Investment Agreement and Shareholders’ Agreement Q&A

1. What is the history around the Government of Mongolia’s stake in Oyu Tolgoi?

In 2000, Ivanhoe Mines Ltd (Ivanhoe) acquired the license to explore the Oyu Tolgoi site from BHP Billiton. The Oyu Tolgoi deposit was discovered in July 2001 by Ivanhoe and was 100 per cent owned by them. The project was initially known as Ivanhoe Mines Mongolia Inc but changed its name to Oyu Tolgoi LLC in 2009. Ivanhoe invested approximately USD 1.1 Billion into the project up until 2009, largely in exploration and development. This cash investment by Ivanhoe was in the form of equity and loans to Oyu Tolgoi. An initial shareholder loan was established at the time that Oyu Tolgoi LLC was formed.

In October 2009 after many years of consultation with the Government of Mongolia, Ivanhoe Mines and its strategic partner Rio Tinto, signed a long term Investment Agreement with the Government of Mongolia (GOM). The investment agreement established a comprehensive framework for the construction and operation of the copper-gold mine.

The GOM acquired 34 per cent of the common shares in Oyu Tolgoi while Ivanhoe Mines retained 66 per cent. With the 34 per cent stake in Oyu Tolgoi the GOM also took a share in the shareholder debt that was used to establish the company. The intention is for the GOM to repay this share of the debt in future years from cash flow from operations.

After signing the Investment Agreement in October 2009, the Oyu Tolgoi project started in earnest. Additional funding that is required to finance the rapid development of the Oyu Tolgoi mine is raised (and loaned to Oyu Tolgoi) by the two shareholders (Ivanhoe and GOM).

Under the Shareholders’ Agreement the Government can ask Ivanhoe to provide funding to cover its share of the costs of the project. Where this happens the GOM incurs a debt in Oyu Tolgoi for the respective amount. This debt can only be repaid with cash flow from operations and never directly from the GOM. Interest is accrued on this debt.

To build Oyu Tolgoi will require estimated capital expenditure of USD $6 billion to August 2012. Ivanhoe and Rio Tinto (Ivanhoe’s largest shareholder) are arranging 100 per cent of Oyu Tolgoi’s funding and this is provided to Oyu Tolgoi in the form of loans.

Oyu Tolgoi will start earning revenues in 2013 and this will initially be used to pay for operating expenditure, future capital expenditure and interest repayments. Oyu Tolgoi is already paying taxes and duties to the GOM ahead of earning revenues.

The loans owed by the GOM must be paid off before cash from profits can be paid as dividends. Once outstanding loans have been paid, the GOM will receive cash from profits in addition to the taxes that Oyu Tolgoi will generate.


2. Has the Mongolian Government’s ownership of Oyu Tolgoi been reduced from 34 per cent to 6.8 per cent?

No. The Mongolian Government’s ownership of Oyu Tolgoi LLC, through its State-owned company Erdenes, will always remain at 34 per cent. It can never be diluted under the Investment Agreement and after 30 years, the initial term agreed in the Investment Agreement, the stake can be increased to 50 per cent.


3. We are reading in the press that this is not the case? Where is the confusion coming from?

The confusion has resulted from misunderstandings around ordinary (or common shares) and preferred shares. Just to be clear, the Mongolian Government, through Erdenes, owns a 34 per cent equity stake in Oyu Tolgoi LLC, with the remaining 66 per cent of the equity stake owned by Ivanhoe Mines.

This is shown in figure 1 below.

<< Graph goes here >>


Figure 1: The Mongolian Government’s 34 per cent stake in Oyu Tolgoi is secure at all times


4. So why are various politicians debating common and preferred shares? What is this all about?

The loans that Ivanhoe have been making to Oyu Tolgoi are called preferred shares. This seems to have caused confusion. In Oyu Tolgoi a preferred share and a common share have the following characteristics:

Preferred Shares



A defined rate of interest


no interest payable

Entitlement to dividends


yes, based on profits and available cash

Entitlement to share of assets and liabilities of Oyu Tolgoi



Rights to representation on Oyu Tolgoi Board



Some politicians have mistakenly mixed the two, believing that preferred shares have the same rights as common shares. Preferred shares are effectively loans, which need to be repaid to the lenders, and attract interest at a predetermined rate.

Some critics have added the value of the loans (or preferred shares) to the value of the total common shares and then compared it to the value of the GOM’s common shares. This is not the correct way of calculating the equity. The GOM’s true equity holding remains at 34 per cent and it will share in 34 per cent of future cash flows when shareholder debts have been paid.

Because the Mongolian Government’s 34 per cent stake is based on common shares, it can never be diluted, even when preferred shares in Oyu Tolgoi LLC are issued

To remove this confusion Oyu Tolgoi is looking at redeeming the preferred shares and replacing them with lending certificates.


5. So why the misunderstanding and why are Oyu Tolgoi’s shareholders being criticised?

We believe that the misunderstanding has arisen because those criticising the project either do not understand the facts or are deliberately distorting the truth.

At all times the Mongolian Government owns 34 per cent of the Oyu Tolgoi project and this cannot be diluted. There are very clear differences between the two types of shares, which are covered by Mongolian Company Law. Links to two Mongolian legal/corporate governance sites that explain the Mongolian Company Law are listed below:

1. The Company Law explanation from website: Legal info

2. A link explaining the Company Law from Corporate Governance Development Centre

3. This link brings you the section of owner’s equity and shares.


6. I thought Ivanhoe was issuing more preferred shares and therefore the GOM’s stake in Oyu Tolgoi was being diluted?

It is correct to say that Ivanhoe has issued about $US500 million more preferred shares this year because the project needs more capital injected. Because they are preferred shares they record the fact that a financial transaction has taken place, but they do not have any impact on the ownership status of the company, which is still owned 34 per cent by the GOM and 66 per cent by Ivanhoe.

As stated above, the preferred shares will be redeemed and issued as lending certificates.


About Oyu Tolgoi LLC (

Oyu Tolgoi LLC, Mongolia's largest copper and gold mining company, is a strategic partnership between the Government of Mongolia, Turquoise Hill Resources and Rio Tinto. Located in the South Gobi, Oyu Tolgoi commenced shipment of product to customers in July 2013. Oyu Tolgoi is managed by Rio Tinto, which is investing global expertise and cutting-edge technology to help develop Mongolia’s mining industry and ensure Oyu Tolgoi is one of the world’s most advanced mines. For Oyu Tolgoi, nothing matters more than safety. The business operates under the principle that if a job cannot be done safely, it will not be done at all.

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