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Oyu Tolgoi releases an official statement related to Parliament’s concerns

Home pageOyu Tolgoi releases an official statement related to Parliament’s concerns
Oyu Tolgoi released an official statement related to Parliament’s concerns
On February 05, 2013, Oyu Tolgoi posted to its website responses to the issues of concern raised during last Friday's (February 01) open Parliament meeting
“During last Friday’s session, many issues were raised that Oyu Tolgoi and its investors have previously addressed through numerous meetings with Government and Ministry officials and staff,” said Cameron McRae, President and CEO of Oyu Tolgoi LLC.
“We remain committed to being transparent and open about our operations and actions. We expect these issues will be raised again during Wednesday’s (February 06) shareholder meeting, which is the appropriate forum to ensure that the Government representatives understand our responses.
The fact that these issues are still being raised underscores the importance of our ongoing efforts to communicate fully with the Government and citizens of Mongolia. As part of that transparency, we also want to make that information available to anyone who seeks to be informed about the project”. 
Official statement of Oyu Tolgoi LLC in relation to information, data and facts related to Oyu Tolgoi discussed during open session of the State Great Khural (Parliament) dated February 01, 2013.
February 05, 2013 

During the Parliament session held on February 01, 2013, many issues were raised that Oyu Tolgoi has previously addressed through numerous meetings with government and ministry officials and staff. The fact that these issues are still being raised underscores the importance of the company’s ongoing efforts to communicate fully with the government and citizens of Mongolia. Oyu Tolgoi is committed to being transparent and open about its operations and actions. This document provides responses to the major issues raised during the session. 
Oyu Tolgoi Phase 1 Capital 
Oyu Tolgoi, through Erdenes Oyu Tolgoi LLC, has always openly communicated with the Government of Mongolia and the Oyu Tolgoi Board of Directors on important topics related to the project, ranging from initial investment to the financing plan for underground development and estimates of dividends. Quarterly financial reports are also sent to the General Taxation Authority and the Ministry of Finance. 
There is some confusion regarding the cost incurred to build the mine, with various commentators quoting different numbers. The table below compares the original capital estimate in the Feasibility Study approved in 2010 against total actual expenditure to the end of 2012. 
Oyu Tolgoi Capital Expenditure Comparatives (USD billion)
  2010 Approved Feasibility
Oyu Tolgoi LLC Capital as
at 31, December, 2012
Initial Phase 1 Capital    
Sunk Costs (pre IA) 1.1 1.1
Phase 1 (post IA) 4.1 4.7
Subtotal 5.2 5.8
Indirect Capital Costs    
VAT and Customs 0.4 0.6
Management Fee 0.1 0.2
Total Phase 1 Development 5.7 6.6

