Matthew StevensColumnist of Australian Financial Review (www.afr.com)
Oyu Tolgoi is a development critical to the standing of both Rio Tinto and its successful but idiosyncratic chief executive Jean-Sebastien Jacques.
Oyu Tolgoi is a very large brownfields expansion whose projected cost recently blew out by $US1.9 billion to something more than $US7 billion because of a redesign forced by geotechnical misunderstandings.
And it is a project’s whose 2015 gateway investment agreement was the product of sustained and direct personal contact between Jacques and the prime minister-elect of Mongolia, Chimediin Saikhanbileg.
As Jacques revealed in a remarkably frank interview with our very own Chanticleer columnist Tony Boyd in May 2015, the bones of what became the Dubai agreement were assembled over five days of meetings with Saikhanbileg over the Rio man’s kitchen table in Holland Park, London.
Jacques was the head of Rio’s copper and coal business when the deal was done and the work he did in breaking a two-year deadlock over Mongolia’s determination to use the leverage of the expansion to redraft the terms of the original 2009 investment agreement certainly played a role in his surprise appointment to succeed Sam Walsh as CEO in March 2016.
On Wednesday, in a statement released through stock exchange platforms here and in London by Rio and in Toronto by the Canadian listing whose control delivers the Anglo Australian ownership of Oyu Tolgoi, the miner revealed that a court in Mongolia appeared to have found that Saikhanbileg’s government had failed the test of due process in signing off on the Oyu Tolgoi Underground Mine Development and Financing Plan (UDP).
The state of ignorance
It is worth reading the introduction to the Rio statement released to the ASX because it implies an arguably unacceptable ignorance of events in Mongolia that are of patently potential significance.
“Rio Tinto today notes Administrative Court proceedings in Mongolia with regard to a lawsuit initiated by the Darkhan Mongol Nogoon Negdel Non-Governmental Organisation (NGO) relating to the government of Mongolia’s process in finalising the Oyu Tolgoi Underground Mine Development and Financing Plan (UDP),” the company said.
“Early reports suggest the Administrative Court of first instance has upheld claims by the NGO that due process was not followed by the government of Mongolia in finalising the UDP, although the court’s formal written ruling is expected to be released only in the coming weeks.''
So, as it turns out, the potential of a decision negative for the plaintiff government and, by extension, for Rio's expensively-wrought interests, arrived as a surprise no bigger than the fact of the case itself.
Not only was there no Rio representative at the Administrative Court hearing but Rio people don’t seem to have any level of understanding of the nature of the case or the import of any decision. And that is largely because, until Tuesday, the company was blissfully unaware that a challenge had been made, that a case had been heard or that a decision may have been foreshadowed.
Rio’s statement went on to “strongly” reject the idea that the 2015 agreement or any other of Oyu Tolgoi’s cornerstone investment protocols are in any way illegal. But that assertion, too, is disturbing because it lands without any certainty that the court has recognised illegality in any of the failings of due process that “early reports” suggest have been called out.
While this thorough state of ignorance is unusual, the potential for the news flow from Mongolia to catch Rio on the hop is not.
Through the turmoil of recent years, which includes a roll call of attempted redrafts of the investment agreements that is firmly linked to the fledgling democracy’s excessively short electoral cycle and volatile politics, Rio has increasingly asked to be excused for the knowledge gaps.
The narrative is that Mongolia is a young and unpredictable nation that continues to struggle to find a balance between the short-term need to harvest its only major resource project and the long-term need to invite foreign investment to ensure there are more Oyu Tolgoi’s in the future.
Oyu Tolgoi is Rio’s single biggest risk. However you cut it, the project sits at least a couple of management generations away from turning a profit. It is a project intimately linked to the current CEO’s reputation, and the underground expansion’s stuttering progress - along with the theatre of political contests around its social licence - demand all the attention that a world class miner like Rio can throw at it.
But for all of Rio’s long-embedded strengths, stakeholder and risk mapping, management’s lens on Mongolia seems more underpowered telescope than the huge magnifying glass this turbulent investment now routinely demands.
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