The cost of expanding Rio Tinto's Mongolian copper project could decline by almost $US1 billion ($1.5 billion) under a surprise Mongolian government plan that could increase the host nation's long-term influence over Rio and the project.

The Mongolian government has told the Rio subsidiaries building the $US6.8 billion Oyu Tolgoi copper expansion that it plans to build a state-owned coal-fired power station that would provide a long-awaited domestic power source for the mine.

The latest curveball from the Mongolian government comes barely a month before parliamentary elections in the developing nation, and a week before Mongolian courts hear charges against the government officials who signed the 2015 agreement that underpins the Oyu Tolgoi expansion.

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The existing mine at Oyu Tolgoi is powered by coal-fired electricity that is imported from neighbouring China, but Mongolia has demanded that Rio find a domestic power source before June 30, 2023.

Rio flagged in February that a $US924 million coal-fired power station was the most likely domestic solution, although it indicated it would not be finished before June 2024.

The Mongolian government disagreed with Rio's $US924 million power station proposal, and has since told Rio and its subsidiaries that it plans to build a state-owned power station at the Tavan Tolgoi coalfields.

The surprise move has both short-term and long-term ramifications for Rio and the Rio subsidiary that owns 66 per cent of Oyu Tolgoi, Turquoise Hill Resources.

Leverage over the project
A government-funded power station would reduce Rio and Turquoise Hill's near-term spend on the project; a prospect that would appeal to minority investors in Turquoise Hill given the company needs to raise "at least $US4 billion" in further funds to cover cost and schedule blowouts on the Oyu Tolgoi expansion.

But a government-controlled power station would give the government a long-term source of leverage over the mine project, which could be important given the fractious nature of Mongolia's relationship with Rio.

The government is also understood to believe it can build such a power station cheaper than the $US924 million price tag suggested by Rio and its subsidiaries.

Turquoise Hill said it was broadly supportive of the government-owned proposal, subject to further agreement over the commercial terms for the supply of power and construction timelines.

Rio and its subsidiaries would likely need a guarantee they can continue importing power from China until the Mongolian government power station was built, suggesting the June 2023 deadline for Rio to find a domestic power source could be extended.

Signatories in court
The surprise proposal for a government-owned power station comes a week before scheduled court appearances by the two men who in 2015 were the Mongolian government signatories to an agreement that allowed the Oyu Tolgoi expansion to go ahead.

Bayanjargal Byambasaikhan was chief executive of Mongolia's sovereign wealth management company Erdenes Mongol in 2015 when he joined Rio Tinto's now chief executive Jean-Sebastien Jacques in signing the expansion agreement in a Dubai hotel.

Known in Mongolia as Byamba, he has since been accused of abusing his authority in signing the deal, which effectively kick-started the project without requiring approval from the Mongolian parliament.

Byamba is now chairman of the Business Council of Mongolia, a lobby group that counts Oyu Tolgoi as a member, alongside Australian companies such as Orica, Worley, Aspire Mining and the Australian embassy to Mongolia.

Similar charges, which relate to matters of process rather than any suggestion of corruption, have been filed against another signatory to the Dubai agreement and former Oyu Tolgoi director Ganbold Davaadorj.

The charges against both men are similar in nature to those filed against former Mongolian prime minister Chimediin Saikhanbileg,

Rio and Turquoise Hill warned in July 2019 that expansion of Oyu Tolgoi was running between 16 and 30 months later than the most recent guidance, and the cost of construction was likely to be between $US1.2 and $US1.9 billion higher than previous guidance.

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Turquoise Hill refined that guidance last week, saying the delays would be between 21 and 29 months late, with the company's best guess at this stage being a delay of 25 months.

The cost blowout range was tightened to between $US1.3 billion and $US1.8 billion, with $US1.5 billion being the company's best guess at this stage.

If Turquoise Hill is correct on those estimates, the construction cost would amount to $US6.8 billion excluding the cost of the power station, and first sustainable production would occur about the middle of 2023.

In 2012, Rio was expecting to have the Oyu Tolgoi underground expansion complete and in production by 2015.

Peter Ker covers resource companies, based in Melbourne. Connect with Peter on Twitter. Email Peter at pker@afr.com

Published Date:2020-05-18