Rio Tinto bids Mongolia on troubled copper project
Rio Tinto is ready to make concessions to the Mongolian government as it seeks to complete the development of a huge copper mine in the Gobi Desert that ranks as its most significant project.
To accelerate returns from the $6.75 billion underground expansion of the Oyu Tolgoi mine, the British-Australian company is set to cut interest rates on loans to Ulaanbaatar to fund its share of the costs of construction.
For its part, Rio wants a number of regulatory and budget issues resolved and a long-term electricity deal put in place so it can start the complex caving process – known as undercutting – and achieve its revised production target of October 2022.
The proposals are detailed in a letter sent last week to Mongolian Prime Minister L Oyun-Erdene by Bold Baatar, head of Rio’s copper division, and Steve Thibeault, head of the company’s Canadian subsidiary, Turquoise Hill Resources.
The approach comes after relations between the company and the government hit a low point earlier this month when an independent review rejected Rio’s explanation for the delays that left the project behind schedule and an estimated budget overrun. at $1.45 billion. The first production from the underground mine was initially planned for the end of 2020.
The 157-page report found that project management issues were the main reasons for the delay and not Rio’s claimed poor ground conditions. The report found that only $12 million to $90 million of the cost overrun could be attributed to geotechnical issues.
Financial regulators in the UK and US are also reviewing Rio’s disclosures about the delays.
Oyu Tolgoi is Mongolia’s largest source of foreign direct investment, creating thousands of well-paying jobs.
Once the underground expansion is complete, it will be one of the largest copper mines in the world, capable of producing nearly 500,000 tonnes of metal per year.
However, the program has been beset by issues and disagreements with Ulaanbaatar over the taxation and funding arrangements that underpin the project.
Rio financed Oyu Tolgoi LLC, the joint venture developing the project, through shareholder loans. Only when the debt and the interest on these loans have been paid off can the government begin to receive dividends.
Ulaanbaatar owns 34% of Oyu Tolgoi LLC, with the balance controlled by Turquoise Hill, in which Rio has a 50.1% majority stake.
Some officials believe they will never see a payout from the mine unless the interest rate on the loans – Libor plus 6.5% – is reduced. At the end of June, outstanding shareholder loans amounted to $7.9 billion, including $1.9 billion in accrued interest.
In their letter, Baatar and Thibeault propose to work with the government to generate $350 million in additional revenue for Mongolia over the next three years; this is in addition to existing taxes and royalties generated by an existing open pit mine at Oyu Tolgoi.
Rio says the extra money can be used to support important social and economic projects that will help Mongolia recover from the coronavirus pandemic.
In addition to reducing the interest rate on government loans, Baatar and Thibeault also say Rio is ready to discuss a “fundamental restructuring” of Oyu Tolgoi’s ownership structure.
In a statement, Rio said it looked forward to further “productive discussions” with the Mongolian government and Turquoise Hill to “identify a potential pathway to achieve the conditions necessary to initiate” the undercut.
The Mongolian government declined to comment, but people familiar with the matter said it was focused on finding solutions.
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