Rio Tinto to Raise Up to $6 Billion for Mongolian Mine Expansion

Rio Tinto Group will seek to raise as much as $6 billion of external funding for the Oyu Tolgoi underground mine in Mongolia as the company prepares a war chest to develop one of the world’s largest untapped deposits of copper and gold.
The money will be raised through third-party project financing, product off-take arrangements and other forms of funds, according to a development plan published by Turquoise Hill Resources Ltd., which owns 66 percent of Oyu Tolgoi. Overseas investors led by Rio control the project through this stake.
Rio and the Mongolian government last week ended a protracted dispute that stalled construction of the underground mine. A midnight signing of the plan in Dubai followed two years of start-stop talks between the two sides that tested the resolve of foreign investors in the Asian country.
Rio has a goal of raising more than $4 billion in third-party project financing and will target 15 to 20 banks, Jean-Sebastien Jacques, head of its copper and coal business, said in a May 19 phone interview. Discussions on terms are to begin in the “coming days and weeks,” he said.
Less than 10 percent of the 200 kilometers (124 miles) of underground tunnels needed for the mine have so far been built, Jacques said. This will take five to seven years, he said.
The negotiations, which included about 30 points of dispute, centered on taxes and cost overruns on the first phase of the mine construction.

Strong Signal

Signing the plan “is a strong signal to investors,” Mongolian Parliamentary Speaker Enkhbold Zandaakhuu said on Saturday. “Mongolia will honor its obligations to investors. I think it’s a very good sign.”
Both sides agreed phase one costs were in line with approved programs and budgets and there are no outstanding issues between the two sides over expenses in this stage, the plan shows.
The initial phase, with a price tag of more than $6 billion, included an open-pit mine that went into production in mid-2013.
The agreement also resolved differences of opinion on using Oyu Tolgoi mine licenses as collateral for financing the underground portion.
Mongolia agreed to provide “security interest” to lenders, including pledges of the Oyu Tolgoi mining licenses and immovable property, as well as benefits of the investment and shareholders’ agreement.

Review Meetings

The parties will hold monthly operational review meetings that will include updates on capital expenditure to address Mongolia’s complaints over a lack of transparency.
The country stands to benefit from a clarification on the management services payment, which must be paid to the team running the project. The rate has been lowered to 3 percent of the capital costs of the underground stage from 6 percent before.
Estimated underground development capital is $4.7 billion, sustaining capital is $1.5 billion and the value-added tax and duties on capital is $600 million, the agreement shows.
The government of Mongolia is to receive $2.2 billion in direct payments and the total estimated direct spending in the country is $9 billion during the underground stage of construction and funding.
While construction of a copper smelter to process concentrate from the mine isn’t yet assured, the agreement states that Oyu Tolgoi LLC will prepare a research report by September 2016 on the economic viability of constructing and operating a smelter.
The agreement also re-states earlier estimates that the government of Mongolia will receive more than 53 percent of the total value of project during its lifetime in the form of taxes, royalties and payments.



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