OYU TOLGOI: 34 PERCENT EQUITY OR INCREASED ROYALTY?

Prime Minister G. Zandanshatar has announced that, as part of efforts to secure greater and more tangible benefits for Mongolia under the Oyu Tolgoi Investment Agreement, the Government is reconsidering policy options to: (i) replace Mongolia’s 34 percent equity stake with an increased mineral royalty (AMNAT), and/or (ii) raise the AMNAT rate to expand fiscal revenues. He further indicated his intention to engage Rio Tinto on a broader package of issues designed to align the Agreement more closely with Mongolia’s national interests. These include enhanced transparency in costs and financing, stronger audit mechanisms, and greater Mongolian participation in decision-making—initiatives that have brought the debate back to the forefront.

The central rationale behind the proposal to “forego 34 percent equity and increase AMNAT instead” is to ensure that Oyu Tolgoi’s returns flow more directly and predictably into the state budget, thereby creating a stable revenue stream. While a 34 percent equity position could, in theory, generate long-term returns as profitability rises, the timeline for Mongolia to realize meaningful net benefits has been delayed by project financing terms, interest costs, capital expenditure structures, and the timing of dividend distributions. In this context, a potential legal pathway has emerged under which the state’s equity share in a strategic deposit could be substituted with a royalty-based mechanism.

At the same time, relinquishing the 34 percent stake is not solely a financial calculation; it also raises issues of governance and oversight. Equity ownership provides more than dividends—it ensures representation on the board, participation in key decisions, access to information, and the establishment of monitoring and control mechanisms. Therefore, if Mongolia were to replace equity with a higher AMNAT, it would need to secure, through other contractual provisions, an equivalent “bundle of rights” relating to governance, transparency, and audit authority. The Prime Minister’s proposed package—cost and reporting transparency, independent external audits, and strengthened Mongolian participation in decision-making—logically aligns with the need to compensate for any reduction in ownership-based control.

Another critical consideration is investor confidence and the practical feasibility of negotiations. In the past, Mongolia has floated the idea of reducing equity while increasing royalties or taxes, and Rio Tinto has stated that it was not interested in such an arrangement. Consequently, even if the proposal resurfaces in 2026, its outcome will depend on Mongolia’s ability to:

· present robust calculations consistent with international practice;

· structure the changes as a balanced reallocation of benefits without undermining contractual stability; and

· pair the approach with institutional safeguards that mitigate political risk, including transparency measures, independent audits, and parliamentary oversight.

Ultimately, replacing the 34 percent equity stake with an AMNAT-based mechanism is not a one-off solution but a strategic choice about Mongolia’s long-term value-capture model. If the priority is near-term, predictable cash flows to support the budget, foreign exchange inflows, and investment in energy and infrastructure, a redesigned AMNAT framework may offer advantages. If, however, the priority is to preserve governance influence and decision-making rights in a strategic deposit, an equity-based model may remain preferable. For this reason, the Prime Minister’s negotiation package should be developed not as a simple equity–tax swap, but as an integrated solution capable of delivering three objectives simultaneously: improved benefits for Mongolia, stronger oversight, and greater transparency.

L.Zolbaatar