Rio Tinto reaches deals to break Mongolia copper logjam
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4 min read . Updated: 25 Jan 2022, 05:50 PM IST - Delays and cost overruns at Oyu Tolgoi underground mine have angered the Mongolian government
Rio Tinto PLC renegotiated agreements with the Mongolian government to advance a delayed and costly expansion of the Oyu Tolgoi copper mine, a sign of resource nationalism’s impact on the mining sector.
Mongolia, Rio Tinto and Turquoise Hill Resources Ltd., the Toronto-listed, Rio Tinto-controlled company that owns most of the Oyu Tolgoi operation, have been in fighting for years over how to split the cost of an underground expansion that is several years late and more than $1 billion over budget.
On Tuesday, Rio Tinto and its partners said they had reached agreements that would allow the project to progress. One provision has Turquoise Hill waiving $2.4 billion of debt owed by Mongolia’s state-run company, Erdenes Oyu Tolgoi.
“The size and the complexity [of the project] requires an aligned way forward, and we haven’t had that for years, I have to admit," Rio Tinto Chief Executive Jakob Stausholm said in an interview. “So it is a big, big step forward."
Rio Tinto and Mongolia have been mining copper from an open pit at Oyu Tolgoi for almost a decade. But much of the deposit lies deep below the Earth’s surface. Difficulties in reaching that ore and the project’s rising cost caused a rift between the mining companies and Mongolian officials that led to a monthslong deadlock on approvals for the next stage of the project.
Rio Tinto had attributed problems largely to more-challenging ground and geotechnical conditions than it had expected, though an expert report commissioned by Turquoise Hill and Mongolia later blamed mismanagement.
Rio Tinto said it fundamentally disagreed with some parts of that report.
To resolve the dispute, analysts said, Rio Tinto has likely given up some of the project’s value in exchange for confidence that construction won’t be held up again.
By 2030, Oyu Tolgoi is expected to be the fourth-largest copper mine in the world. Analysts expect it eventually to account for roughly a third of Rio Tinto’s annual copper output. With demand forecast to rise because of copper’s use in products vital to a low-carbon economy, such as electric vehicles, Rio Tinto wants to increase production, Mr. Stausholm said.
Analysts and investors have previously questioned the logic of waiving Mongolia’s loan. RBC Capital Markets last month said revised agreements could set an unhelpful precedent for the mining industry.
In many parts of the world, high commodity prices have emboldened countries to seek greater profits from their minerals. In Chile, lawmakers want to increase royalties on copper sales. In Indonesia, officials want to ban the export of some raw commodities and are weighing a tax on some shipments of nickel.
The Mongolian economy is emerging from its deepest recession in a decade, during which public debt has sharply increased.
“The commencement of Oyu Tolgoi underground mining operations demonstrates to the world that Mongolia can work together with investors in a sustainable manner," said Luvsannamsrain Oyun-Erdene, Mongolia’s prime minister.
Rio Tinto has been facing negotiating challenges in other parts of the world as well. Serbia recently revoked its licenses for the Jadar lithium project following community protests.
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Mr. Stausholm defended the Oyu Tolgoi compromise, saying he didn’t expect the debt waiver to encourage other governments to seek sweetened deals.
“I don’t necessarily see why that should be relevant for other parties," he said Tuesday. “You make an agreement and you stick with it, but [in Mongolia] we have had open disputes for a long time and those disputes had to find a solution."
A spokesperson for Erdenes Oyu Tolgoi couldn’t immediately be reached for comment.
Rio Tinto estimated the total bill for the Oyu Tolgoi underground project at $6.925 billion, including $175 million through last year in costs related to Covid-19.
Rio Tinto and its partners originally budgeted $5.3 billion for the underground mine at Oyu Tolgoi in 2016, with copper output starting in 2020. The miner now expects that in the first half of 2023.
“We now have greater certainty and confidence to complete construction of this once-in-a-generation mine," said Steve Thibeault, interim chief executive of Turquoise Hill.
There is still roughly $1.8 billion to spend on the underground development, although those forecasts will be reviewed in coming months to determine whether further revisions are needed, Rio Tinto said.
Under the new agreements, the partners will seek to reschedule debt repayments, and Rio Tinto will provide a project finance facility to the project. Turquoise Hill will also conduct equity or rights offerings of up to $1.5 billion.
This story has been published from a wire agency feed without modifications to the text
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