Copper Critical – a Mongolian Megaproject
Supporting the government in technical, legal, tax and financial issues in the Oyo Tolgoi project – the country’s single largest investment contract
The challenge
The Oyu Tolgoi (OT) copper and gold project is a $10 billion megaproject, which at its peak in just a few years could produce up to 500,000 tonnes of copper per year from both an open pit and an underground mine. How does a government continue to engage one of the world’s largest, most experienced companies and ensure that it has received all its due revenue along the way?
Given the technical complexities of the mine, the environmental sensitivities and the array of revenue and tax questions, the Mongolian government requested CONNEX’s services again. Deputy Minister Solongoo Bazarsaikhan commented, “The Mongolian government was particularly grateful for their
first support package regarding financial models, which led to a real discussion about the contract and is still cited in Mongolian circles. With OT’s long-term implications and the sensitivity of its next phase, we were very pleased to welcome CONNEX’s experts again.”
Our Role
With the scope and scale of the Oyu Tolgoi copper project, the Mongolian government was keen to focus on legal and technical expertise, the latter of which had a strong environmental angle. One important factor was the potential environmental impact that the second phase, the underground mine, may bring. To support the government’s ministries to better understand the potential impacts, CONNEX brought in a technical firm, which provided an analysis concerning the risk, allowing the government to equip itself with the right questions when negotiating with the investor. On the legal front, the International Senior Lawyers Project (ISLP), a longstanding strategic partner of CONNEX, found three extremely talented experts with a combined experience of a century, looking at legal, strategic and, very importantly, tax expertise. The experts held introductory meetings virtually and then were able to travel three times to Mongolia to meet first-hand with the several working groups that were responsible for the contract’s different aspects.
Our Impact
How does a nation with abundant national resources and limited negotiation experience prepare for the
negotiations of billion-dollar mineral contracts that impact the global economy and energy transition? For the last number of years, the Mongolian government has had to deal with this, in the context of its economic transition to a more market-based society, coupled with the pandemic’s dramatic economic impacts.
Tax has been and will likely continue to be a very challenging aspect in contracts. Very concretely, the experts supported the government in its case regarding tax revenue and how much (more) the company should have paid. This is where the finer details can mean the difference of hundreds of millions of dollars, with Base Erosion and Profit Shifting (BEPS) tactics still a major issue in mining contracts. The implication of the global minimum tax adds another layer to an already complex theme. CONNEX’s experts did bring answers, supporting the government to better see the larger picture and the related implications and consequences of their single largest investment. Sometimes though, the experts used their years of experience to simply listen and ask the right questions. While there was no doubt capacity built, the experts tried to embed a culture of learning and sharing of experiences as well as self-confidence. More ministerial coordination and a well-formulated strategy can pay off at the negotiation
table. These aspects were particularly important, as there may be other projects to negotiate in the future. In addition to this second support package, CONNEX’s first support package in 2018-19, which focused on financial modelling, supported the government in recovering from a mountain of debt of 2.3 billion USD, which could have later ballooned to 22 billion USD because of interest payments. Furthermore, an agreement was achieved in terms of the underground mine, which meant a significant
increase in production (300%) and an increase in budget revenues. This is important, considering the initial contract is for 30 years, with a possible 20-year extension.
We were very pleased to have CONNEX’s support. We all have learned so much from them and have
been very grateful for their assistance over the last couple of years.
Solongoo Bazarsaikhan, Deputy Minister