As at 31 December, 2012 Oyu Tolgoi’s financial statements reported total assets of 7.4 billion USD comprising 6.6 billion USD of Phase 1 Development costs (shown above) plus interest costs on loans (0.5 billion USD), early Phase 2 capital (0.2 billion USD) and further exploration (0.1 billion USD). 
How is development of Oyu Tolgoi financed? 
Mongolia owns the minerals in the ground and leases the rights to extract those minerals to companies who pay the government for the leases. The companies then use their own funds to construct and operate the mines. 
In the case of Oyu Tolgoi, the government chose to buy an equity stake of 34 percent in the company. To fund its 34 percent Erdenes Oyu Tolgoi chose to borrow money from the other shareholders.  Initially the interest rate agreed to between the shareholders was “Consumer Price Index + 9.9%”. However, investors reduced this to “LIBOR (London Interbank Offered Rate) + 6.5%”. This way, investors were able to reduce the loan interest rate by more than 3 percent – well below their own cost of capital. 
Erdenes Oyu Tolgoi is not required to repay its loan unless the business is profitable. If the project, for any reason, fails to earn high enough returns to repay the loan, then it will never be repaid and there will be no obligation on the Government of Mongolia. In short international investors who have provided all of the funding absorb the financial risk. Finally the opportunity for Erdenes Oyu Tolgoi LLC to obtain a low interest loan from other sources to finance its 34 percent financing remains open according to the Investment Agreement. 
Project Financing
Currently, investors are seeking to raise project finance from international banking and financial institutions to enable the next stage of development. Project financing would lower the interest rate the Government is paying with the opportunity to bring forward shareholder dividends. Project financing is expected to decrease the total cost of the business to all shareholders. 
Rio Tinto provides to Oyu Tolgoi highly valuable skills, systems and processes. It also enables Oyu Tolgoi to benefit from Rio Tinto’s experience, reputation and goodwill in the international marketplace. 
Management fees of this type are commonly used in mining joint ventures around the world. The fees compensate providers of services that enable the mine to operate successfully. 
The Shareholders Agreement specifies that the Management Service Fee be calculated as: 
- 3 percent of all capital and operating costs incurred prior to the commencement of production 
- 6 percent of all capital and operating costs incurred after the commencement of production 
There is a lot of variation in fee structures at other mining operations. Fees are commonly calculated as 1-3 percent of revenue; however, cost-based fees are also frequently applied. Revenue-based fees have the disadvantage of rising when the price of minerals rises. They also often cover only marketing services and not the full range of services being provided by Rio Tinto, such as the technical expertise that comes from being the world’s foremost underground miner. 
When Oyu Tolgoi reaches commercial production, management fee payments are expected to be in the range of 60-80 million USD per year. While capital cost increases also increase management fee payments, Rio Tinto has no incentive to increase costs. Loss of dividends and higher financing costs erode a far greater value for Rio Tinto than it receives in increased management service fee payments. 
The Board of Oyu Tolgoi LLC consists of 9 members, led by a Mongolian Chairman. Three members represent Erdenes Oyu Tolgoi LLC, the government shareholder; three members represent Turquoise Hill Resources, and three members represent Rio Tinto. Each board member has one voting right; all have equal rights. 
At Oyu Tolgoi, we believe in value-led leadership. Leading from our values means that we lead from the core of who we are. Our goal is to help grow the Mongolian economy and improve livelihoods by rapidly developing a world-class business that is profitable, safe and sustainable. Oyu Tolgoi's current executive committee is comprised of 12 accomplished experts across multiple disciplines within the mining industry from several countries, including Mongolia, UK, US, Australia, and Japan. Oyu Tolgoi also has in place a comprehensive program of skills training and succession planning to ensure Mongolians are able to assume very senior management roles. 
Oyu Tolgoi was the country’s sixth biggest taxpayer in 2011, according to the General Tax Office. This was before the mine was even operational. From January 2010 through November 2012, Oyu Tolgoi had paid 803 million USD in taxes and payments to the Government. Like all responsible companies, Oyu Tolgoi submits its tax records to the Ministry of Finance and the Mongolian Tax Authority (MTA). 
Between 2010 and 2011, Oyu Tolgoi LLC loaned 250 million USD to Government of Mongolia, at the Government’s request. Part of this was a 150 million USD loan in the form of a tax pre-payment, with repayment coming in tax credits. Under the Prepayment Agreement, Oyu Tolgoi was entitled to use these tax credits from 2012. 
Some people incorrectly accuse Oyu Tolgoi of not paying its taxes. 
In fact, in 2012 Oyu Tolgoi paid a total of 280 million USD in national and local taxes and other government fees.
The taxes paid included: 
- 33.3 million USD to the MTA in taxes and payments. 
- 94.6 million USD to the Umnugovi Tax and Customs authority. 
- 122.5 million USD in VAT paid via suppliers. 
- 29.7 million USD in social security and other fees. 
Oyu Tolgoi is fully transparent in the manner in which it conducts its business. Its financial reporting meets both Mongolian and international standards for a private company. 
- Annual reports are independently audited in compliance with clause 3.24 of the Investment Agreement. 
- The government has seen Oyu Tolgoi’s audited accounts for every year since it commenced operations (2010 and 2011) and it has seen the accounts for the first quarter of 2012. 
- Oyu Tolgoi reports on a quarterly basis, not just to the government but also to the Board of Oyu Tolgoi and the shareholders (Turquoise Hill Resources, Rio Tinto and Erdenes MGL). 
During Phase I, Oyu Tolgoi is investing more than 5.8 billion USD of direct capital. Throughout this process, Mongolian companies are contributing to Oyu Tolgoi as suppliers of goods and services with further benefits flowing through the economy. 
