Mongolia Seeks to Ease Dispute Over Mine

DALIAN, China—Mongolia is moving to smooth over a dispute with mining giant Rio Tinto RIO.LN -1.84% PLC that has threatened the operation of the world's third-largest copper-gold mine, part of an array of measures the resource-rich country is deploying to try to restore the confidence of foreign investors.

The standoff at the $6.2 billion Oyu Tolgoi mine is emblematic of the fallout of Mongolia's assertion last year of national interests in controlling its resources, which led to a flight of foreign investment and shrouded the Mongolian economy in uncertainty. As a boom in minerals fades, it has sought to mitigate the effects of nationalist policies.

The Mongolian government, which owns 34% of Oyu Tolgoi via its state-owned vehicle Erdenes Oyu Tolgoi LLC, will now retreat from disputes between Rio Tinto—which owns the rest of the asset through a subsidiary—and the Mongolian firm, said Chimed Saikhanbileg, a government minister and chief of the Cabinet Secretariat.

Mongolia is committed to "a favorable business environment in the mining sector," he said on the sidelines of this week's World Economic Forum in the coastal Chinese city of Dalian.

The mining project has been mired in years of spats over matters including how to maximize returns and the ratio of foreigners in its workforce. Earlier this year, Ulaanbaatar refused to support Rio Tinto's fundraising efforts to develop the project.

The dispute with Ulaanbaatar deepened in August, when the Anglo-Australian miner said it would lay off as many as 1,700 employees and contractors from Oyu Tolgoi, barely a month after the mine began trucking Mongolian copper to customers in China.

Mr. Saikhanbileg said his government would let the two sides resolve their differences. To that end, the Oyu Tolgoi board would fly to London next week for a meeting, he said. Rio Tinto didn't respond immediately to a call for comment Friday.

"It's high time to sit down and relax and solve our problems at a board level," Mr. Saikhanbileg said.

Ulaanbaatar's eagerness to appease foreign investors underscores how the policies and the global commodities downturn has hurt resource-rich Mongolia. Foreign direct investment in the country has fallen 43% in the first half of the year, while its currency, the tugrik, has fallen 23% so far this year against the dollar despite $900 million worth of government intervention to defend it, according to a Resource Investment Capital report this week.

Mr. Saikhanbileg blamed the plunge in foreign investment on policies including a law since last May restricting foreign investment in "strategic" sectors including mining, and earlier legislation targeting miners operating near rivers and forests.

To ease investment procedures, the government will set up an agency called Invest Mongolia with a mandate to handle business-registration approvals. Modeled on a Hong Kong counterpart, it would commit to making a decision within 14 days of an application filed by a private-sector company. The Ministry for Economic Development would handle foreign enterprises with a majority government ownership that seek stakes of more than 25% in Mongolian assets. In these cases, a decision would be made within 45 days or it would be approved automatically, the minister said.

The government would guarantee that the tax rate on investments of more than $10 million remains unchanged for five to 10 years, depending on the size.

Achieving these changes will require political consensus in Mongolia's democratically elected and famously fractious parliament. Business-friendly groups have made promises of reform at international forums in the past only to find implementation of such proposals difficult back in Mongolia. Many ordinary Mongolians feel they have missed out on the riches generated by a mining boom that began to slow sharply in 2012.

Mongolia's parliament is meeting in an emergency session this month to consider the new laws, and Mr. Saikhanbileg said it could pass them by Oct. 1.

Other widely expected changes include the repeal of a law that prohibits mining within 200 meters of water bodies or forests. Mr. Saikhanbileg acknowledged that the decision to suspend hundreds of mining licenses under this law had come "like a bombshell." The local governments' discretion to interpret 200 meters is going to be disallowed, which will permit most companies to resume operations, he said.

Mongolia also plans to "give some kind of freedom in exploring for gold," abolishing a 5% tax on gold sales and halving 5% royalty payments under certain conditions. The aim was to halt smuggling and boost gold production.

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