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Rio Tinto, Mongolia clear way for $10b mine expansion www.afr.com
Rio Tinto’s most important growth project could be back on track after the miner struck a settlement with the Mongolian government to resolve the major disputes that have hampered progress on a $US6.9 billion ($10 billion) expansion of the Oyu Tolgoi copper mine.
Rio and its subsidiaries have agreed to waive a $US2.4 billion debt the Mongolian government owed after Rio and its subsidiaries covered the developing nation’s share of construction costs over the past decade.
In exchange, Mongolia softened its stance on several matters, most notably its desire for the mine to get all of its power from a Mongolian generator by July 2023.
While a domestic power source will still be sought eventually, the Mongolian government will in the meantime allow Rio to extend the existing power contract with a Chinese power generator to at least 2026 and possibly 2030.
Importantly for progress on the mine, Rio has agreed to push ahead with a crucial and expensive mining move called the “undercut”, which triggers the controlled collapse of rock within the mining zone and is effectively the start of a continuous mining process.
Rio had refused to go ahead with the undercut until a swathe of financial, tax and mine planning disputes were resolved, using it as a bargaining chip in talks with the government.
Some of those disputes, including over tax, remain unresolved.
But Rio said on Tuesday that enough common ground had been found for the undercut to begin in “coming days”.
Sustainable production of copper and other metals will now occur in the first half of 2023, putting Oyu Tolgoi on track to be one of the world’s top five copper producers by 2030.
Stability and peace in the relationship between Rio and the Mongolian government has only ever been achieved temporarily, but if Tuesday’s settlement can stick in the longer term, it will be a coup for new chief executive Jakob Stausholm and his Mongolian-born copper boss Bold Baatar.
“This agreement represents a reset of our relationship and resolves historical issues between the Oyu Tolgoi project partners,” said Mr Stausholm on Tuesday.
“This is a massive step forward, it started a year ago when I appointed Bold to run the copper portfolio and it has been a lot of effort.”
Speaking from the Mongolian capital of Ulaan Baatar before travelling to the mine site on Tuesday, Mr Stausholm confirmed that some disputes with the government remained unresolved.
“We have a few smaller issues which we, with a reset of relationships, for sure it will solve,” he said.
“We still have an outstanding tax dispute which I expect we will resolve in the course of the year.
“All the conditions for starting up the mine have been resolved, we have got a path forward on power and we don’t need to build a coal-fired power plant, that is a massive achievement in my view”
Complex ownership
Rio has mined copper, gold and silver from a small open pit mine at Oyu Tolgoi – located in the remote South Gobi Desert – since 2011, but the priority has always been to unlock the huge resource through a massive underground expansion of the mine.
A Mongolian company called Oyu Tolgoi LLC owns 100 per cent of the mine, and that company is 66 per cent owned by Toronto-listed company Turquoise Hill and 34 per cent owned by the Mongolian government.
Rio’s exposure to the mine comes through its 50.79 per cent stake in Turquoise Hill, and Rio’s power has been enhanced by the fact it is the main financier and technical manager of the expansion project.
Relations between Rio and the Mongolian government have always been fractious; Oyu Tolgoi is Mongolia’s largest private-sector employer, the biggest source of foreign investment and the prime bellwether for investor sentiment toward the developing nation.
Those facts have made Oyu Tolgoi a political football in Mongolia at the best of times, and relations with the government deteriorated when Rio’s management of the expansion project led to massive cost and schedule blowouts before the onset of the pandemic exacerbated those blowouts.
The blowouts were painful for the Mongolian government, which faced the prospect of stumping up more money to fund its 34 per cent share of construction costs and waiting longer for dividends from the mine to start flowing.
The Mongolian government wanted Rio, as the project manager that oversaw the blowouts, to bear the brunt of those costs, and the two parties have effectively been in a stand-off over the matter since mid-2019.
Tuesday’s agreement to waive the Mongolian government’s debt resolved those tensions.
The waiving of the debt had long been anticipated but not enthusiastically by some minority shareholders in Turquoise Hill.
Pentwater Capital has been the second biggest shareholder in Turquoise Hill in recent years and has previously suggested that Rio - as the manager of the cost blow outs - should provide financial compensation to the Mongolian government, rather than Turquoise Hill.
Pentwater spokesman Matt Halbower said Tuesday’s deal had confirmed his firm’s fears, with the Mongolian government debt to be waived by Turquoise Hill, meaning minority shareholders will take a hit as well as Rio.
“It was Rio Tinto’s concealment of the cost overruns and schedule delays which necessitated the large compensation package provided to the government of Mongolia. Turquoise Hill has now been left holding the bag by being forced to pay for Rio’s lies because Rio has steadfastly refused to allow minority shareholders to have a voice on Turquoise Hill’s board,” he said
Mr Stausholm said Ro’s contribution to the settlement was in the right proportion.
Turquoise Hill requires a further $US3.4 billion to complete the underground expansion and expects to be able to source more than half that amount by refinancing existing debt and taking on some new debt.
Turquoise Hill will also be compelled under the deal to raise funds through a share issue before August 31; the share issue must raise at least $US650 million with Rio set to take up its share of the raising.
The previous chief executive of Turquoise Hill, Ulf Quellman, had publicly pushed back against Rio over how to fund the shortfall.
Mr Quellmann was ousted soon after he took that stance and relations between Turquoise Hill and its parent have been more cordial ever since.
“We are very excited to be starting work on the undercut, which is critical to unlocking the immense potential of this world-class, high grade deposit for the benefit of all stakeholders,” said Turquoise Hill chief executive Steve Thibeault.
“Following the agreements with the Government of Mongolia and the Amended Heads of Agreement with Rio Tinto being put in place, we now have greater certainty and confidence to complete construction of this once-in-a-generation mine.”
Peter Ker covers resource companies, based in Melbourne. Connect with Peter on Twitter. Email Peter at pker@afr.com
Published Date:2022-01-25
