Rio Tinto warns Mongolia on tampering with rights to copper mine

By Neil Hume

Rio Tinto has warned Mongolia not to tamper with the contracts that underpin its investment in a giant copper mine in the Gobi desert if it wants to attract more foreign capital to the country.

Speaking at the Mongolia Economic Forum on Tuesday, Arnaud Soirat, the head of Rio’s copper business, said Mongolia had all ingredients to become a “successful resource nation” but only if it honoured agreements around issues such as tax and royalty payments. 

 “The world is watching how Oyu Tolgoi develops. It is a test case for future investment in Mongolia which brings with it jobs, new business opportunities and community development,” he told delegates, including government ministers. 

 A resource-rich nation of just 3.1m people, Mongolia desperately needs foreign direct investment. Last year, the country, which is sandwiched between China and Russia, turned to the International Monetary Fund for a bailout as bond payments loomed. 

 Rio is currently the largest foreign investor in Mongolia. It has ploughed more than $7bn into the first phase of the Oyu Tolgoi. It is planning to spend a further $5.5bn on developing an underground mine that will unlock the project’s full potential. 

 But these plans are under threat. Earlier this year, the cash strapped government hit Rio with a $155m tax bill, while members of parliament have set up a working group to review the agreements that underpin the development of the Oyu Tolgoi mine. 

 Analysts say much of the frustration with the contracts can be traced to the government’s decision to take a 34 per cent equity stake in Oyu Tolgoi. To finance its share of the mine’s development costs Ulan Bator has had to borrow money from a Rio subsidiary. Until that debt is paid off it cannot receive dividends. 

 “Protecting agreements and honouring contracts is critical – particularly in mining where time horizons are long and upfront investment is massive”, said Mr Soirat. “When agreements and contracts are honoured – it gives international investors’ confidence the same will be done for them.”

 Mr Soirat also touched on the tax row in his speech, saying that resource-rich countries like Mongolia should aim “to foster dispute resolution mechanisms and forums that yield fair and fact-based results.” 

 Rio has said it will take the tax dispute to international arbitration if it cannot reach agreement with the government. 

 “Mongolia has all the ingredients to become a successful resource nation and to use her mineral revenue to fuel sustainable, long-term, diversified growth,” said Mr Siorat. “But the three things I talked about are critical: a safe and secure climate for investment… adherence to the rule of law… and a clear signal to the world about the value of doing business here in Mongolia.”

Source:Financial Times



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