The cancellation follows a string of complaints by the
Mongolian government over Oyu Tolgoi, which is controlled by Rio
Tinto through its Turquoise Hill Resources unit, in the
lead-up to a presidential election due in June.
The fight is crucial to both sides. At full tilt, Oyu Tolgoi
will account for nearly a third of Mongolia's economy, while Rio
Tinto is dependent on Oyu Tolgoi to drive growth outside its
massive iron ore business.
Mongolia's Mining Ministry this week said it had cancelled a
decision made in 2009 when it converted into mining licenses the
Shivee Tolgoi and Javhlant exploration licenses held by Oyu
Tolgoi and Entrée Gold.
Mongolia is now reviewing the decision, originally part of
the 2009 investment agreement for Oyu Tolgoi, to ensure the move
Oyu Tolgoi owns an 80 percent interest, and Entree a 20
percent interest, in production from the mining licenses.
"At this time, the company has not received formal
notification from any government agency regarding the status of
the licenses and is seeking clarification," Entrée told the
Toronto stock exchange.
The move on the Shivee Tolgoi and Javhant mining licenses
adds to other issues unsettling Oyu Tolgoi just as it ramps up
for commercial production, due to start in June.
Rio Tinto has vowed to negotiate hard to protect the pact
and said it would not start selling copper from the project
until the problems were resolved.
"Subject to the resolution of these issues, first commercial
production from Oyu Tolgoi is scheduled to commence by the end
of June 2013," Rio said in a results announcement on Feb. 14.
Among the issues raised by the Mongolian government, it has
accused Oyu Tolgoi of failing to pay taxes and overspending on
the project, which is eventually expected to produce 425,000
tonnes of copper and 460,000 ounces of gold a year.
Following the first meeting of Oyu Tolgoi shareholders on
February 8, which was adjourned for the Lunar New Year holiday,
Finance Minister Chultem Ulaan said no tax had been paid for the
mine in 2012.
Rio said that was incorrect, adding that it had agreed in
2010 to lend the government $250 million in the form of a "tax
pre-payment, with repayment coming in tax credits."
There was also a dispute over development costs, which
Mongolia's president said had surged above $7 billion. Rio
contends the project is on budget at $6.2 billion.
The government says the additional costs would mean waiting
14 years more to collect on dividends, whose distribution is
blocked by the terms of the pact until investors have recouped
their original investments.
There are also reports that the government has antagonized
the company by temporarily freezing the project's bank accounts.
An Oyu Tolgoi spokesman declined to comment, and Mongolia's
tax authorities could not be immediately reached for comment.
Mongolia fears the agreement may not be in its best
interests. Some within government would like a majority stake in
the project, in which Mongolia now has a 34 percent stake.
Others feel the aggressive actions are designed to play to
nationalist concerns ahead of this year's presidential election.
Promises to close the mining sector to foreign investment
were used by candidates at Mongolian parliamentary elections
last year to try and attract votes.
Disputes would continue until after the election, said Chris
MacDougall, managing director of Mongolian Investment Banking
"Then we'll see the rhetoric change and Oyu Tolgoi progress.
I don't think we will see any material changes for Oyu Tolgoi,"