Who – the protagonist
The Oyu Tolgoi Copper Mine in Mongolia.
What?
Oyu Tolgoi was one of the largest known copper and gold deposits in the world, based in the Mongolian section of the Gobi Desert, 50 miles north of the Chinese border.
The mine has held the potential to be the fourth largest copper mine in the world and contributed a third of Mongolia’s GDP.
Jointly owned by the government of Mongolia (GOM) and the Canadian company, Turquoise Hill (TRQ), GOM held a 34% stake and TRQ 66%.
Phase 1 (an open pit mine) of Oyu Tolgoi was completed in 2013 while phase 2 (an underground mine) remained incomplete even though there was an initial forecasted completion date of 2016.
Why?
There have been numerous disruptions and hold ups despite the strong incentives to finish the project, namely copper demand and prices reaching an all-time high in May 2021.
Since the signing of the 2009 Oyu Tolgoi Investment Agreement (OTIA) between the GOM, TRQ and Rio Tinto, TRQ’s parent company, a number of issues have occurred.
These include poor project management of the mining operations by Rio Tinto, and technical challenges which have led to a host of disagreements between the government and investors linked to the GOM’s desire to realise their expected return on the project.
In 2021, the GOM, TRQ and Rio Tinto agreed to renegotiate the Underground Development Plan (UDP) after allegations from the GOM that the agreement lacked legitimacy having not been approved by the Mongolian parliament in 2015.
When?
It was March 2021 when all parties agreed to renegotiate terms on the contract for the underground development of the mine.
Where?
Since 1990, Mongolia’s neighbour China has been their largest trade partner.
With its mines located so close to the Chinese border, Mongolia has exported primarily coal and copper ore to their neighbours, accounting for 55% of total exports to China in 2000.
Mongolia’s economic dependence on China has grown, increasing at an annualised rate of 19.4% between 1995 and 2019.
Key quote
“Initially, the government gratefully received additional income from the venture, but as it started to depend on the income over time, the government felt threatened by the power the foreign investor gained from this.”
Raymond Vernon, the late Harvard economist.
What next?
Was it possible to rewrite a new investment contract to solve the current disagreements between TRQ/Rio Tinto and the GOM?
Why have the agreements negotiated to date failed to overcome the problem of the obsolescing bargain, and what lessons can be learned for future contracts?
What actions must be taken by both sides to ensure renegotiations are not necessary in the future?
Identifying a topical case subject
Christine said: “It is now understood that the extraction of important minerals, such as copper, is critical to the transition to a renewable energy future, and we were excited to explore this issue. The case focuses on one of the largest copper projects in the world. Many of these critical minerals are located in emerging or developing countries with weak institutions, and we also wished to explore the specific challenges faced by mining companies operating in these circumstances. One particular challenge has been characterised as the risk of an obsolescing bargain involving a shift in the power dynamics of the relationship between governments and multinational corporations in the extractives industry over time in the government's favour, resulting in hold-up problems.
“Much of the academic thinking around the obsolescing bargain suggests that companies can address the challenge of the obsolescing bargain through a two-tier bargaining approach - taking advantage of investment treaties negotiated between the home and host countries and negotiating investment contracts directly with the host country. We observed that in Mongolia however, despite the two-tier bargaining approach, challenges remained between Rio Tinto, TRQ and the Government in moving the Oyu Tolgoi copper mining project forward. We were keen to get a better understanding of these additional challenges and the role played by entry mode (joint venture in this case) as well as the specific governance arrangements of the joint venture relationship.”
Keeping up with the story
Christine continued: “Additionally, we knew this was a fast-moving situation and felt that this could provide a great opportunity for students to interact with a live case, where events unfolded quite rapidly.
“This particular case has had many fast-moving developments during the time of writing and since the publication. The challenge has been keeping up with the changes both practically on the ground and between the key players, and the theoretical problem of positioning the case to provide a more nuanced understanding of the obsolescing bargain, and hold up problem centred around ownership and governance issues.”
Experience of teaching the case
She added: “We have been teaching this case at the London School of Economics (LSE) for a couple of years now - both while it was in development and since its publication. We have taught it at the executive masters level as well as to undergraduates and full-time postgraduates. Overall, it has been well received and students have been engaged in the discussions and issues the case is trying to address.”
Student interest
Christine commented: “Students have really enjoyed this case. They love how current it is, as well as how relevant the topic is - with respect to the current and growing importance of critical minerals and their use in both every day and evolving renewable technologies. They are fascinated by the challenges firms face when operating in emerging markets generally, and are also very conscious of the ethical and moral dilemmas extractive industry firms must address, with respect to ensuring the impact of the investment is not environmentally or socially harmful to the host country, but also that the host country is able to reap the benefits of investments in their natural resources.”
Case writing tips
Christine concluded: “Case writing is a very iterative process. We have found it important to test run and refine the case prior to submission for publication. Students enjoy being part of the case development process and are willing to engage in discussions of an evolving case. We would highly recommend engaging students in the case development process.”
