Mining giant Rio Tinto is facing the threat of the Mongolian government halting its $8.7 billion expansion of the Oyu Tolgoi copper-gold mine amid concerns about cost blowouts eroding economic benefits for the developing nation.
In a fresh setback for Rio's problem-plagued project, the Mongolian government this week warned the Anglo-Australian miner it was dissastisfied with the progress of the Oyu Tolgoi underground mine expansion and was now considering revoking its 2015 mine development and financing plan unless fiscal returns were improved.
The plan to enlarge the Oyu Tolgoi mine has been beset by a series of delays and cost blowouts since construction began in 2019.Credit:Bloomberg
The New York and Toronto-listed shares of Rio's majority-owned Turquoise Hill Resources, which provides the miner's exposure to Oyu Tolgoi, dropped by nearly 20 per cent following the news. Rio shares were down 0.5 per cent to $121.83 on the ASX in afternoon trade.
"The government of Mongolia has indicated that if the Oyu Tolgoi project is not economically beneficial to the country, it would be necessary to review and evaluate whether it can proceed." Turquoise Hill said.
"In particular, the government of Mongolia has expressed its intention to initiate discussions with
respect to the termination and replacement of the UDP [underground development plan]."
The Oyu Tolgoi deposit in Mongolia's Gobi Desert is one of the world's largest-known copper and gold deposits. The Mongolian government holds a 34 per cent stake in Oyu Tolgoi and Turquoise Hill owns 66 per cent.
Top growth project
Rio's long-held plan to enlarge the mine is considered its most important growth project and a key plank of the company's ambition to diversify away from iron ore, which accounts for more than 80 per cent of its earnings. But the project has been beset by a series of long delays and cost blowouts since construction began in 2019. The mine's expansion was first anticipated to cost $US5.3 billion ($6.8 billion) but is now likely to exceed $US6.7 billion ($8.7 billion), Rio told investors in October.
The problems at Oyu Tolgoi loom as an early challenge for Rio Tinto's newly minted chief executive, Jakob Stausholm, after he assumed the top job at Australia's second-largest miner on January 1. Mr Stausholm replaced former CEO Jean-Sebastien Jacques, who resigned amid investor demands for accountability over the miner's disastrous decision to blow up two culturally significant Aboriginal rock shelters which had evidence of continual human occupation dating back at least 46,000 years.
Morgan Stanley analyst Alain Gabriel said the potential renegotiation of the Oyu Tolgoi agreement increased risks around the project's timing and budget.
"Any delays in obtaining approvals beyond the first half of 2021 may result in further value erosion of the project, which we expect to ramp up in October 2022," he said. "A potential renegotiation of the mining agreement could result in some value leakage as the government seeks to accelerate its access to cash flows."
Rio Tinto and its partners have invested more than $11 billion in Oyu Tolgoi over the past decade.
In a statement, Turquoise Hill said it was committed to "engage immediately" with the Mongolian government and Rio Tinto to "revisit the sharing of economic benefits" arising from the Oyu Tolgoi project.
Rio pledged to work with the Mongolian government to ensure the project stayed on track for the next phase of development, which would unlock the most valuable part of the project.
"Rio Tinto has been engaged with the government in good faith in relation to the topics raised … and remains open to improving the underground development plan to increase the benefits of Oyu Tolgoi to all shareholders," the company said.
The Oyu Tolgoi mine is Mongolia's biggest source of foreign investment and provides thousands of local jobs.
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