National Post (National Edition)

Mongolia seeks Rio Tinto backing to secure better terms for delayed mine

Undergroun­d expansion of Oyu Tolgoi

- NEIL HUME

The government of Mongolia is seeking Rio Tinto Group's agreement to terminate the deal that underpins the constructi­on of a US$6.75-billion undergroun­d copper mine in the Gobi Desert, according to people with knowledge of the situation.

The ruling Mongolian People's party and its new prime minister Luvsannams­rain Oyun-Erdene is facing pressure from parliament to replace the undergroun­d developmen­t plan for the Oyu Tolgoi mine.

But rather than act unilateral­ly and risk future foreign investment projects in the country, Ulan Bator has asked the Anglo-Australian miner whether it is prepared to mutually terminate the plan and replace it with an agreement that offers better terms so they can push on with constructi­on, the people said.

The undergroun­d expansion of Oyu Tolgoi has been dogged by problems and disputes with the government. The project — Rio's most important — is already US$1.5-billion over budget and almost two years behind schedule.

The government holds a 34-per-cent stake in the project, while Rio Tinto-controlled Turquoise Hill Resources Ltd. owns the remainder. Vancouver-based Turquoise Hill traded 4.88 per cent higher to $16.77 Monday on the Toronto Stock Exchange.

The government threatened last month to halt developmen­t, saying the delays had eroded the economic benefits the country had hoped for.

At peak production Oyu Tolgoi will be the fourth-biggest copper mine in the world, producing almost 500,000 tonnes a year from its existing open pit and undergroun­d mine. A decision on whether to start complex caving operations must be taken by June. First production is expected in October 2022.

Oyu Tolgoi, the country's biggest source of foreign direct investment, has created thousands of well-paid jobs and generated almost US$3-billion of taxes and fee revenue over the past decade.

Signed in 2015, the UDP, also known as the Dubai agreement, put the undergroun­d project back on track after an earlier dispute between Rio and the government.

The agreement — and US$4.4 billion of project financing — was pulled together by Rio's former chief executive Jean-Sébastien Jacques and the nation's then-prime minister Chimediin Saikhanbil­eg.

It set out the fee Rio will receive for managing the project as well as the interest rates on the cash Ulan Bator has borrowed to finance its share of the constructi­on costs.

However, the UDP was never approved by Mongolia's parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits from mine.

A parliament­ary resolution was passed in December 2019 ordering the government to improve the terms of the UDP.

“The government has to fix the legitimacy issue,” said one person with knowledge of the discussion­s. “Mutual terminatio­n of the UDP would achieve this.”

Rio has already told Ulan Bator it is prepared to “explore” a reduction of its project management fees and loan interest rates, according to documents seen by the Financial Times.

However, it is unlikely to agree a new developmen­t plan unless it also addresses some of the company's concerns. These include a longterm power solution and Oyu Tolgoi's budget for 2021.

Rio's negotiatio­ns are now being led by Bold Baatar, a Mongolian national who was recently appointed to run Rio's copper business.

“I acknowledg­e the government's wish to improve the undergroun­d developmen­t plan and I am looking forward to discussing that with them, I hope in a way which promotes investor confidence in the country,” Baatar said in a statement.

Nyambaatar Khishgee, Mongolia's minister of justice and home affairs, who is leading the government's Oyu Tolgoi working group described his first meeting with Baatar last week as a “success.”

“We are all in the same boat,” he said on social media.

The push to replace the UDP comes ahead of presidenti­al elections in June, which the government hopes to win to complete a clean sweep of Mongolia's hybrid parliament­ary-presidenti­al system. The government declined to comment.

GOVERNMENT HAS TO FIX THE LEGITIMACY ISSUE.

 ?? DAVID STANWAY / REUTERS FILES ?? Oyu Tolgoi is Mongolia's biggest source of foreign direct investment and has created thousands of well-paid jobs.
DAVID STANWAY / REUTERS FILES Oyu Tolgoi is Mongolia's biggest source of foreign direct investment and has created thousands of well-paid jobs.
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