Abstract:
In 2005, Ivanhoe Mines Ltd. released a development plan for open pit and
underground copper and gold mining of the Oyu Tolgoi porphyry deposits in Mongolia’s
Gobi desert. Ivanhoe refers to the project as the largest copper-gold development project
in the world. Under Mongolian law, the national government maintains ownership of all
mineral reserves, and private parties license exploration and mining rights from the
government. A contract agreement between the government and the private mining
company stipulates the terms of the license. The size of the state’s share in the copper
deposit will be determined by the contract and the Minerals Law of Mongolia. The
purpose of this project is to analyze how the contract under consideration distributes
environmental risk when environmental financial assurance is included.
The basis for this analysis is a cash flow model developed by Robert Conrad for
the Open Society Forum Mongolia and Revenue Watch. Two new cash flow models are
created by adding self insurance and environmental fund assurance schemes to the
Conrad model. Monte Carlo simulations are used to estimate the effects of environmental
damages on the relative risk shares born by the Mongolian government and Ivanhoe
Mines. Under both financial assurance models, risk shares diverge as the probability that
environmental damage will occur increases. Risk shares also diverge as damages
increase. The sum of the standard deviations on NPV to the government and the investor
is higher than the standard deviation on the NPV to the project as a whole.
The results of this analysis are general with respect to the contract but
independent of the environmental parameters. The results also imply that the interactions
between environmental assurance and other contract terms will ultimately determine the
value of the project to the parties. Given the current contract structure, any risk of
environmental damages will necessarily result in a cost to the government. This risk may
be unnecessary and may dampen any development benefits of the Oyu Tolgoi license.
