Revised taxation and minerals laws in Mongolia set the stage for conclusion of an Investment Contract for Ivanhoe's Oyu Tolgoi
10 Julho 2006 - 10:44AM
PR Newswire (US)
ULAANBAATAR, Mongolia, July 10 /PRNewswire-FirstCall/ -- John
Macken, President and CEO of Ivanhoe Mines, said today the company
expects to resume final negotiations with the Mongolian Government
after the current Naadam summer festival holiday to conclude a
formal Investment Contract that will confirm a tax and
infrastructure framework for the development of the Oyu Tolgoi
copper-gold mine in Mongolia's South Gobi Region. The Mongolian
Parliament approved a revised Minerals Law on Saturday. The revised
Minerals Law, and previously approved amendments to the Tax Law,
have set the stage for finalization of negotiations on a formal,
long-term agreement with Ivanhoe. "We now have a broad playing
field with flexibility to tailor an agreement appropriate for the
Oyu Tolgoi Project. We are confident that Ivanhoe and the
Government of Mongolia can proceed to reach a mutually beneficial
accord that will establish a precedent for future capital-intensive
projects backed by investors from around the world who are closely
monitoring these developments," Mr. Macken said. Investment
Contracts Doubled to 30 Years Mr. Macken added that one of the
positive provisions of the amended Minerals Law is a doubling of
the period to be covered by an Investment Contract, formerly known
as a Stability Agreement, to a period of 30 years for projects
requiring an investment of more than US$300 million. Extensive
discussions between Ivanhoe and the Government have focused on a
comprehensive agreement that will create a stable tax and royalty
environment, cover arrangements for essential infrastructure,
including roads, the supply of interim and long-term electrical
power, and confirm the company's commitments to maximize
opportunities to educate, train and employ Mongolians. Ivanhoe has
received assurances in meetings with senior Government
representatives during recent months, and has noted numerous
official public statements by Government and Parliament officials,
that the Investment Contract would be addressed after the amended
taxation and minerals laws established the framework for a new
generation of agreements for future mine ventures, Mr. Macken said.
"In our meetings with the Government, we have emphasized the need
for Mongolia's laws to reflect the scale, long life and necessary
magnitude of investment for major mineral discoveries such as Oyu
Tolgoi, which will become one of the largest mining complexes in
the world and create thousands of jobs and expanded government
revenues for more than 50 years. "The Members of Parliament appear
to have set a more secure legal framework for new mining projects
to proceed with development. Some measures will require
clarification of the specifics of their potential application to
Oyu Tolgoi, but on the basis of our understanding of the amended
Tax and Minerals laws, and of the expressed intentions of many
Members of Parliament and Cabinet Ministers, we are pleased that
Mongolia now is committed to advancing the role of foreign
investment in the development of its mining industry," Mr. Macken
added. Role of Expert Advisers Welcomed In a Cabinet decision May
31, following a recommendation from the National Security Council
last year, the Mongolian Government decided to seek the assistance
of international expert advisers in concluding an Investment
Contract for Oyu Tolgoi - a positive development that Mr. Macken
said Ivanhoe welcomes. On March 22 this year, the Cabinet also
approved the formation of an inter-ministerial working group to
conclude negotiations with Ivanhoe on an Investment Contract that
would conform to the new Tax and Minerals laws. Government May
Choose to Negotiate Interests in Strategic Deposits Amendments to
the Minerals Law give the Mongolian government the option to
acquire interests in mineral deposits deemed to be "strategic." The
law defines a strategic deposit as one with potential to have an
impact on Mongolia's national security, economic and social
development; with minerals that are in strong international demand;
or a deposit capable of annual mineral production that exceeds 5%
of Mongolia's gross domestic product. The government will have a
qualified right to acquire an interest of 1)from zero to 34% in
strategic deposits discovered through privately financed
exploration; and 2) from zero to 50% in deposits that were
discovered through the use of state funds during the former Soviet
