Mongolia’s President Tsakhia Elbegdorj said the nation should have more control of Rio Tinto Group’s Oyu Tolgoi copper and gold project after the government claimed costs had increased.
The total cost of the Rio Tinto-operated development in southern Mongolia has jumped to $24.4 billion, according to an e-mailed statement from the government, which gave a summary of a parliamentary discussion on Feb. 1 attended by the president. London-based Rio’s earlier estimate for total cost was $14.6 billion, according to the statement.
“It’s time for Mongolia to have Mongolian representation on the management team,” Elbegdorj said at the session on Feb. 1, according to his website. “It’s important that the government takes the Oyu Tolgoi matter into its own hands.”
The president’s comments heighten tension with the second- biggest mining company over the ownership and future development of a project, which is currently the world’s biggest copper mine under construction. Rio is considering a temporary halt to work to protest government demands for a greater share of profit, two people familiar with the plans said last week.
“We continue to work together with all stakeholders, including the government of Mongolia, to bring the benefits of Oyu Tolgoi to all parties,” Rio Tinto said today in an e-mailed response to questions. “We are now focused on first commercial production. We are on schedule to deliver that in the first half of this year.”
Respect Agreement
David Luff, a Melbourne-based spokesman for Rio Tinto, wasn’t immediately able to comment on the cost overrun and safety concerns raised by the Mongolian government.
Mongolia also needs representation “in all the most important decision making departments: financial department, procurement department, legal department, sales and project services department,” said Elbegdorj. The country had to wait for “months” for Rio to respond to questions on the project, he said.
In December, the president urged Mongolia’s government to respect the Oyu Tolgoi agreement, according to a Jan. 25 report by Ulan Bator-based broker BDSec, which cited a Dec. 26 interview with Elbegdorj on state television.
“The current rhetoric is accentuated by the upcoming presidential election,” slated for the end of June, said Eric Zurrin, director general at Resource Investment Capital Ltd., a corporate finance adviser in Ulan Bator, by e-mail today. “I doubt Rio would endanger the start-up of OT following first production last week, nor its future economic interests, by entering into games of brinkmanship with the Mongolian government. I think cooler heads will work out a solution for both ends, Mongolian and foreigner.”
Cost Increases
The costs for the first two stages of the mine would be $11.3 billion, according a report on the website of Turquoise Hill Resources Ltd. (TRQ), the Rio unit which owns 66 percent of Oyu Tolgoi.
“We need to address these cost increases with Rio Tinto and better understand why costs went up,” the government statement cited Prime Minister Norovyn Altankhuyag as saying. “We also need to discuss salaries for Mongolian workers, safety matters and benefits to workers.”
The mounting tensions between Mongolia’s politicians and Rio could prompt a reshuffle of the Oyu Tolgoi board, which includes both company and government officials, Dambadarjaa Jargalsaikhan, an independent economist based in Ulan Bator, said by phone today.
Business Matter
“Mongolian politicians are acting a little bit too strongly,” Jargalsaikhan said. “There should be a certain acceptance of cost changes from planned ones. It happens with a big project like this. It’s a business matter and as soon as it is explained, things will go forward.”
The mine, which is controlled by Rio and 34-percent owned by Mongolia, may account for 2.2 percent of the company’s earnings before interest, tax depreciation and amortization this year, according to Richard Knights, a mining analyst at Liberum Capital Ltd. Rio’s 2013 Ebitda will be $22.2 billion, according to the average of 25 analysts’ estimates compiled by Bloomberg.
In October, Rio rejected a second move by Mongolia to renegotiate a 2009 investment agreement for the development of Oyu Tolgoi, which is currently the world’s biggest copper project under construction.
To contact the reporters on this story: Michael Kohn in Singapore at [email protected]; Yuriy Humber in Tokyo at [email protected]
To contact the editor responsible for this story: Jason Rogers at [email protected]
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