The Mongolian prime minister who allowed Rio Tinto to kickstart a $US5.3 billion expansion of the Oyu Tolgoi mine says the developing nation should sell its stake in the giant copper project in a bid to accelerate cashflow and soothe political tensions with Rio.

Five years after he struck a deal with Rio chief executive Jean-Sebastien Jacques to restart the expansion, former Mongolian prime minister Chimediin Saikhanbileg said it was time for the "arrogant" miner and the government to resume constructive talks and realise they were "in the same boat".

The relationship between the Mongolian government and Rio - the nation's biggest employer, foreign investor and an important lender - has soured since Khaltmaa Battulga was elected president in July 2017 on a platform of reducing foreign control over Mongolia's natural resources.

The two parties are bound for arbitration over a tax dispute and the Mongolian government has flagged a desire to revise aspects of the seminal legal agreement that underpins Rio's work in Mongolia - the 2009 Oyu Tolgoi Investment Agreement.

The Mongolian government has a 34 per cent stake in Oyu Tolgoi but regularly borrows from Rio to pay for its share of construction costs, and Mr Saikhanbileg said Mongolia would be better served by selling that stake.

''I support the idea that today’s complex ownership structure should be simplified. In my opinion, the ideal structure from our side is that we should sell the current 34 per cent stake to Rio Tinto or another third party and renegotiate the tax arrangement so the government can begin to collect taxes and other benefits from the project,'' he told The Australian Financial Review.

The Mongolian government will not receive its share of dividends from Oyu Tolgoi until its debts to Rio are repaid, meaning it could take a decade or more for Mongolia's 34 per cent ownership stake to generate tangible dividends.

Last year's multibillion-dollar cost and schedule blowouts on the Oyu Tolgoi expansion have only exacerbated the Mongolian frustrations, sparking political tensions over whether the nation was getting its share of the mine's wealth.

''The 34 per cent ownership has become the main cause of all misunderstanding and political confrontation in Mongolia. Moreover, with such a change, it would be easier for Rio Tinto as well to manage Oyu Tolgoi’s daily operations,'' said Mr Saikhanbileg.

"In 2009 and in 2015 when Oyu Tolgoi agreements were signed, a majority of people in Mongolia believed Oyu Tolgoi was a good thing. But populist politicians and resource nationalists have succeeded in seizing the narrative, and now some Mongolians are being told that Rio Tinto is fleecing their country.''

The comments come after the Mongolian government flagged in December it was willing to discuss swapping the 34 per cent stake for a special royalty.

Mr Saikhanbileg has spent much of the past year in North America after the current Mongolian regime charged him with abusing parliamentary process over the 2015 deal he struck with Mr Jacques to restart expansion of Oyu Tolgoi.

While the case against Mr Saikhanbileg has been suspended, similar charges have proceeded against several of his top lieutenants who assisted in striking the deal with Rio.

Former Oyu Tolgoi directors Bayanjargal Byambasaikhan and Ganbold Davaadorj were both given jail sentences in July after Mongolian courts found them guilty of charges relating to the deal.

The charges related to process, rather than personal gain.

Mr Saikhanbileg said those jailings were ''a profound injustice and an assault on rule of law'' which showed Mongolia was headed in the wrong direction.

''The current government believes they can change the Oyu Tolgoi agreements or even kick Rio Tinto out of Mongolia by jailing those politicians and experts who negotiated them in the first place,'' he said.

''It is unfortunate that Rio Tinto has never acted in response to these developments, and has never spoken up to set the record straight.

''Rio Tinto and the government should realise they are in the same boat and should work together.

''Rio should also abandon its arrogant behaviour and treat the government as its business partner, while the government should be more reasonable and treat Oyu Tolgoi as a business, removing the politicisation of the project.''

The ownership structure of Oyu Tolgoi has long been complex; the mine is owned by an eponymous Mongolian company, which is 34 per cent owned by the Mongolian government and 66 per cent owned by Canada's Turquoise Hill Resources.

Rio gets its exposure through its 50.7 per cent stake in Turquoise Hill and is the operator of the mine.

Rio said in 2019 that Oyu Tolgoi had a recoverable value of $US8.3 billion, suggesting Mongolia's 34 per cent stake could be worth close to $US2.8 billion.

Turquoise Hill, which has virtually no assets beyond its 66 per cent stake in Oyu Tolgoi, had a market capitalisation of $US2.33 billion this week, but its valuation is depressed amid expectations it will need to conduct a dilutive equity raising within the next two years.

by: Peter Ker

Published Date:2020-09-04