Rio Tinto Mongolian hardball ends up looking soft www.reuters.com
LONDON, Dec 13 (Reuters Breakingviews) - Jakob Stausholm’s hardball tactics have taken a softer turn. Rio Tinto’s (RIO.AX), (RIO.L) chief executive has offered to write off $2.3 billion of debt owed by the Mongolian state in exchange for making progress on the country’s $10 billion Oyu Tolgoi copper mine. The concession should let the $105 billion Anglo-Australian group keep hold of a bigger prize.
The reward is potentially very large. Once its key second phase starts production, probably in 2023, Oyu Tolgoi will be on track to become the world’s fourth-biggest copper mine at a time when the red metal’s price has soared. Yet the project is around two years late. Its rickety governance is partly to blame.
Rio is the majority shareholder in Turquoise Hill Resources (TRQ.TO), which holds 66% of Oyu Tolgoi, with the Government of Mongolia holding the remaining 34%. The problem is that the cash-strapped nation borrowed the cost of its initial stake from Turquoise Hill’s forerunner and agreed that any dividends from the project would first repay the loan. With interest accruing annually at Libor plus 6.5% the balance has reached $2.3 billion. Mongolia correctly feared it could be decades before it pocketed any dividends from the project.
Stausholm initially offered to cut the interest rate. Yet ultimately Mongolian Prime Minister Oyun-Erdene Luvsannamsrai had a stronger hand. In extremis the country could have thrown Rio off the project, putting Turquoise Hill’s $7 billion investment at risk. Hence the write-off.
The decision means Rio gives up potentially billions of dollars of future interest that Mongolia would have owed. However, it had no prospect of collecting the debt without the project going ahead. It’s also not a bad moment for Stausholm to take a hit. Rio Tinto has a $50 billion balance sheet, minimal net debt, and made a return on capital employed of 50% in the first half of 2021.
Meanwhile, Oyu Tolgoi ought to generate lots of cash. On average it could produce 350,000 tonnes of copper for 30 years, which at a 70% EBITDA margin and the current market price of $9,000 a tonne implies over $2 billion in annual EBITDA. A softball approach looks more profitable for everyone involved.
- Anglo-Australian mining giant Rio Tinto has agreed to write off Mongolia’s outstanding $2.3 billion debt for its share in the Oyu Tolgoi copper-gold project, Prime Minister Oyun-Erdene Luvsannamsrai said on Dec. 13.
- Oyun-Erdene said his office had received a letter from Rio Tinto agreeing to write off the debt, conduct an independent audit into the financing of the project’s underground expansion and improve governance.
- “We have proposed that the benefits of Oyu Tolgoi be in the interests of the Mongolian people,” Oyun-Erdene told a briefing.
- A Rio Tinto spokesman said the offer made to Mongolia “aims to reset the relationship and allow all parties to move forward together”, without providing details.
- Rio shares were up 1.6% at 48.28 pounds at 0820 GMT on Dec. 13.
Published Date:2021-12-15