Mongolia casts doubt on Rio Tinto's Oyu Tolgoi expansion

Rio Tinto is facing more uncertainty in Mongolia after a senior lawmaker was reported suggesting the developing nation would not honour a 2015 agreement that underpins a $US5.3 billion expansion of the Oyu Tolgoi copper mine.

Mongolian media quoted the nation's minister for Mining and Heavy Industry, Sumiyabazar Dolgorsuren, as suggesting the Mongolian government would no longer accept a 2015 legal agreement that laid out the fiscal terms for the expansion.

That agreement was struck by Rio chief executive Jean-Sebastien Jacques when he was the miner's copper boss.

“We do not stand by the contract,” Mr Dolgorsuren was quoted as saying by News.mn.

The comments have since been republished by Bloomberg's bureau in the Mongolian capital Ulaan Baatar.

Rio shareholders will likely take the comments with a grain of salt; Mongolian parliamentarians have on many occasions in the past decade made threats to discard the major legal agreements that underpin Rio's investment in Oyu Tolgoi.

On most occasions the threats have proved to be hollow, with Rio continuing to work under a 2009 investment agreement that Mongolia has sought to revisit numerous times.

Adding to the tension is the fact the Mongolian Parliament is currently controlled by political rivals of the party that struck the 2015 agreement in Dubai.

But the outburst comes at a fragile time for Rio given a Mongolian parliamentary working group continues to analyse Oyu Tolgoi from a range of perspectives, including the fiscal terms but also practical issues relating to the supply of power and water.

Rumours have persisted in recent months that the parliamentary working group will seek revisions to the 2015 expansion agreement, while Mongolia's anti-corruption agency is investigating some of the politicians involved in signing the 2009 investment agreement.

Rio copper boss Arnaud Soirat made clear in April that he had no appetite to revisit those agreements.

''A commitment to honouring agreements and contracts is essential, especially in our industry, where time horizons are long and upfront investment is massive. At Oyu Tolgoi, the sanctity of the key
investment agreements makes the shareholders’ potential US$12 billion investment in Mongolia possible,'' he told an audience in Chile.

''Without these agreements we do not have a business case. And we will not have an operation.''

Rio is also expected to confirm the scale of cost and schedule blow outs on the project in coming months, which could further strain the relationship given the Mongolian government owns 34 per cent of the mine and is eager for its copper and gold to boost government revenues as soon as possible.

Mongolia has been unable to fund its 34 per cent share of development costs on the project; a situation that has further complicated the relationship and will ensure Mongolia's dividend streams from the mine are compromised in its early years of operation.

While Rio has been forced to tolerate the volatility that comes with Mongolian politics, the company's hand in negotiations is strengthened by the fact Oyu Tolgoi is viewed internationally as a bellweather for Mongolia's investibility.

Foreign investment into Mongolia slumped in the years prior to the 2015 Oyu Tolgoi agreement, and successful development of the mine is expected to embolden other investors.

Peter Ker covers resource companies, based in Melbourne. Connect with Peter on Twitter. Email Peter at pker@afr.com

Source:www.afr.com