The case
Who – the protagonist
The Oyu Tolgoi Copper Mine in Mongolia.
What?
Oyu Tolgoi was one of the largest known copper and gold deposits in the world, based in the Mongolian section of the Gobi Desert, 50 miles north of the Chinese border.
The mine has held the potential to be the fourth largest copper mine in the world and contributed a third of Mongolia’s GDP.
Jointly owned by the government of Mongolia (GOM) and the Canadian company, Turquoise Hill (TRQ), GOM held a 34% stake and TRQ 66%.
Phase 1 (an open pit mine) of Oyu Tolgoi was completed in 2013 while phase 2 (an underground mine) remained incomplete even though there was an initial forecasted completion date of 2016.
Why?
There have been numerous disruptions and hold ups despite the strong incentives to finish the project, namely copper demand and prices reaching an all-time high in May 2021.
Since the signing of the 2009 Oyu Tolgoi Investment Agreement (OTIA) between the GOM, TRQ and Rio Tinto, TRQ’s parent company, a number of issues have occurred.
These include poor project management of the mining operations by Rio Tinto, and technical challenges which have led to a host of disagreements between the government and investors linked to the GOM’s desire to realise their expected return on the project.
In 2021, the GOM, TRQ and Rio Tinto agreed to renegotiate the Underground Development Plan (UDP) after allegations from the GOM that the agreement lacked legitimacy having not been approved by the Mongolian parliament in 2015.
When?
It was March 2021 when all parties agreed to renegotiate terms on the contract for the underground development of the mine.
Where?
Since 1990, Mongolia’s neighbour China has been their largest trade partner.
With its mines located so close to the Chinese border, Mongolia has exported primarily coal and copper ore to their neighbours, accounting for 55% of total exports to China in 2000.
Mongolia’s economic dependence on China has grown, increasing at an annualised rate of 19.4% between 1995 and 2019.
Key quote
“Initially, the government gratefully received additional income from the venture, but as it started to depend on the income over time, the government felt threatened by the power the foreign investor gained from this.”
Raymond Vernon, the late Harvard economist.
What next?
Was it possible to rewrite a new investment contract to solve the current disagreements between TRQ/Rio Tinto and the GOM?
Why have the agreements negotiated to date failed to overcome the problem of the obsolescing bargain, and what lessons can be learned for future contracts?
What actions must be taken by both sides to ensure renegotiations are not necessary in the future?
Author perspective
Identifying a topical case subject
Christine said: “It is now understood that the extraction of important minerals, such as copper, is critical to the transition to a renewable energy future, and we were excited to explore this issue. The case focuses on one of the largest copper projects in the world. Many of these critical minerals are located in emerging or developing countries with weak institutions, and we also wished to explore the specific challenges faced by mining companies operating in these circumstances. One particular challenge has been characterised as the risk of an obsolescing bargain involving a shift in the power dynamics of the relationship between governments and multinational corporations in the extractives industry over time in the government's favour, resulting in hold-up problems.
“Much of the academic thinking around the obsolescing bargain suggests that companies can address the challenge of the obsolescing bargain through a two-tier bargaining approach - taking advantage of investment treaties negotiated between the home and host countries and negotiating investment contracts directly with the host country. We observed that in Mongolia however, despite the two-tier bargaining approach, challenges remained between Rio Tinto, TRQ and the Government in moving the Oyu Tolgoi copper mining project forward. We were keen to get a better understanding of these additional challenges and the role played by entry mode (joint venture in this case) as well as the specific governance arrangements of the joint venture relationship.”
Keeping up with the story
Christine continued: “Additionally, we knew this was a fast-moving situation and felt that this could provide a great opportunity for students to interact with a live case, where events unfolded quite rapidly.
“This particular case has had many fast-moving developments during the time of writing and since the publication. The challenge has been keeping up with the changes both practically on the ground and between the key players, and the theoretical problem of positioning the case to provide a more nuanced understanding of the obsolescing bargain, and hold up problem centred around ownership and governance issues.”
Experience of teaching the case
She added: “We have been teaching this case at the London School of Economics (LSE) for a couple of years now - both while it was in development and since its publication. We have taught it at the executive masters level as well as to undergraduates and full-time postgraduates. Overall, it has been well received and students have been engaged in the discussions and issues the case is trying to address.”
Student interest
Christine commented: “Students have really enjoyed this case. They love how current it is, as well as how relevant the topic is - with respect to the current and growing importance of critical minerals and their use in both every day and evolving renewable technologies. They are fascinated by the challenges firms face when operating in emerging markets generally, and are also very conscious of the ethical and moral dilemmas extractive industry firms must address, with respect to ensuring the impact of the investment is not environmentally or socially harmful to the host country, but also that the host country is able to reap the benefits of investments in their natural resources.”
Case writing tips
Christine concluded: “Case writing is a very iterative process. We have found it important to test run and refine the case prior to submission for publication. Students enjoy being part of the case development process and are willing to engage in discussions of an evolving case. We would highly recommend engaging students in the case development process.”
