Turquoise Hill Resources (TSX:TRQ) and the Mongolian government is on a collision course over Oyu Tolgoi which produced its first concentrate only last week.
Turquoise Hill, controlled by Rio Tinto (RIO:LSE), holds 66% of the massive copper-gold mine while the Mongolian government owns the remainder.
Last week media reports suggested Rio may halt work on the project in a dispute over ownership and royalties from the mine and on Monday, the president of the Asian nation fired back.
President Tsakhiagiin Elbegdorj, who is also the architect of draft legislation being considered by Mongolia's parliament that would place severe restrictions on foreign miners in Mongolia, accuses Rio of working fast and loose with financing for the project.
Not mincing words Elbegdorj said to the contrary of official forecasts from the Anglo-Australian giant the mine is on track to cost more than $24 billion and that the country has not been kept abreast of "what is taking place".
The Mongolian leader said the country is reluctant to pay its share without more control over matters including having a say over the project's bankers, suppliers, workforce and pay for management which it believes is excessive:
As the Mongolian government owns 34 percent of the project, it must also contribute to the costs. The Mongolian government has acquired an 8 percent interest loan to contribute its share of the project. On December 31, 2012, Mongolia made a payment of 705 million USD on the loan.
According to the government task force devoted to auditing Oyu Tolgoi, which is led by the Mining Minister D.Gankhuyag, Anglo Australian mining giant Rio Tinto, the major stakeholder of Turquoise Hill Resources, intends to raise 6.6 billion USD this year for Oyu Tolgoi. From the raised capital, 4.4 billion USD will go back to Turquoise Hill Resources on the grounds that this was the amount invested by the company in the past, while 2 billion USD will be used for the project operations. Furthermore, the company has informed the task force that they need additional capital of 5.1 billion USD.
President Ts.Elbegdorj noted that Rio Tinto shouldn’t be making such decisions and that the investment agreement does not allow this. Furthermore, even if such actions were allowed, Mongolia would have to pay its share of the raised capital of 6.6 billion USD, even if Rio takes back 4 billion USD for itself.
“The initial estimate for the underground mine’s financing was 14.6 billion USD, but the company is planning to spend 24.4 billion USD. The expenses are 9.8 billion more than the estimates, this must be addressed,” said the president. “The investment agreement is that the initial investment will be used to produce ore concentrates and the commercial profit will be used for operation expenses. There was nothing about raising around 7 billion USD more, from some other source, and the company taking back its expenses from the investment and leaving. The time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands,” said President Ts.Elbegdorj.
The president said that Mongolia must take its rightful place in Oyu Tolgoi and that it is not satisfactory that Mongolia has a 34 percent stake in the project but is excluded from the project and does not know what is taking place.
“Firstly, there needs to be someone on their managing board to represent Mongolia, as well as Mongolian representatives in all the critical departments. Secondly, the project operations need to be audited and reported – they must be transparent – but at the moment they are not. The government and parliament ask for information but the company delays its reports for months at a time. Mongolia has laws and they need to be abided by.
The third issue is the participation of domestic businesses. The issue has been left unaddressed. Mongolian businesses need to participate. Besides investment, Mongolian businesses can be formed by the thousand to provide services and supplies. Mongolians need jobs and salaries,” the president said.
Furthermore, the manner in which Turquoise Hill Resources selects suppliers needs to be transparent and Turquoise Hill must report whether the suppliers are domestic or foreign, and must report the amount of money changing hands.
Another major issue noted in the meeting was the matter of management costs and resource fees. The president observed that 6 percent of the investment is used to pay the salaries of those in management positions in Oyu Tolgoi. This is 2.5 times higher than the international rate. President Ts.Elbegdorj said this is unacceptable, especially because Mongolia only gets 5 percent in resource fees.
The government approved 153 million USD for Oyu Tolgoi management expenses by January 31, 2013, but the company in fact spent 321.4 million USD on management expenses by that date. The president commented that, “Due to irresponsible management, the company’s expenses have increased. Our auditing evaluation has revealed that this is a billion dollar issue.”
Another issue raised was the matter of employment of Mongolian nationals. According to the agreement made with the government, the company promised to ensure that 90 percent of its employees are Mongolian, but at the moment the number of foreign employees exceeds the number of Mongolians by 368. Furthermore, the wages of foreign employees are almost double the wages paid to Mongolian workers in the same positions, which is against the law.
The president also said that all financial transactions of the project should go through Mongolian banks since every other company does this, except Rio Tinto. “Since they operate in Mongolia, they should contribute to the nation’s development,” he noted.
President Ts.Elbegdorj also noted the logistical issues related to the Oyu Tolgoi mine, such as transportation. Turquoise Hill has begun producing ore concentrates, and soon they will need to export it, but they do not have railways or roads to do this. The president said they need to be urged to quickly build the transport routes that are necessary.
Oyu Tolgoi is one of the richest prizes in mining and the Mongolian government has long coveted more of the mine.
A group of influential parliamentary backbenchers in a petition in September – not long after general elections that brought resource nationalists to power – called for the enforcement of a parliamentary resolution that gives the Mongolian government majority ownership of Oyu Tolgoi.
It was not the first time Mongolian politicians had tried to rework the 2009 deal that only allows a bigger stake for the state 30 years after the project goes into operation (Oyu Tolgoi – turquoise hill in the local language – has an estimated life of mine of twice that).
In 2011 shares in Turquoise Hill, then Ivanhoe Mines, plunged on news that the Mongolian government wanted to rework the deal to gain a 51% stake.
At the time Rio and Ivanhoe took a tough stance however and after some desperate negotiations Mongolia backed off.
The mine is set to produce more than 1.2 billion pounds of copper worth $4.6 billion at today's prices, 650,000 ounces of gold ($1.1 billion) and 3 million ounces of silver (just under $100 million) each year.
Image of Mongolian President Ts. Elbegdorj during the opening ceremony for Khaan Quest 2009 at Five Hills Training Facility, Mongolia, by Daniel Balmer, US Marine Corps