Mongolia threatens to halt Rio Tinto copper project www.ft.com
Rio Tinto is facing an escalation of its problems in Mongolia, where the government has threatened to halt development of its huge underground copper deposit.
The $6.75bn underground expansion of the Oyu Tolgoi mine in the Gobi Desert is the company’s most important project. However, it has been dogged by problems and is now running late and over budget.
The cost overruns have alarmed Ulaanbaatar, which has said it will have no option but to terminate the investment agreements that underpin the project unless they are improved. Once complete, it will be the world’s fourth-largest copper mine.
The government laid out its concerns in a letter after a virtual meeting last month with Rio’s new chief executive Jakob Stausholm and the head of its copper and diamonds business Arnaud Soirat.
Chief among them is Mongolia’s belief it will never receive a dividend from Oyu Tolgoi because of the amount of debt taken on to develop the existing open pit mine and pay for the underground expansion.
Oyu Tolgoi is 66 per cent owned by Toronto-listed Turquoise Hill Resources, in which Rio has a 50.8 per cent controlling stake, and 34 per cent by the government.
Ulaanbaatar is funding its share of the development costs through loans from Rio, which operates the mine and is managing the underground project. It will not receive any dividends from the project until these debts are paid back.
“The estimates whereby the Government will never receive dividend payments [from the Oyu Tolgoi project] and will incur debt of $22bn create great difficulties for our future co-operation,” the letter said.
“In addition, the estimate that Oyu Tolgoi would pay corporate income taxes or profit taxes only in four years until 2051 raises doubts as to the economic benefits of the project.”
In light of the economics and the fact the mine sits in a region where water is scarce, the government goes on to say that “it is becoming necessary for us to review and evaluate whether or not this project should go ahead”.
The development of the underground mine is underpinned by an investment agreement negotiated by Rio’s former chief executive Jean-Sébastien Jacques and the then Mongolian prime minister Saikhanbileg Chimed.
A parliamentary working group ordered the government to improve the terms of the so called “Dubai” agreement in December 2019.
For its part, Rio has told Ulaanbaatar that under the guidelines of the parliamentary resolution it is prepared to “explore” a reduction of its project management fees and loan interest rates. It has also offered to investigate the idea of a national development fund, according to people with knowledge of the situation.
However, the government wants Rio to address other issues including tax and water.
“Unless Rio Tinto assesses the situation realistically and accepts the proposal of the working group, we have no option but to formally submit a notice to unilaterally terminate” the Dubai agreement, it said in the letter.
Rio said it had invested more than $11bn in Mongolia since 2010 and was “open to improving” the terms of the agreement to “increase the benefits of Oyu Tolgoi to all shareholders”.
TRQ, which saw its share price crash 24 per cent on Monday, said it was “committed to engaging immediately” with Ulaanbaatar.
For the Mongolian government the stakes are high. Oyu Tolgoi is a crucial part of the country’s economy. Not only is it the country’s biggest source of foreign direct investment, it also provides thousands of well-paid jobs.
“The Mongolian government should not be bullied into fearing that foreign direct investment will dry up if they reset this agreement,” said Henry Steel, portfolio manager at Odey Asset Management, who has bet against TRQ shares. “The agreement assumed that there would be no cost or time overruns. Now there have been, the agreement needs to be reset to incorporate this.”
Published Date:2021-01-12