Mongolia, Turquoise Hill force Rio Tinto into Oyu Tolgoi cost review

The Government of Mongolia and representatives of Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) have set up a special board committee to conduct an independent review into the cost overruns and delays at the Oyu Tolgoi underground expansion flagged by Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) last year.

Two of the commission’s four members were nominated by Turquoise Hill, with another two chosen by Erdenes Oyu Tolgoi, Mongolia’s entity that owns the remaining 34% interest in the massive Oyu Tolgoi copper-gold-silver mine.

Rio Tinto’s partners unexpected show of defiance comes amid threats of legal action against the company for failing to meet set cost and timeline for the mine expansion.

The world’s second-largest miner confirmed in July that its most important growth project would be delivered almost two years late and close to US$1.5 billion over budget. Rio Tinto also lowered at the time its forecast for annual copper output at the Oyu Tolgoi open-pit, citing coronavirus-related disruptions.

The dispute over funding the expansion’s sudden cost increase began heating up in early November when Rio Tinto-controlled Turquoise Hill launched arbitration proceedings against the mining giant to get clarity on funding.

Rio Tinto has said it will not allow the Canadian miner to take on more than US$500 million in additional debt, and asked the company to fill a funding gap of up to US$3 billion by reprofiling loans and raising equity.

Minority investors in Turquoise Hill, including U.S. hedge fund Pentwater Capital, oppose Rio Tinto’s attempts to force Turquoise Hill to conduct an equity raise. The claim there are “much cheaper and more advantageous financing options” available to the Canadian company, such as streaming and bond financing. 

Mongolia has complained about overruns in the past. Much of Oyu Tolgoi’s copper lies deep underground. When Rio Tinto finally kicked off the delayed project, profits from surface extraction were meant to pay for digging up more of the copper below.

With time, it became clear the underground mine alone would cost as much as a third more than the original US$5.3 billion budget.

Mounting investor activism is just one of the may headaches Rio Tinto has had while building what would rank as one of the world’s three largest copper mines when operating at full tilt – now expected to be by 2025 at the earliest.

The Mongolian government’s insistence on owning an equity stake in the mine has also been a major obstacle for Rio Tinto to overcome.

A group of legislators recommended a review of the 2009 deal that launched construction of the mine. It also advised revoking a 2015 agreement allowing for the now ongoing underground expansion. 

Mongolia’s parliament ended up approving a resolution in December last year, which reconfirmed the validity of all the Oyu Tolgoi mine-related agreements. The decision brought an 18-month-long review to a close.

The underground expansion of Oyu Tolgoi is Rio Tinto’s most important growth project. Once completed, it is expected to lift the mine’s production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, targeted for 2025.

The giant deposit, discovered in 2001, is one-third owned by Mongolia’s government and two-thirds by Turquoise Hill. Rio Tinto has a 51% stake in the Vancouver-based miner.

This article first appeared in MINING.com, part of Glacier Resource Innovation Group.