Mongolia threatens to halt Rio Tinto copper challenge

Rio Tinto is dealing with an escalation of its problems in Mongolia, the place the federal government has threatened to halt enhancement of its massive underground copper deposit.

The $6.75bn underground growth of the Oyu Tolgoi mine in the Gobi Desert is the company’s most crucial job. Having said that, it has been dogged by troubles and is now operating late and more than finances.

The value overruns have alarmed Ulaanbaatar, which has reported it will have no alternative but to terminate the investment decision agreements that underpin the task unless of course they are improved. When complete, it will be the world’s fourth-biggest copper mine.

The authorities laid out its considerations in a letter right after a digital meeting very last month with Rio’s new main government Jakob Stausholm and the head of its copper and diamonds company Arnaud Soirat.

Main between them is Mongolia’s perception it will under no circumstances get a dividend from Oyu Tolgoi since of the amount of money of financial debt taken on to acquire the existing open pit mine and fork out for the underground enlargement. 

Oyu Tolgoi is 66 for each cent owned by Toronto-stated Turquoise Hill Resources, in which Rio has a 50.8 per cent managing stake, and 34 for every cent by the government.

Ulaanbaatar is funding its share of the improvement charges as a result of financial loans from Rio, which operates the mine and is controlling the underground challenge. It will not obtain any dividends from the project until eventually these debts are compensated back.

“The estimates whereby the Authorities will by no means get dividend payments [from the Oyu Tolgoi project] and will incur personal debt of $22bn generate terrific complications for our foreseeable future co-operation,” the letter reported.

“In addition, the estimate that Oyu Tolgoi would pay out company profits taxes or profit taxes only in 4 years right up until 2051 raises doubts as to the financial positive aspects of the job.”

In gentle of the economics and the truth the mine sits in a area where water is scarce, the government goes on to say that “it is turning out to be required for us to critique and evaluate whether or not this venture ought to go ahead”.

The enhancement of the underground mine is underpinned by an expense arrangement negotiated by Rio’s former main government Jean-Sébastien Jacques and the then Mongolian key minister Saikhanbileg Chimed.

A parliamentary functioning group purchased the government to make improvements to the conditions of the so identified as “Dubai” agreement in December 2019.

For its section, Rio has informed Ulaanbaatar that underneath the suggestions of the parliamentary resolution it is ready to “explore” a reduction of its job administration costs and bank loan interest fees. It has also available to examine the idea of a nationwide growth fund, in accordance to men and women with know-how of the predicament.

Even so, the authorities wants Rio to deal with other challenges including tax and h2o. 

“Unless Rio Tinto assesses the scenario realistically and accepts the proposal of the operating team, we have no option but to formally post a observe to unilaterally terminate” the Dubai arrangement, it stated in the letter.

Rio said it had invested extra than $11bn in Mongolia because 2010 and was “open to improving” the conditions of the agreement to “increase the gains of Oyu Tolgoi to all shareholders”.

TRQ, which saw its share price tag crash 24 for each cent on Monday, reported it was “committed to partaking immediately” with Ulaanbaatar.

For the Mongolian govt the stakes are higher. Oyu Tolgoi is a critical component of the country’s financial system. Not only is it the country’s biggest supply of overseas direct expenditure, it also offers countless numbers of well-paid out work opportunities.

“The Mongolian govt need to not be bullied into fearing that foreign direct investment decision will dry up if they reset this agreement,” claimed Henry Metal, portfolio manager at Odey Asset Administration and a vocal critic of the challenge. “The arrangement assumed that there would be no expense or time overruns. Now there have been, the agreement needs to be reset to integrate this.”