Mongolian Gov't Looks to Repeal Mining Windfall Tax Law

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"Mongolia is desperate for revenues to flow from new mining projects. . ."

Mongolian parliamentary committees worked into the night Thursday on legal revisions aimed at paving the way for foreign mining investment, including billions of dollars promised for the Oyu Tolgoi copper project.

Chief among the changes is repeal of the windfall profits tax, passed hurriedly in 2006, which was designed to allow the state to benefit from historically high copper and gold prices but instead set the stage for acrimonious negotiations with Oyu Tolgoi developer Ivanhoe Mines Ltd of Canada.

Ivanhoe, partner Rio Tinto and the Mongolian government earlier this month reached a draft agreement that requires changes to the legal framework for foreign investment.

Mongolia is desperate for revenues to flow from new mining projects to allow the government to meet social commitments over the next several years.

Its economy, which is heavily dependent on mining, contracted by 1.3% in the first half of this year, and non-performing loans increased, speaker D Demberel said as he opened an extraordinary session of Parliament on Wednesday.

"These draft laws are directed at improving the legal environment related not only to the Oyu Tolgoi deposit but to other mineral deposits, as well," Demberel said.

"Establishing the Oyu Tolgoi Investment Agreement will speed up the development of Mongolia, win time and create possibility for exploiting the next major deposits."

Fears that the Mongolian state would lose out on the benefits from the $4 billion Oyu Tolgoi project led the government in 2006 to pass a law requiring the state take 34% of any deposit and 50% of any prospected with state money.

Contentious debates over the state share and the windfall profits tax followed soon after, throwing foreign investors into a state of uncertainty and freezing projects during the peak of the commodity boom.

The windfall profits law assessed a 68% tax on copper above $2,600 a ton, and gold above $500 an ounce. On Thursday, benchmark copper MUC3 traded at $6,030 a ton and gold at $940.50 an ounce.

Under the current proposal on the windfall profit tax, it would be abolished effective Jan. 1, 2011.

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