Mongolia says Rio’s Oyu Tolgoi mine expansion to go ahead

Oyu Tolgoi ranks as Rio Tinto’s most important growth project. (Image courtesy of Turquoise Hill.)

Mongolia’s mining minister sided on Tuesday with mining giant Rio Tinto (ASX, LON, NYSE: RIO) by saying the company’s ongoing $7 billion expansion of the massive Oyu Tolgoi underground copper-gold mine will “not be stopped.”

Speaking at an industry conference in London, Dolgorsürengiin Sumyaabazar said the project “would proceed directly forward,” adding that the country’s National Security Council will work with Rio on “improving” the investment agreements that underpin the underground expansion, reported.

The news will be something of a relief for the world’s No.2 miner, which feared the government might try to completely renegotiate the agreements after an administrative court and then the parliament backed last week a petition to revise the documents allowing the asset’s development.

Rio Tinto has feared the government would try to completely renegotiate the agreements underpinning the asset’s development

While Sumyaabazar didn’t specify how the government intends to make the deal more beneficial for Mongolia, his comments likely mean that Rio won’t have to face further delays in the development of Oyu Tolgoi’s underground section.

Rio Tinto has faced a number of challenges in Mongolia over the past two years. In January 2018, the country’s government served Oyu Tolgoi with a bill for $155 million in back taxes —  the mine’s second tax dispute since 2014. The company said at the time the charge related to an audit on taxes imposed and paid by the mine operator between 2013 and 2015.

Shortly after, the southern Gobi Desert-based mine had to declare force majeure after protests by Chinese coal haulers disrupted deliveries near the border.

The situation prompted Rio’s chief executive Jean-Sebastien Jacques to visit Prime Minister Ukhnaagiin Khurelsuk to discuss how to build “win-win” partnerships. The trip was followed by the company’s announcement that it was opening a new office in the country, focused on exploration and local links.

Cost and schedule blowouts

The issue resurged in April, when a group of Mongolian legislators recommended a review of the 2009 deal that launched construction of the mine. It also advised to revoke a 2015 agreement allowing for an underground expansion. 

Rio warned in July this year that the under execution expansion would take 16-30 months longer than expected. It also warned the project would cost as much as an additional $1.9 billion to the projected $5.3 billion investment, with first production being delayed between 16 and 30 months.

The copper-gold mine is located in the South Gobi region of Mongolia, about 550 km south of the capital Ulaanbaatar.

Oyu Tolgoi was discovered in 2001 and Rio gained control of it in 2012. The ongoing expansion of the mine is expected to lift production from 125–150kt this year to 560kt at full tilt from 2025, making it the biggest new copper mine to come on stream in several years.

The giant mine is one-third owned by Mongolia’s government and two-thirds held by Canada’s Turquoise Hill Resources (TSX, NYSE:TRQ). Out of Turquoise’s 66% share, Rio owns 51% of the project.

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