era. The Oyu Tolgoi discoveries on Ivanhoe's licences, and on the
adjoining Entree Gold joint-venture property, were financed
entirely by private capital. Ivanhoe's coal discoveries in the
Nariin Sukhait region, and at Tsagaan Tolgoi, west of Oyu Tolgoi,
also have been funded solely by private capital. The law states
that any acquisition of a state interest in a mining project will
be subject to negotiation with the licence holder as part of the
Investment Contract process. Although the details of the new
amendments to the Minerals Law will need to be addressed, the
extent of state participation will be determined in part on a
project-by-project basis by the proportion of the project capital
that the state is prepared to invest. Mr. Macken said a full
assessment of the provisions of the amended laws will be possible
after official versions of the final texts are made available by
the Government during coming weeks, after the current Naadam
holiday and 800th anniversary celebration of the founding of the
Mongolian state. He said that Ivanhoe always has been prepared to
negotiate with the Mongolian Government to reach a realistic,
mutually acceptable agreement on potential state participation in
the project. "We expect that the conclusion of a comprehensive
Investment Contract with Ivanhoe will set a precedent and
demonstrate that long-term benefits can be achieved for all
Mongolians from the responsible development of the country's
mineral resources," Mr. Macken said. "In fact, because any
Investment Contract for the Oyu Tolgoi Project likely will be
tailored to the unique circumstances of the Project, and
subsequently will receive Parliament's vote of approval, it is
expected that many of the uncertainties associated with recent
legislative decisions in Parliament will be resolved through a
negotiated process and clarified in the Investment Contract." On
September 8, 2003, Ivanhoe Chairman Robert Friedland said in a
public statement that Ivanhoe would consult closely with Mongolian
Government leaders and assess all strategic alternatives available
for the development of Oyu Tolgoi, including the possibility of
accepting one or more minority investments from official,
government-owned entities whose involvement could be profoundly
beneficial to the project's long-term success. Summary of Other
Legislative Changes Under the amended Minerals Law, future
Investment Contracts for investments of greater than $100 million
will be ratified by the Mongolian Parliament, giving such
Investment Contracts a broader, expanded authority and greater
degree of long-term security than previous agreements, because they
will have the authority of law. Legislative changes approved by the
Mongolian Parliament in recent weeks include the following: - The
Minerals Law contains a new single-rate royalty for all metals of
5%; this doubles the previous 2.5% rate that applied to copper and
hard-rock gold, but is significantly lower than some proposals that
were advanced in recent months and rejected by the Parliament. -
However, the royalty increase will be offset by a five percentage-
point reduction in the corporate income tax, to 25%, that will
apply to the Oyu Tolgoi Project. The revised corporate income tax
law passed last week reduced the corporate income tax from 30% to
25% for annual incomes above three billion tugrugs (approximately
US$2.6 million) a year, and to 10% for annual incomes up to three
billion tugrugs. Personal income tax also has been reduced to a
flat rate of 10% as part of the tax reform package. - The term for
an exploration licence is increased from seven to nine years. The
maximum mining licence term is 70 years, reduced from 100 years
under the previous 1997 Minerals Law. Existing licence holders will
be required to convert their licences within five months to bring
them into conformance with the periods specified by the amended
Minerals Law. Ivanhoe, which has held mining licences for Oyu Togoi
since December, 2003, is seeking clarification on the retroactivity
of these amendments. - A minimum of 10 percent of the common shares
issued by a public company that holds the mining licence for a
deposit classified as being of strategic importance must be made
available for trading on the Mongolian Stock Exchange (MSE). In
March this year, Ivanhoe committed to obtaining a listing on the
Mongolian exchange and discussions currently are well advanced with
the MSE and financial regulation authorities. - Investment
Contracts have been made more flexible and give improved
recognition to investors making larger, longer term commitments.
