Will Mongolia benefit from Oyu Tolgoi? – GIS reports
After a bitter dispute over the financial arrangements, Mongolia and Rio Tinto are finally moving forward with the exploitation of the underground mine of Oyu Tolgoi.
In a word
- Mongolia and Rio Tinto have reached an agreement
- The Oyu Tolgoi project seems on track for now
- Political challenges remain
On December 30, 2021, Mongolia’s parliament passed a resolution outlining steps the country should take to improve its deal with mining giant Rio Tinto, which runs the copper and gold mining joint venture Oyu Tolgoi (see box below). below). Then, on January 25, Mongolian Prime Minister Luvsannamsrai Oyun-Erdene and Rio Tinto CEO Jakob Stausholm ushered in the start of underground mining operations. Mongolia and Rio Tinto have now agreed on a way forward for the project, avoiding another protracted standoff.
The point of contention
In July 2019, it was announced that due to “unexpected and challenging geotechnical issues” and “complexities”, the project would require additional funding of $1.2–1.9 billion. The operation of the underground mine was to be delayed by 16 to 30 months.
The total equity investment in the project was expected to reach $6.75 billion, which is $1.45 billion more than the amount disclosed in the 2015 estimates. As a result, the Mongolian government would not receive any dividends on its 34 % of interest carried. Ulaanbaatar would end up with a debt of 22 billion dollars at the end of the project, announced the Mongolian negotiators on the basis of their own calculations. According to the first estimates, made before the initial agreement between the parties in 2009, the Mongolian government planned to start collecting dividends from 2023. This delay also meant that the increase in royalties and taxes to be paid to the Mongolian budget had to be considerably postponed as well.
facts and figures
What is Oyu Tolgoi?
The company holds a license to develop the Oyu Tolgoi copper and gold deposit in southern Mongolia, considered one of the largest in the world. The project currently produces nearly 146,300 tonnes of copper per year from an open pit mine. It should produce 480,000 tonnes of copper per year once the underground mine is operational. Gold is also a major source of income.
It was the development of the underground mine, where most of the valuable mineral deposits are located, that caused a major conflict between the shareholders. © GIS by macpixxel
The new figures caused public outcry in Mongolia, where most hoped the mine would become a major cash cow for the country’s economy. On November 21, 2019, the parliament passed a resolution asking the government to stick to the initial financial conditions and to improve certain provisions.
In March 2021, Turquoise Hill Resources Ltd.’s largest minority shareholder, Pentwater Capital Management, filed a class action lawsuit in New York against Rio Tinto, claiming the delay was due to “deficient engineering, procurement and construction”. . Rio Tinto has also been accused of failing to inform shareholders that the project would face cost overruns and major hurdles, despite knowing it well in advance.
The parliamentary resolution
On December 13, 2021, the CEOs of Rio Tinto and Turquoise Hill sent a proposal to Mongolian Prime Minister Oyun-Erdene, the fruit of two years of negotiations. In the letter, they proposed to cancel the debt accumulated on interest carried by Mongolia, 2.3 billion dollars, and to cancel the 2015 agreement signed between the shareholders of Oyu Tolgoi LLC to solve the problems outstanding. They offered to conduct an independent audit for the underground mine cost expansion and agreed that Turquoise Hill and Rio Tinto would cover all additional costs until production began in 2023. The document also suggested suspending the arbitration of the ongoing tax dispute for six months.
The project now looks set to go ahead unless further issues of mismanagement by Rio Tinto arise.
Parliament accepted the proposal, but with a major caveat. He demanded not only that no additional debt be incurred by Erdenes OT LLC, the state-owned company holding the Mongolian shares, but also that Oyu Tolgoi LLC, in which the government and Turquoise Hill are shareholders, not receive any additional loans. shareholders. and third parties.
