Mongolia's quest to renegotiate a 2009 deal to develop the giant Oyu Tolgoi copper-gold deposit might create a crisis of trust for foreign investors, but analysts said the decision could help it through a difficult legislative session starting next week.
On Sunday, at a ceremony held under the punishing midday sun of the Gobi desert, Jan Du Plessis, chairman of global mining giant Rio Tinto , praised the efforts made to launch the $10 billion Oyu Tolgoi project.
The shared vision and courage of the government and its development partners led to the creation and passing into law of the Investment Agreement, he said.
This solid framework gives us the confidence to invest billions of dollars in building this incredible mine.
But minutes after completing his own speech to mark the half-way point of construction at Oyu Tolgoi, Mongolia's mining minister, Dashdorj Zorigt, confirmed that the government was now seeking to change the terms of the 2009 deal.
Weeks ago, 20 Mongolian members of parliament signed a petition urging the government to renegotiate the agreement, which gave 66 percent of the mine to Ivanhoe Mines and allowed Mongolia the option to raise its stake to 50 percent only after 30 years. Ivanhoe is 49-percent owned by Rio Tinto.
Political opponents want to increase Mongolia's stake to 50 percent as soon as Ivanhoe sees a return on investment, which could be as early as five years, said Bayarsaikhan Garidkhuu, a lawmaker who signed the petition.
Investment recovery depends on the copper price in the world market, and what I want is after the investment is recovered -- it could be five or 10 or 15 years -- we should immediately take the remaining 16 percent, he told Reuters.
Investors in Ulan Bator expressed surprise that the government decided to act upon the petition, saying it could undermine trust among the business community, but in a parliament of just 78 members, the 20 opponents represent a vital source of political capital.
Zorigt had been obliged to send the letter since he is the Minister for Mineral Resources and he oversees mining activities, said Oscar Mendoza, chief operating officer with the Ulan Bator-based Frontier Securities.
You could tell he was reluctant because he and (Prime Minister) Batbold had kept quiet during the entire time all of this was brewing, he said.
Mongolia's fragile coalition government has been put under increasing strain as it seeks approval for a new budget and election law as well as an investment plan for the Tavan Tolgoi coal mine, which will determine whether a multi-billion dollar IPO can go ahead on time in the first half of 2012.
To get all that legislation through, the government will need all the help it can get. Sanjaasuren Oyun, former foreign minister and leader of the centrist Civic Will and Green Party, said it would struggle to meet its objectives.
Usually the autumn session is very busy, she said. A lot depends on the political will of the leaders of the main parties.
Rio Tinto said they remained confident that the original agreement would be honoured, adding that grandstanding ahead of next year's parliamentary elections was only to be expected. The MPs who signed the petition responded angrily to suggestions that this was merely a case of electioneering.
This group of parliament members is just expressing its voice, said Bayarsaikhan. We don't care how foreign investors see us and explain it in relation to the election. The issue (of ownership) was there from the very beginning.
We are doing this for benefit of Mongolia. Even if we don't do anything now, I'm sure members in the next parliament will want to change the agreement.