Mongolia’s financial straits are helping to push Ivanhoe’s $3bn copper-gold project through its tortuous approval process, but deals signed by governments under financial pressure do not always stand the test of time
This is the second article in our ‘License to Operate Flashpoint’ series analysing socio-political risks around resource projects in the news
Why is this project in the news?
- Ivanhoe Mines and its partner Rio Tinto appear to be reaching the end of a long-running battle to develop a vast copper-gold deposit at Oyu Tolgoi, Mongolia. After years of negotiations that have attracted enormous political attention, the country’s Parliament recently voted (by large majorities) to amend key laws, appearing to clear the way for development.
- Despite previous concerns from elements of the government (including the recently-elected President and many parliamentarians) and from civil society that Mongolia needs to benefit more from the development of its mineral resources, rising unemployment and budget deficits brought about by the financial crisis appear to have encouraged politicians to push an agreement through.
How secure is Ivanhoe’s socio-political ‘License to Operate’?
- Undoubtedly the project now has popular support within Mongolia. As well as the huge revenues the mine will generate for the government, politicians have spoken of the need to reassure other foreign investors and open the door to a wave of investment seen by many as desperately needed to develop the country.
- At the same time, many in Mongolia are suspicious about the role of foreign companies in the economy. Given its scale, Oyu Tolgoi will set a precedent for future projects – thus the years of debate about the appropriate national stake and how best to balance equity, a share of profits and tax revenues. Before long, some may argue the deal is still skewed in Ivanhoe’s favour: such concerns may not be fair, but they are too recent to have vanished for good.
- So Ivanhoe may be wise to remain wary. A legal ‘license to operate’ is not always enough to protect a politically sensitive project if influential stakeholders are dissatisfied; when the economy and commodity prices pick up further and mining revenues begin to flow (and once significant investment in the mine is already sunk), a future government might seek to revisit agreements made under pressure when times were harder. This is not a given: large mines in some parts of the world have enjoyed relatively stable fiscal terms over many decades. But where the debate over the setting of these terms has been as difficult and (until recently) fraught as in Mongolia, such stability is less likely.
What can Ivanhoe do?
- The company is no doubt aware of this risk. To secure its socio-political ‘license to operate’ for the long term, however, it may need to continue pedalling hard to ensure a broad set of stakeholders are convinced of the project’s benefits. Making the case that well-managed foreign investment is key to national development may help, though doing so takes sensitivity: a recent company letter arguing this piqued some in Mongolia. Maximising local hiring and infrastructure contributions – which Ivanhoe promises – are also important. (The company points out it has already created some 4,000 jobs for Mongolian nationals.)
- Political critics of extractive projects often use complaints over environmental performance (whether these are merited or not) as a lever against companies. Ivanhoe needs to ensure it provides no fuel for such attacks.
¹ This simplified version of a ‘heat map’ is one element of LicenseSecure™, a model developed by Critical Resource to help companies responsibly strengthen the ‘license to operate’ (i.e. local, national and international stakeholder support) for resource projects. This particular ‘heat map’ is based on outside-in analysis; a full LicenseSecure™ study involves in depth, on-the-ground research, and analyses company policies and activities as well as external factors.
Yurt image © istockphoto.com/Kesman