Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Mongolian legislators will vote next month whether to rewrite a 2015 investment agreement with mining giant Rio Tinto (ASX, LON, NYSE:RIO) for the massive Oyu Tolgoi copper-gold mine, located in the Gobi Desert.
The landlocked country currently owns 34% of the mine, with Canada’s Turquoise Hill Resources (TSE, NSYE: TRQ), which is majority-owned by Rio Tinto, holding the remaining 66%.
While the parliament is leaving the agreement covering the project’s ownership alone, it is likely to approve a series of binding recommendations that would end the 2015 “Dubai Agreement.” The document covers the costly and several times delayed underground expansion of Oyu Tolgoi.
A lawyer involved in Mongolian mining deals, speaking on condition of anonymity, told MINING.COM that critics of the four-year-old deal argue it made changes to the original one, signed in 2009. Thus, they said it should have been subject to full parliamentary approval, instead of receiving only the prime minister’s okay.
Among the recommendations lawmakers will vote on, there is a stipulation that would bring forward the date when Mongolia starts receiving dividends from Oyu Tolgoi, currently set at 2041
Among the binding recommendations lawmakers will vote on, there is a stipulation that would bring forward the date when Mongolia starts receiving dividends from Oyu Tolgoi, currently set at 2041. That is the year when the country’s debt from the project is supposed to be repaid.
The facility, which could come with a bill as high as $1 billion, would add to the already hefty cost of the mine’s expansion, currently pegged at $5.3 billion.
Earlier this week, Rio warned the ongoing project could add as much as an additional $1.9 billion. It also warned of further delays of up to two and a half years.
There is also a clause that forces Rio to build a power plant, even though the company is already committed to do so. The world’s No. 2 miner earmarked in 2018 $250 million a year for the development of such power station in its 2019 and 2020 spending plans.
The first sustainable production is now expected between May 2022 and June 2023, though Rio said a final estimate cost and schedule would be announced in the second half of 2020.
This is not the first time Rio faces legal woes in Mongolia. Last year, the government served Oyu Tolgoi with a $155 million bill in back taxes — its second tax dispute since 2014.
Shortly after, the Mongolian Anti-Corruption Authority (ACA) asked Rio to provide financial data related to the mine. The request is part of a probe about possible abuse of power that has seen the arrest of two former prime ministers and a former finance minister.
The mining giant is also facing increasing pressure from shareholders about its alleged lack of transparency about pledges to the Mongolian government and escalating costs for the expansion.
Rio is currently Mongolia’s largest foreign investor. It has ploughed so far more than $7 billion into the first phase of its Oyu Tolgoi mine and plans to spend at least $5.5 billion developing the underground section.
The operation helped spur a mining boom that drove the nation’s economic growth up to double digits from 2011-2013.
A resource-rich country of just 3.1 million people, Mongolia desperately needs foreign direct investment. A rapid collapse in foreign investment and falling commodity prices saw it plunge into an economic crisis in 2016, forcing it to seek aid from the International Monetary Fund.
Oyu Tolgoi was discovered in 2001 and Rio gained control of it in 2012. Once finished, the expansion is expected to lift the mine’s production from 125–150kt this year to 560k tonnes of copper concentrate at full tilt from 2025 on, making it the world’s third-largest copper mine.
