Rio Tinto makes offer to Mongolia over troubled copper project www.ft.com
Rio Tinto is prepared to make concessions to the government of Mongolia as it seeks to complete the development of a huge copper mine in the Gobi desert that ranks as its most important project.
To speed up returns from the $6.75bn underground expansion of the Oyu Tolgoi mine, the Anglo-Australian company is willing to reduce the interest rates on loans to Ulan Bator to fund its share of the construction costs.
For its part, Rio wants a number of regulatory and budget issues cleared up and a long-term power agreement put in place so it can start the complex caving process — known as undercutting — and hit its revised production target of October 2022.
The proposals are detailed in a letter sent to Mongolia’s prime minister L Oyun-Erdene last week by Bold Baatar, the 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 earlier this month when an independent review rejected Rio’s explanation for delays that have left the project running late and an estimated $1.45bn over budget. First production at the underground mine had initially been expected in late 2020.
The 157-page report found project management issues were the main reasons for the late running and not the weak ground conditions that Rio had claimed. The report found that only $12m to $90m of the cost overrun could be attributed to geotechnical issues.
Financial regulators in the UK and US are also examining Rio’s disclosures about the delays.
Oyu Tolgoi is Mongolia’s biggest source of foreign direct investment, creating thousands of well-paid jobs.
Once the underground expansion is complete, it will be among the biggest copper mines in the world, capable of producing almost 500,000 tonnes of the metal a year.
However, the scheme has been beset by problems and disagreements with Ulan Bator over tax and the financing agreements that underpin the project.
Rio has funded Oyu Tolgoi LLC, the joint venture company developing the project, through shareholder loans. Only when the debt and interest on these loans have been paid off can the government start to receive dividends.
Ulan Bator owns 34 per cent of Oyu Tolgoi LLC with the balance controlled by Turquoise Hill, in which Rio has a controlling 50.1 per cent stake.
Some officials believe they will never see a payment from the mine unless the interest rate on loans — Libor plus 6.5 per cent — is reduced. At the end of June, the outstanding balance of the shareholder loans was $7.9bn, including accrued interest of $1.9bn.
In their letter, Baatar and Thibeault offer to work with the government to generate $350m of additional revenue for Mongolia over the next three years; this is in addition to existing taxes and royalty payments generated by an existing open pit mine at Oyu Tolgoi.
Rio says this extra money can be used to support the delivery of important social and economic projects that will aid Mongolia’s recovery from the coronavirus pandemic.
As well as reducing the interest rate on the government’s loans, Baatar and Thibeault also say Rio is prepared to discuss a “fundamental restructuring” of Oyu Tolgoi’s ownership structure.
In a statement Rio said it was looking forward to further “productive discussions” with the government of Mongolia and Turquoise Hill to “identify a potential pathway to achieve the conditions necessary to initiate” undercutting.
The government of Mongolia declined to comment but people familiar with the matter said it was focused on finding solutions.
Published Date:2021-08-30