Turquoise Hill takes Rio Tinto to arbitration over Mongolia mine funding

Oyu Tolgoi is Rio Tinto’s biggest copper growth project. (Image courtesy of Oyu Tolgoi..)

Canada’s Turquoise Hill Resources (TSX, NYSE: TRQ) is taking Rio Tinto (ASX, LON, NYSE: RIO) to arbitration over the mining giant’s role and obligations to support the company in securing additional funding for the vast Oyu Tolgoi copper-gold-silver mine in Mongolia.

Turquoise Hill said a special committee of its board, which approved the arbitration, concluded that Rio’s approach to the financing of the mine expansion was “incompatible with the company’s announced strategy to maximize debt and/or hybrid financing for the Oyu Tolgoi project so as to minimize the size, and defer the timing, of an equity rights offering (if any)”.

The Rio Tinto-controlled company and mine operator had expected the underground expansion to cost $5.3 billion when it was approved in 2015. Last year, however, Turquoise Hill flagged stability risks associated with the original project design, adding that amendments to it could increase costs by as much as an additional $1.9 billion.

Arbitration proceedings seek to clarify provisions of some arrangements between Turquoise Hill and Rio Tinto related to additional funding for Oyu Tolgoi’s expansion

Turquoise Hill also warned at the time of further delays of up to two and a half years, with first sustainable production from Oyu Tolgoi’s underground expansion expected between May 2022 and June 2023.

Rio Tinto had said in September it planned to raise up to $500 million through additional lending to develop the giant copper mine. The move, Rio said, would reduce the remaining funding requirement of the expansion to up to $1.4 billion.

By reprofiling, the parties sought more time to repay their debt, knowing that the principal of the extended debt, or in some cases even the interest rate on it, are not reduced.

Any remaining funding for the underground mine, Rio vowed, was to be met through a Turquoise Hill equity offering.

The Vancouver-based miner said late on Wednesday that the proceeding, which was started in British Columbia, followed recent discussions with Rio Tinto relating to the reprofiling.

It also said it would be between three and five months before the parties hear the results of the arbitration, which Turquoise Hill expects to be a binding decision.

BMO Metals and Mining analyst Edward Sterck criticized Turquoise Hill’s move. “It appears that Turquoise Hill wants Rio Tinto to backstop additional debt or a streaming agreement, which in our view is not in Rio Tinto’s best interests,” he wrote on Thursday. 

The expert said both options would leave Rio carrying all the risk at a capital cost likely higher than a direct equity funding option.

Mulling options

Turquoise is simultaneously advancing its evaluation of financing options for Oyu Tolgoi. Such alternatives include additional debt from banks or international financial institutions, an offering of global medium-term notes and a gold streaming transaction, it said.

The company had previously disclosed it was facing a funding shortfall for Oyu’s expansion of up to $4 billion, including balance sheet servicing costs.

BMO Capital Markets expects Turquoise Hill to be short between $1.5 and $2 billion, even before the $500 million the miner and Rio Tinto are hoping to secure.

The miner noted it would present Rio with details of the preferred funding options for its consideration before the end of the year.

Once completed, the underground section of Oyu Tolgoi will lift production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, which is now expected by 2025 at the earliest. This would make it the biggest new copper mine to come on stream in several years.

Oyu Tolgoi, located in the South Gobi desert near the border with China, produced 35,203 tonnes of copper and 26,154 ounces of gold in the first three months of this year.

Rio Tinto owns the mine through its majority stake in Turquoise Hill, which has a 66% interest in Oyu Tolgoi. The Mongolian state has the remaining 34% of the operation.

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