Oyu Tolgoi Procurement activities are governed by transparent Procurement policies and procedures, which ensure our alignment with world-class procurement practices and protocols. Our procurement policies are accessible to all. (http://ot.mn/mn/procurement) 
Oyu Tolgoi’s Procurement function seeks to engage with Mongolian national companies on a preferential basis through its national procurement policies. 
- From 2010 to 2012, Oyu Tolgoi spent more than 1.1 billion USD on procurement with Mongolian national suppliers. 
- In 2012 alone, 67 percent of the total number of our businesses and suppliers were Mongolian. 
- Through the “Local Business Economic Development” program, Oyu Tolgoi has created a “micro-lending” facility through Khan and XAC banks to provide loans for small businesses in South Gobi. Some 53 local businesses have benefitted from this 1.5 billion MNT (1.2 million USD) fund. 
Further benefits to the Mongolian economy are evident when you consider indirect benefits and the multiplier effect. 
Building Oyu Tolgoi has been a joint effort between Mongolians and workers from 44 nations. At the end of 2012, the Oyu Tolgoi project directly employed around 13,000 people, 85 percent of whom were Mongolians. During the operational phase, more than 90 percent of Oyu Tolgoi total work force will be Mongolians. 
Both foreign and Mongolian workers are paid commensurate with prevailing market conditions in their home countries. This is standard across the world. Oyu Tolgoi employs foreign experts in the short term to transfer their knowledge and skills to Mongolians for the long term. 
Oyu Tolgoi national salary scales are annually benchmarked by independent analysts against other salaries in the mining, information technology and banking sectors - and Oyu Tolgoi salaries are consistently found to be higher than the norm, even when compared to these high-paying industries. 
More than half the departments in Oyu Tolgoi are 100 percent Mongolian. Mongolians hold leadership positions at every level of the company, from the Board to the “shop floor.” 
Oyu Tolgoi is providing the biggest-ever investment in education in Mongolia; investing 126 million USD in the vocational education system over 5 years. Under this investment, Oyu Tolgoi is building three new vocational education centers and upgrading four existing vocational education center in seven towns and cities of Mongolia. It is training 3,300 workers in 21 aimags and providing scholarships for hundreds of students to study in national and international universities. 
Oyu Tolgoi has made a number of mine-related infrastructure improvements: 
- Built an international-standard airport capable of accommodating a Boeing 737 or C-130 airplanes and has a passenger service building, air traffic control tower, full-service fire station and terminal that can serve up to 240 passengers per hour. 
- Is building a 100km paved road from Oyu Tolgoi to the Chinese border and a 10.3km road in Khanbogd, which is more than 50 percent completed. 
- Developed a water supply a place called Gunii Khooloi, a deep-water aquifer about 70km away from the project site. The use of this water will not affect the drinking water of nearby herders. The Gunii Khooloi water aquifer is not suitable for human or animal consumption as it is fossilized, oceanic water buried deep in the ground, full of salt and solids. The GoM issued permits to use only 20 percent of the total water reserve of the aquifer during the mine project period. Underneath the surface is a steel pipeline, buried 3 meters, that runs parallel to the road. This road goes from Oyu Tolgoi to the Gunii Khooloi aquifer. By burying the water pipeline, there will are no effects on animal movements or the environment. 
Oyu Tolgoi also has made a number of improvements in the South Gobi region as much of the company’s business development activities are centered in this area: 
- Nearly completed construction of a 35kW power line from the mine to Khanbogd, and already are supplying the town with 24-hour power. Investment will be 5.9bn MNT. 
- Invested 1.68 billion MNT in finding more water sources so the town has access to greater supplies of drinking water. This will continue in 2012 and the water sources will be connected to the sum (soum) centre. Oyu Tolgoi has pledged zero impact on quality and quantity of community water supplies. 
- Constructed a Vocational Training Center, which opened in May 2012, with an investment of nearly 2 billion MNT. The vocational training centre will accommodate 150 students. 
- Building a technical Mining School of Excellence in Dalanzadgad, one of three schools that Oyu Tolgoi is building in Mongolia. 
- These improvements are in addition to 30 billion MNT Oyu Tolgoi has spent to advance the social, economic and cultural development and preservation in Umnugovi aimag
Some have asked by Oyu Tolgoi has not built a new town near the mine. Neither the original feasibility study for the mine nor the Investment Agreement have plans or commitments to build a new town or development of Khanbogd sum. This is not a budgeted expense under the feasibility study. However, Oyu Tolgoi will support Government of Mongolia to develop Khanbogd into a town that will support accommodations for Oyu Tolgoi’s workforce. 
Oyu Tolgoi cannot build a town on its own - in Mongolia, responsibility for urban planning, town administration and maintenance sits with the Government. Oyu Tolgoi would like to see a thriving community of Oyu Tolgoi and non-Oyu Tolgoi people, an entrepreneurial settlement and diversified economy that outlives mining. Oyu Tolgoi is committed to work with the government, community and private sectors to support the development of Khanbogd sum and, together, bring this vision to reality. The Government will need to plan adequate social services, including schools and hospitals, for Khanbogd town, the same way the government plans for any other town in Mongolia. 
Oyu Tolgoi is paying close attention to urban planning issues. To build a sustainable town for the long term, significant effort needs to be put into planning before any construction begins. Oyu Tolgoi is working with government on a long-lasting master plan for Khanbogd. When this process is complete, and financing is obtained, partners can construct elements of the town. 


February 06, 2013

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