Rio threatens to halt work at Oyu Tolgoi over Mongolia's demands for bigger stake

Bloomberg reports Rio Tinto (RIO:LSE)  is considering halting work at its $10 billion Oyu Tolgoi copper and gold project in Mongolia over profit-sharing and ownership demands from the government.

The threat, which could suspend mining and processing at the newly constructed mine, was not confirmed by Rio Tinto to Bloomberg which cited "people familiar with the plans," but who "aren’t authorized to comment publicly."

The dispute comes amid mounting concerns over draft legislation being considered by Mongolia's parliament that would place severe restrictions on foreign ownership and greatly increase state control over mining and exploration companies.

The Mongolian government holds 34% of Oyu Tolgoi and Turquoise Hill Resources (TSX:TRQ), controlled by Rio Tinto, holds the rest. Turquoise Hill fell over 5% on Wednesday – the counter is down 50% over the last year. Rio Tinto retreated slightly in  London.

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.

Of the $5.8 billion in annual earnings 71% will flow into Mongolian state coffers thanks to the government's 34% stake and the royalties, income tax, VAT, customs duty and other taxes it will receive.

Turquoise Hill also holds 58% interest in Mongolian coal miner SouthGobi Resources (TSX:SGQ). The Mongolian government last year blocked a takeover deal by China's Chalco for SouthGobi decreeing a ban on majority ownership of Mongolian assets by state-owned companies.

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