The request puzzled some parliamentarians. During the debate, some MPs asked how Oyu Tolgoi LLC should raise the necessary funds to complete the project without a loan. The head of the parliamentary task force, known for his critical opinions on previous agreements with Rio Tinto, explained that Oyu Tolgoi LLC could pay with its own resources, including the prepayment of its mineral production and new share issues .
But in the end, the parliament resolution did not impose a total ban on new financing for Oyu Tolgoi LLC, and the definition of “additional loans” was defined in the final stages of negotiations.
Scenarios
In January 2022, Rio Tinto and the Mongolian government announced that they had reached an agreement. It has been decided that major issues, such as infrastructure financing, will not result in additional loans for Oyu Tolgoi LLC or Erdenes OT LLC. Issues of electricity supply and increased transparency have been resolved. Funding will come from available cash, an extension of debt repayment and Turquoise Hill’s prepayment for copper concentrate. The ruling on the Development and Financing Plan signed in 2015 and the tax arbitration dispute are still being negotiated.
This is a major victory and a potentially historic legacy for young Prime Minister L. Oyun-Erdene. The agreement represents a significant transfer of economic value to Mongolia. With a $2.4 billion waiver, which includes not only ordinary share funding but also accrued interest, Mongolia will receive the 34 percent equity for free, while the other parties had to invest billions. The additional costs, $1.4 billion, will have to be financed without the Mongolian shareholder, Erdenes OT LLC, going into further debt. Even the tax dispute would have been suspended for six months pending negotiations.
The project now looks set to continue, at least until the next feasibility study, scheduled every five years according to the original agreement – unless further issues of mismanagement by Rio Tinto arise. Some questions raised by critics may remain unanswered, such as the validity of multi-billion dollar loans taken by Oyu Tolgoi LLC from Rio Tinto. From the parliamentary proceedings, it appears that the independent audit mentioned in both the letter and the resolution will establish whether the money has been spent on the project or wasted, as some claim. Either way, the deal allows the underground mine to become operational, bringing value to all shareholders. Those revenues could finally vindicate the beleaguered project, long plagued by cost overruns, political controversy and general mistrust, in the eyes of the Mongolian public — if it can be redeemed after years of populist attacks.
Prime Minister L. Oyun-Erdene addressed these challenges, saying the deal is “a final leap of faith” on Mongolia’s part. He also pointed out that the government expects production to start in the first quarter of 2023 as agreed.
Mongolia’s economy, which until the mid-2010s was one of the hottest emerging frontier markets, is suffering from a lack of investment, particularly from the West. The government has announced a set of objectives aimed at boosting the economy by attracting foreign investment, and the agreement with Rio Tinto could prove useful in this regard.
Rio Tinto is the only major Western investor in Mongolia. If the agreement had not materialized, Mongolia’s relations with its Western partners could have been affected. Strong and balanced relations with neighboring Russia and China are essential for Mongolia’s security and development. At the same time, the Mongolian government is trying to strengthen its ties with the so-called third neighbours, major global players with whom Mongolia shares democratic values.
During the inaugural ceremony, the Prime Minister underlined that “the decision to launch the Oyu Tolgoi project financed by a third neighbor was an important step towards economic sovereignty and independence” and that “Mongolia is a partner who can s get along with investors, work stably and cooperate on a mutually beneficial basis.
The failure of negotiations would also have been a defeat of huge proportions for Rio Tinto, which has invested billions in the company. The company would have become unrecoverable in the eyes of Mongolian citizens.
Without an agreement at the end of this last round of negotiations, Rio Tinto could have chosen to withdraw. Since the initial agreement was signed in 2009, the press has speculated that some players may want to push Rio Tinto out of Mongolia. Given the size and value of the project, rival companies keen on such a risky project might hope to replace Rio Tinto, or even actively try to undermine the deal.
However, for now, the project seems to be on the right track.
The author was one of three signatories to the original 2009 contract in his capacity as Mongolian Minister of Mineral Resources and Energy.