Rio Tinto and the Mongolian government could be headed for international arbitration, after the Rio subsidiary that owns the Oyu Tolgoi copper mine filed a formal notice of dispute against the developing nation.

The dispute relates to Mongolia's recent claim for $US155 million in taxes that the government believes were not paid between 2013 and 2015, and it comes after months of rising tensions between Rio and the developing nation.

Rio's exposure to the Mongolian mine comes through its 50.8 per cent stake in Canadian company Turquoise Hill Resources (TRQ), which in turn owns 66 per cent of the Mongolian company that owns the mine; Oyu Tolgoi LLC.

The latter company agreed to pay $US4.8 million of the tax claim, but filed the notice of dispute on Thursday over the remainder of the claim.

"On March 15, 2018, Oyu Tolgoi filed a notice of dispute with the Government of Mongolia under the Investment Agreement," said TRQ on Friday morning.

Dispute resolution is covered by chapter 14 of the 2009 Investment Agreement for Oyu Tolgoi, which is the seminal legal and financial contract between Rio, its subsidiaries and the Mongolian government.

"The notice of dispute filing is the first step in the process and includes a 60 working day negotiation period. If the parties are unable to reach a resolution during the 60 working day period, the dispute can be referred to international arbitration," said TRQ.

According to the 2009 investment agreement, the arbitration must take place in the London Court of International Arbitration, be conducted in English language and be in keeping with the arbitration rules of the United Nations Commission on International Trade Law.

"The arbitral award shall be final and binding on the parties," says chapter 14 of the 2009 investment agreement.

TRQ declined to record a provision for the tax claim on Friday, but noted that the sums involved would be material if forced to pay.

In a generic statement of corporate risks filed by TRQ on Friday, it conceded it may struggle to enforce the outcome of any arbitration proceeding if Mongolia chose to ignore the terms of the 2009 investment agreement.

"To the extent that the government of Mongolia does not observe the terms and conditions of the investment agreement and the underground plan, there may be limitations on the company's ability to enforce the terms of the investment agreement and the underground plan against the government of Mongolia, which is a sovereign nation, regardless of the outcome of any arbitration proceeding," said TRQ.

"If the terms of the investment agreement and or the underground plan cannot be enforced effectively, the company could be deprived of substantial rights and benefits arising from its investment in Oyu Tolgoi with little or no recourse against the government of Mongolia for fair and reasonable compensation."

The dispute comes almost four years after TRQ filed a similar notice of dispute against the Mongolian government over the government's claim for $US130 million in unpaid taxes.

Mongolia settled on that occasion for a $US30 million payment.

Rio, TRQ and Oyu Tolgoi have had a rough start to 2018, with copper exports being interrupted by a blockade at the Chinese border.

Mongolia also tore up a power supply agreement in February, which had allowed Oyu Tolgoi to source power from China. Rio must now find a way to source power for the mine from within Mongolia within four years, in a change that could add to the costs of the project.

First production of copper concentrate from Oyu Tolgoi's open pit came in 2013, but most of the mine's value lies in a giant underground expansion that is now under way and is expected to deliver copper from about 2021.

That expansion is expected to cost $US5.3 billion and will make Oyu Tolgoi the world's third biggest copper producer by 2025, when the underground mine reaches peak production rates.

Published Date:2018-03-16