Rio Tinto strikes deals to end copper stalemate in Mongolia
ADELAIDE, Australia—Rio Tinto RIO -0.96%
PLC has renegotiated agreements with the Mongolian government to advance a delayed and costly expansion of the Oyu Tolgoi copper mine, a sign of the impact of resource nationalism on the mining sector.
Mongolia, Rio Tinto and Turquoise Hill Resources ltd.
the Toronto-listed, Rio Tinto-controlled company that owns most of Oyu Tolgoi’s operation, has been battling for years over how to spread the cost of an underground expansion that is several years behind schedule and over a billion dollars over budget.
On Tuesday, Rio Tinto and its partners said they had reached agreements that would allow the project to move forward. One provision is for Turquoise Hill to waive $2.4 billion in debt owed by Mongolia’s state-owned company, Erdenes Oyu Tolgoi.
“The size and complexity [of the project] requires an aligned track, and we haven’t had that in years, I have to admit,” Rio Tinto chief executive Jakob Stausholm said in an interview. “So that’s a big, big step forward.”
Rio Tinto and Mongolia have been mining copper from an open pit mine at Oyu Tolgoi for nearly a decade. But much of the deposit lies deep below the Earth’s surface. Difficulties in reaching that ore and rising project costs caused a rift between mining companies and Mongolian officials that led to a months-long stalemate over approvals for the next stage of the project.
Rio Tinto had attributed the problems largely to more difficult ground and geotechnical conditions than it had anticipated, although an expert report commissioned by Turquoise Hill and Mongolia later blamed mismanagement. .
Rio Tinto said it fundamentally disagrees with parts of this report.
To resolve the dispute, analysts say, Rio Tinto likely gave up some of the value of the project in exchange for confidence that construction will not be further delayed.
By 2030, Oyu Tolgoi is expected to be the fourth largest copper mine in the world. Analysts expect it to eventually account for around a third of Rio Tinto’s annual copper output. While demand is expected to increase due to the use of copper in products vital to a low-carbon economy, such as electric vehicles, Rio Tinto wants to increase production, Stausholm said.
Analysts and investors have previously questioned the logic of Mongolia’s loan waiver. RBC Capital Markets said last month that the revised agreements could set an unnecessary precedent for the mining industry.
In many parts of the world, high commodity prices have encouraged countries to seek greater profits from their minerals. In Chile, lawmakers want to increase royalties on copper sales. In Indonesia, the authorities want to ban the export of certain raw materials and impose a tax on certain nickel shipments.
Mongolia’s economy is emerging from its deepest recession in a decade, during which public debt has risen sharply.
“The start of Oyu Tolgoi underground mining operations shows the world that Mongolia can work with investors in a sustainable way,” said Luvsannamsrain Oyun-Erdene, Prime Minister of Mongolia.
Rio Tinto has also faced trading challenges in other parts of the world. Serbia recently revoked its licenses for the Jadar lithium project following community protests.
Mr Stausholm defended the Oyu Tolgoi compromise, saying he did not expect debt cancellation to encourage other governments to seek sweet deals.
“I don’t necessarily see why it should be relevant to other parties,” he said on Tuesday. “You make a deal and stick to it, but [in Mongolia] we have had disputes that have been open for a long time and these disputes had to be resolved.
A spokesperson for Erdenes Oyu Tolgoi could not immediately be reached for comment.
Rio Tinto has estimated the total bill for the Oyu Tolgoi underground project at $6.93 billion, including $175 million until last year in Covid-19-related costs.
Rio Tinto and its partners originally budgeted $5.3 billion for the Oyu Tolgoi underground mine in 2016, with copper production beginning in 2020. The miner now expects that to happen in the first semester 2023.
“We now have more certainty and confidence to complete construction of this unique mine in a generation,” said Steve Thibeault, Interim General Manager of Turquoise Hill.
About $1.8 billion remains to be spent on underground development, though those forecasts will be reviewed in the coming months to determine if 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 proceed with equity or rights issues of up to $1.5 billion.
Write to Rhiannon Hoyle at [email protected]
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