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Rio stands ground on Oyu Tolgoi tax take in Mongolia www.afr.com
Rio Tinto and the Mongolian government are yet to thrash out a deal on taxes and other issues around the giant Oyu Tolgoi copper mine in which they are partners, despite a thaw in relations.
Rio chief executive Jakob Stausholm confirmed on Monday that international arbitration proceedings in the long-running tax dispute between the Oyu Tolgoi partners had been put on hold pending talks aimed at finding a resolution.
Mr Stausholm said Rio was hopeful of settling the tax dispute and other issues soon, but it took “two to tango”.
He said Rio and the Mongolian government had been able to “move mountains” lately as Rio looks to unlock the true value of a $US15 billion ($22.5 billion) investment in Oyu Tolgoi.
However, there is no end in sight to the mine relying on China for its power and on Russia for its key inputs, albeit at arms length through a network of Mongolian-based suppliers.
Mongolian prime minister Luvsannamsrain Oyun-Erdene and Mr Stausholm appeared together 1.3 kilometres below ground at Oyu Tolgoi on Monday for a celebration to mark the start of sustainable underground production.
Mr Stausholm said the company’s relationship with Mongolia had entered a new era as block cave mining deep underground starts to unlock the copper and gold riches of the deposit deep in the south Gobi Desert.
Rio later continued its charm offensive in Mongolia by signing a memorandum of understanding that commits it to supporting the work of Mongolia in investigating the building of a copper smelter and a ring road around the sometimes gridlocked capital Ulaanbaatar.
Asked if Rio was close to settling the tax dispute, Mr Stausholm said: “I hope so, but it takes two to tango. There was no way we could solve everything in one go.”
Rio has said previously that Oyu Tolgoi received a tax assessment for about $US155 million in 2018 relating to an audit on taxes already imposed and paid by the mine between 2013 and 2015.
It is understood Rio is reluctant to concede and pay up because of the risk of setting a precedent for future tax bills.
Mr Stausholm has been focused on repairing the relationship since early last year when he struck a deal to waive the $US2.4 billion debt the Mongolian government owed to the project after Rio and its partners had covered the construction costs owing from Mongolia’s 34 per cent stake.
The revised deal included undertakings from Rio to protect scarce water resources essential to nearby communities herding livestock and to ensure social infrastructure was provided for workers drawn to the mine.
The deal overcame an impasse on underground mining and later in 2022, Rio completed a gruelling $US3.3 billion takeover of Turquoise Hill to simplify the ownership structure and give it the remaining 66 per cent stake in its own right.
Rio thinks the trouble and expense has been worth it, with Oyu Tolgoi set to emerge as the world’s fourth-biggest copper mine and one Rio sees as having potential to operate well into next century.
It is hailed as the most sophisticated and biggest block cave mine in the world and targeted to achieve peak production of 500,000 a year of copper by about 2029.
The mine already employs more than 20,000 people and 97 per cent of the workforce is Mongolian.
Apart from sorting out its remaining issues with the Mongolian government, Rio needs to work out a long-term power source for the mine.
Rio copper boss Bold Baatar said its power supply deal with China, the dominant buyer of copper concentrate from Oyu Tolgoi, had expired and was in the throes of being renegotiated.
Mr Baatar estimated about 30 per cent of the power from China came from wind turbines on the Chinese side of the Gobi Desert.
Rio is under pressure to come up with a renewable source in Mongolia, where the government says a lack of generation capacity is holding back economic development.
Mr Baatar indicated it would be just as difficult for Rio to cut off Russian sourced input for the mine as it would for some European nations to go without Russian gas.
Rio installed Mr Baatar, a Mongolian national, to run copper and Oyu Tolgoi soon after Mr Stausholm replaced Jean-Sebastien Jacques as Rio chief executive in January 2021.
Mr Oyun-Erdene became Mongolian prime minister in the same month and his government has worked hard to attract investment from Western nations while treading a fine line with China on one border and Russia on another.
It remains unclear if Mongolia will continue to try to re-write the 2009 Investment Agreement that underpins Rio’s operations.
The agreement was struck between Mongolia and the company that owned Oyu Tolgoi at the time, Ivanhoe Mines, but the government has sought to revise aspects multiple times.
BY: Brad Thompson
The author travelled to Mongolia as a guest of Rio Tinto.
Brad Thompson writes across business and politics from Western Australia for The Australian Financial Review. Brad is based in our Perth bureau. Connect with Brad on Twitter. Email Brad at brad.thompson@afr.com
Published Date:2023-03-14
