Mongolia and Rio Tinto agree $5bn Oyu Tolgoi mine expansion
Plans for an underground expansion of the mine near China have been stalled for two years because of disagreement between the Anglo-Australian group and Mongolia’s government over sharing the project’s costs and revenues.
Expanding the Oyu Tolgoi mine would significantly increase Rio’s exposure to copper, a metal that many analysts say is heading for supply constraints that should support the price.
Rio would also rely less on iron ore, where growth in supply and lacklustre demand has sent benchmark prices plummeting.
However Rio said production from the expansion is unlikely before 2020.
Jean-Sébastien Jacques, Rio’s chief executive for copper and coal, said the project still needed an approved feasibility study, permits from the Mongolian authorities and board approval.
“We want to bring this on line when the copper market recovers to maximise value,” he said. “Even if a decision was made today it would take five to seven years to build.”
Rio controls the project through its majority ownership of Turquoise Hill, the separately-listed Canadian miner that owns 66 per cent of Oyu Tolgoi. Mongolia owns the remaining 34 per cent.
Oyu Tolgoi’s initial phase started production in 2013 after an investment of more than $6bn, but the companies say more than 80 per cent of the mine’s value is in the underground expansion.
Multilateral lenders and international banks had previously signalled willingness to lend $4bn in project finance for the expansion, which is estimated could cost $5bn-$6bn.
Patrick Jones, analyst at Nomura in London, said Rio wanted to minimise its capital spending during the mining downturn. “We would think Rio would deploy a ‘go-slow’ strategy for starting capex spend for Oyu Tolgoi Phase II for a while,” he said in a research note.
Restarting construction work at Oyu Tolgoi would nevertheless boost Mongolia’s economy, which has suffered as foreign investment — much of it linked to mining — has dried up. Analysts see the mine as a test for the country’s relations with international investors.
Anushka Shah, sovereign risk analyst for Moody’s in Singapore, said the deal could trigger other investments in the country, although Mongolia faced a period of “precariousness” in its foreign reserves and potential policy divisions during its upcoming election season.
Mongolia is due to pay back $1.1bn in external bonds in the next two years, equal to roughly a tenth of annual gross domestic product.
The deal with Mongolia removes some fees that eroded the country’s revenues from the mine, including a reduction from 6 per cent to 3 per cent in the service fee that Rio charges on top of its revenue split.
There is, however, no cap on Rio’s fees — an arrangement that could lead to wrangling over future cost overruns.
Turquoise Hill has relinquished a 2 per cent royalty fee, a legacy of the mine’s earlier ownership, and accepted a change in how royalties to the state are calculated. It will pay a $30m Mongolian tax bill, instead of $127m that was initially calculated, in line with a compromise offered by Mongolian authorities last year.
Turquoise Hill said the changes affected less than 2 per cent of the $7.4bn “net present value” attributed to the expansion project in a study last year.