forecasts suggest the Oyu Tolgoi project alone could account for about 5 percent of the country's GDP growth.
By the time the first shipment leaves the site, more than $6 billion will have been spent on the project, and the Mongolian Government will have received more than $700 million in payments, according to Rio Tinto.
McRae said the project had already brought huge benefits to the Mongolian economy, helping to transform the capital Ulan Bator and driving construction and growth across the country.
Another benefit of the Oyu Tolgoi agreement was the confidence it gave other foreign firms to invest in the country, he said.
Phase One of the massive mine, started almost from scratch last year in the remote and sparsely populated South Gobi region, will be ready to begin producing copper in the second half of next year.
It is expected to produce an average of 450,000 tonnes of copper a year over its 50-60 year lifetime.
Nationalist politicians continue to bridle at the idea of "selling out" their strategic resources, and foreign investors in Mongolia remain concerned about the risk of more populist legislation directed at overseas mining firms, especially as next year's parliamentary elections loom.
Previous bills passed by parliament include an export tax on gold and a windfall tax on mining profits, both of which were heavily criticized by investors and subsequently revoked.
Experts also said that while a move to increase the government's stake might appease nationalist sentiment, it was unlikely to improve the potential of the mine itself.
"If a government takes more than 50 percent, projects will shut down -- mining is bringing tremendous growth to Mongolia but that could be killed very quickly," said Bernard Guarnera, president of mining consultants Behre Dolbear, speaking in Ulan Bator earlier this month.
(Reporting by David Stanway; Editing by Sugita Katyal)