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Posts Tagged ‘railway’

Mongolia’s future as commodities exporter

May 24, 2011 Comments off

“Mongolia is going to be a major future supplier of commodities from coal through gold to copper – and maybe even crude oil. But how soon will this landlocked country with a population of 3m really begin delivering these resources to the world in a significant, market-moving way?

Although Mongolia is located right next to its biggest customer, China, their history of rivalry makes Mongolia suspicious of its southern neighbour. And capricious politics – parliament has tried to oust Dashdorj Zorigt, minister for mineral resources and energy, twice this year – mean that economic logic is sometimes subordinate to politics or nationalism.

Take the development of Tavan Tolgoi, by some calculations the world’s second-largest coal deposit. The government recently scrapped plans to build a railway directly to the border, less than 300km away, even after feasibility studies and initial permits for the line had been granted. Instead a new line will go east, connecting the mines to the Trans Mongolian Railway that leads to both Russia and China, albeit by a longer route. …

There are some exceptions to this pattern: the Oyu Tolgoi mine, which is co-owned by Rio Tinto, Ivanhoe and the Mongolian government, is ahead of schedule and will come online next year. The copper and gold produced there will be shipped out by truck, posing fewer logistical difficulties than the bulky coal. But still, the investment agreement governing the mine took more than five years to negotiate and remains a source of intense political debate.”

Source: Financial Times – Commodities Note, May 20 2011

Observations:

  • Tavan Tolgoi holds estimated coking and thermal coal reserves of 6.4bln tons. Indian ICVL has expressed interest in buying into the project, which the Mongolian government wants to bring to the stock exchange.
  • Rio Tinto’s development of copper and gold deposit Oyu Tolgoi with/through Ivanhoe is the first major foreign investment project in the country, which appears to go smoothly so far. Rio Tinto’s shareholder Chinalco has repeatedly indicated it would like to take part in the project, but has been kept out by Rio Tinto to date.
  • In October last year Ivanhoe was still hoping to export the products from Oyu Tolgoi by rail. In current plans the transport to the Chinese border (80 kilometers) will initially take place using trucks.

Ivanhoe's Oyu Tolgoi logistics plan

Implications:

  • Western companies will try to tease the Mongolian government into collaborating in the construction of direct rail links to the Chinese rail network in the south. The government’s objective in linking the producing region to the Trans-Mongolian Railway mainly is to stimulate domestic processing industry and to gain political leeway in the relationship with China by having the option to supply to Russia. Most likely the corporates and the government will come to a compromise in which the costs of infrastructure development is shared in some way.
  • The elections in Mongolia next year could create a complicated situation for the western miners in the country, as any new government will try to review and/or renegotiate development and royalty deals currently in place.

©2011 | Wilfred Visser | thebusinessofmining.com

Rio Tinto signs agreement with Guinean government

April 25, 2011 Comments off

“Rio Tinto’s most troubled mining project appears poised for multibillion-dollar development after the company agreed to pay $700m to the government of Guinea and grant it a 35 per cent stake in its iron ore mine. The deal was reached on Friday ahead of plans by Guinea, a west African country rich in iron ore and bauxite, to review all mining licences as part of its push to secure bigger returns from its mineral wealth.

Vale and other multinational miners active in Guinea now have a precedent for their negotiations with the government. Vale, the Brazilian company that is the biggest iron ore miner, paid $2.5bn for a stake in a Guinean deposit last year. Rio’s deal allows Guinea to move towards a 35 per cent stake in Simandou, the iron ore deposit – located in a remote corner of the country – that is thought to be one of the world’s best untapped lodes of the ore.”

Source: Financial Times, April 23 2011

Observations:

  • Last month Guinea announced a review of mining licenses, including the demand to get minority stakes in all major mining projects in the country.
  • Rio Tinto controls blocks 3 and 4 of the Simandou deposit, with Brazil’s Vale controlling blocks 1 and 2. First shipment of iron ore by Rio Tinto is expected by mid-2015.

Implications:

  • The agreement of Rio Tinto to construct a railway through is a major blow for the government of Liberia, which hoped to convince the miners to export the ore with a shorter route via Liberia. The decision on the export route will further trigger challenging negotiations with Vale about using the same infrastructure to export ore from the area.
  • The 35% government stake can be build up over time, with the final 10% to be bought at market value in 15-20 years time. Tax rate is set at 30% after the first 8 years, with additional 3.5% royalties. The $700mln payment is only made conditional on granting the concession and approving the Rio Tinto / Chalco joint venture. Based on these conditions it appears Guinea intends to be a friendly host to international mining companies in the long term, but requires strict payment and infrastructure development contribution in the short term.

©2011 | Wilfred Visser | thebusinessofmining.com