Rio offers to drop $2bn royalty in bid to solve Mongolian standoff

Rio says it will not be rushed into a deal. Picture: Bloomberg Source: Supplied
RIO Tinto has offered to abandon a $US1.6 billion ($2bn) royalty it would get from the Oyu Tolgoi copper and gold mine in a bid to end a standoff with the Mongolian government over development of a stalled $US5bn underground expansion needed to unlock most of the deposit’s value.
But Rio has not heard back from the government on the ­October offer, with a new negotiating team understood not to have been finalised in the wake of a November change of prime minister.
In fragments of the offer recently posted by the owner of a Mongolian Twitter account, Rio claims the government will be entitled to more than half the cash flow from the project under the proposed deal. The Australian has verified the document is genuine.
Rio is facing writedowns on delayed construction of the second stage of the Oyu Tolgoi, where expansion work was shut down 17 months ago because of a disagreement with the government over fiscal terms.
A $US6.5bn open pit is operating, but 80 per cent of the value of the project lies in the underground expansion, on which an extra $US1.3bn has already been spent.
In a draft memorandum of understanding given to the Mongolian government, Rio, which operates Oyu Tolgoi, has offered to abandon a “net smelter return” of 2 per cent of the project’s revenue.
“Turquoise Hill (the Rio subsidiary that owns 66 per cent of the project) and Rio Tinto agree that neither they nor any other party have any further entitlement to receive from Oyu Tolgoi net smelter royalty,” the draft MOU said. The smelter royalty has been estimated by Turquoise Hill to be worth $US1.59bn over the mine’s 41-year life.
Mongolia is a 34 per cent shareholder in the project, so will benefit from the royalty not going to its partner.
The landlocked nation of 3 million people wants a better share of the profits from the mine and compensation for cost blowouts and delays on the first stage.
Talks have been delayed further by the ousting of the prime minister and subsequent formation of a new cabinet.
The draft MOU, which Rio copper chief Jean-Sebastian Jacques in October referred to when he said there was a “deal on the table”, appears little changed from an earlier investment agreement that Rio has said needed to be adhered to for it to restart construction of the project.
“The share of economic benefits of the Oyu Tolgoi project (under the MOU) are broadly in line with those referred to in the 2010 feasibility study,” the draft document said. “The government of Mongolia receives over 53 per cent of the total undiscounted cash flows of the project over the life of the mine (the majority of which will come from taxes and royalties).”
Rio chief Sam Walsh has said the company will not be rushed into a deal.
In December, CFO Chris Lynch warned more delays on the project could hurt its appeal by making it compete with later projects such as the Resolution copper mine in the US.



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