Projects involving an investment of US$50-100 million will have 10-
year terms; US$100-300 million projects will have 15-year
agreements; and projects involving more than US$300 million will
have 30-year agreements. - The tax reform package passed last week
introduced a number of progressive changes to improve overall
investment environment. For example, the value-added tax (VAT) has
been reduced from 15% TO 10%. - A reinvestment tax credit of 10%
has been established. - A loss carry-forward provision of three
years, improved depreciation allowances and a re-investment tax
credit have been included in the amended Tax Law. These business
deductions are expected to compensate for the elimination of tax
holidays that previously applied only to foreign-owned companies,
and not to domestic entities. Windfall Profits Tax Still of Concern
to International Investors Mr. Macken said he is disappointed that
a Windfall Profits Tax, passed in haste by the Parliament in May,
remains as an unamended statute that has sent a negative message to
foreign investors. "Ivanhoe has previously stated that we do not
expect this tax to compromise the basis for our planning for Oyu
Tolgoi. There have been widespread calls from the business
community and members of parliament, including the Prime Minister
and members of cabinet, for the repeal of the tax and we expect
that the Parliament will address the excessive and now redundant
measures within this law in due course." Mr. Macken said that an
analysis of the final Windfall Profits Tax law, guided by
directives subsequently issued by the Mongolian taxation
authorities, showed the tax does not act as a tax on gross revenue,
as initially thought. The effective price at which the tax will
apply to Oyu Tolgoi copper is approximately $1.45 per pound, since
the base price ($1.18/lb) and the cost of external smelting and
realization costs can be deducted from sales proceeds.
Clarification by the government also has confirmed that the tax
would not be applied to gold content because Oyu Tolgoi will be a
producer of copper concentrate. Importantly, any windfall taxes
paid would be allowable as a tax deduction. The tax will not apply
to smelted copper. In a statement issued May 26 this year,
following meetings between Ivanhoe and senior Government
representatives, Ivanhoe reaffirmed its willingness to work with
the Government to have downstream smelting capacity built in
Mongolia that could serve Oyu Tolgoi and other mines and help
produce value-added products for domestic and export markets. This
would avoid exposure to a Windfall Profits Tax. Mr. Macken said
that in contrast to the surprise passage of the Windfall Profits
Tax, the mining industry had an opportunity to make submissions to
the Members of Parliament addressing proposed amendments to the
minerals and tax laws, and this input was beneficial for all
parties concerned. Mr. Macken added: "We deeply respect Mongolia's
commitment to democratic processes. We are confident that we now
can move forward to conclude a long-term and legally secure
Investment Contract that will lead to the construction of the first
mine at Oyu Tolgoi, dramatically boost economic growth, generate
long-term employment and support Mongolia's initiatives to attract
international investment." Forward-Looking Statements: This
document includes forward-lookingstatements. Forward-looking
statements include, but are not limited to,statements concerning
the Oyu Tolgoi Stability Agreement and developmentprogram,
pre-feasibility studies and planned mining, and other statements
thatare not historical facts. When used in this document, the words
such as"could," "plan," "estimate," "expect," "intend," "may,"
"potential," "should,"and similar expressions are forward-looking
statements. Although Ivanhoe Minesbelieves that its expectations
reflected in these forward-looking statementsare reasonable, such
statements involve risks and uncertainties and noassurance can be
given that actual results will be consistent with
theseforward-looking statements. Important factors that could cause
actual resultsto differ from these forward-looking statements are
disclosed under theheading "Risk Factors" and elsewhere in the
corporation's periodic filingswith Canadian and US securities
regulators. CONTACT: Contacts - North America, Media: Bob
Williamson, (604) 331-9880; Mongolia, Layton Croft, 976 9911 3339,
Munkhbat Ania, 976 9911 2385 DATASOURCE: Ivanhoe Mines Ltd.
CONTACT: Contacts - North America, Media: Bob Williamson, (604)
331-9880; Mongolia, Layton Croft, 976 9911 3339, Munkhbat Ania, 976
9911 2385
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