Mongolia threatens to revoke Rio Tinto’s plan for Oyu Tolgoi

The Government of Mongolia may cancel and replace the development and financial plan for the country’s vast Oyu Tolgoi copper-gold mine, Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) said today.

The company, which is controlled by Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO), said Mongolian authorities are dissatisfied with its plans and are particularly concerned about the costs of the expansion, recently updated to US$6.75 billion, about US$1.5 billion higher than its original estimate.

In 2019 Rio Tinto  flagged stability risks associated with the original project design, which translated into as much as an additional US$1.9 billion cost and a 30-month delay.

The miner confirmed the new cost estimate for the underground expansion in December, and noted that production would begin in October 2022.

Erdenes Oyu Tolgoi LLC, the Mongolian state-owned company that owns a third of the mine, reacted to the new timeline and budget by saying that Rio Tinto had not delivered on its 2015 promises.

Erdenes’ interest in Oyu Tolgoi is technically held through a 34% in a Mongolian company called Oyu Tolgoi LLC. The remaining stake belongs to Turquoise Hill Resources, which is 50.79% owned by Rio Tinto.

“The Government of Mongolia has indicated that if the Oyu Tolgoi project is not economically beneficial to the country, it would be necessary to review and evaluate whether it can proceed,” Turquoise Hill said in a press release.

The Vancouver-based miner said it was committed to engaging immediately with both Mongolian authorities and Rio Tinto to address the development plan and revisit the sharing of economic benefits arising from the Oyu Tolgoi project.

Under scrutiny

Mongolia had requested an independent review of the cost blowout and delays at the project, with results expected in early 2021.

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

The mining giant has said it will not allow Canada’s Turquoise Hill to take on more than US$500 million in additional debt. It has also asked Turquoise Hill 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 the Canadian miner to conduct an equity raise. They claim there are “much cheaper and more advantageous financing options” available to the company, such as streaming and bond financing. 

They also worry about Rio Tinto growing its stake in Turquoise Hill through such an equity raising. Investors based this argument on the expectation that Rio Tinto would underwrite any shortfall created by minority Turquoise Hill shareholders who do not participate in the raising.

Mounting issues

Mongolia and the various foreign investors in Oyu Tolgoi, including Rio Tinto, are also embroiled in a tax dispute, which is awaiting a United Nations arbitration decision.

On Jan. 11, Turquoise Hill also flagged a proposed class action against the company and some of its current and former officers in the Superior Court of Montreal. The claim alleges the miner made material misstatements and omissions with respect to, among other subjects, the schedule, cost and progress of Oyu Tolgoi’s development.

The company said it believed the case lacked merit.

The government of Mongolia has complained about overruns in the past. A group of legislators recommended last year 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. 

The parliament ended up approving a resolution in December 2019, which reconfirmed the validity of all the Oyu Tolgoi mine-related agreements. The decision brought an 18-month-long review to a close.

Rio Tinto has repeatedly said the underground expansion is its most important growth project. Once completed, Oyu Tolgoi will churn out 480,000 tonnes of copper a year from 2028 to 2036.