Rio Tinto’s Mongolian copper mining dream lives on, but at a cost
Rio Tinto’s most important growth asset has taken a major step toward development, after the Mongolian government agreed to a $US148 million settlement that will allow a $US5.4 billion expansion of the Oyu Tolgoi copper mine to go ahead.
Ending an impasse that has lasted for close to three years, Rio and its subsidiaries agreed to pay a $US30 million tax claim, backpay ten months worth of royalties to the Mongolian government and cede control of a lucrative smelter royalty in return for permission to push ahead with the expansion, which is considered to contain about 80 per cent of Oyu Tolgoi’s value.
The fine print of the settlement shows that those items are worth up to $US148 million, but Rio said the cost was less than 2 per cent of the value proposition within the project.
“There has been no material value leakage from one party to the other,” said Rio’s copper boss Jean-Sebastien Jacques.
“The value leakage, or value transfer from one party to the government of Mongolia, is very small and it is less than 2 per cent of the overall value of the project.”
Mr Jacques said the 2009 investment agreement upon which Rio’s entry to Mongolia was based has not been changed.
“There was no change to the investment agreement or our shoulder agreement whatsoever … we did clarify some terms,” he said.
Deutsche mining analyst Paul Young said the money that would flow to Mongolia under the new settlement was a small price to pay for a project of such significance.
“That is not material, part of that $US140 million is from adjusting the terms back to what they should be on any mining project in the world,” he said.
Mr Young, who visited Oyu Tolgoi late last year, said Oyu Tolgoi was “absolutely” Rio’s most important growth asset.
“This is the best undeveloped copper project globally and probably the best undeveloped asset in the industry,” he said on Tuesday.
Located in the desolate South Gobi desert, the giant copper, gold and silver project has an official mine life of 41 years, but some believe it will operate for more than a century before the full size of the deposit is revealed.
Rio’s exposure to the mine comes through its 50.79 per cent stake in Canadian company Turquoise Hill Resources, which owns 64 per cent of Oyu Tolgoi.
The Mongolian government owns the remaining 34 per cent of the asset.
In a sweet irony for Rio shareholders, both Oyu Tolgoi and the nearby coal deposit that will power it, Tavan Tolgoi, were previously held and passed over by its old rival BHP Billiton.
Despite the significance of the agreement, Rio still has more work to do in Mongolia, where it must strike a power deal with the government-controlled Tavan Tolgoi, win approval from the government for a feasibility study, and obtain certain permits from the government before starting construction.
Despite those uncertainties, and Mongolia’s track record of seeking to renegotiate the investment agreement for Oyu Tolgoi, Mr Jacques said he was confident the agreement would pave the way for work to resume on the expansion.
Mongolian Prime Minister Chimediin Saikhanbileg said Mongolia was “back in business”.
“We have finalised a way forward with our partners which re-establishes the foundations of a new and constructive relationship based on mutual trust,” he said.
The settlement means Rio and its partners can return to a syndicate of lenders and ask them to revive their previous commitments to supply more than $US4 billion of finance toward the expansion.
More than a dozen international banks had twice extended those commitments, but the lengthy dispute between Rio and the Mongolian government saw most of those commitments expire during 2014.
Mr Jacques confirmed that funding commitments from the World Bank’s International Finance Corporation, and the European Bank for Reconstruction and Development were still valid.
Australia’s taxpayer-funded Export Finance and Insurance Corporation had also vowed to fund the expansion, but the corporation was unable to clarify on Tuesday whether those commitments were still valid.
“What we are going to do in coming weeks and months is to re-engage with the entire consortium in order to put the product finance back in place,” said Mr Jacques.
Mr Jacques indicated that production from the expansion was unlikely to start until after 2022.
“It is a big project, it is about 200 kilometres of underground development and it will take between five and seven years to build the mine,” he said.
“If, in a perfect world, we were to be able to get all the permits and all the approvals to them today, it would take five to seven years to be able to get to production.”
But Mr Young was more optimistic about the schedule.
“My view is they are well advanced, and we think it can be into commercial production by 2019 or 2020,” he said.
Oyu Tolgoi is particularly important for Rio given prices for its biggest money-spinner, iron ore, are widely considered to be past their peak, and the company is banking much of its future prosperity on copper.
Earlier this month Mr Jacques said copper markets would be short of supply within 18 months or two years, but he said on Tuesday he was not worried that the Oyu Tolgoi expansion would not be ready for that period.
“I think the next cycle for copper will be very long and very attractive and therefore I truly believe we will be able to fully harvest the next cycle in terms of copper,” he said.
When asked whether Oyu Tolgoi was Rio Tinto’s most important growth asset, Mr Jacques said it was “one of the most important ones”.
Rio shares were unchanged on Tuesday at $57.45.
The benchmark copper price was $US2.89 per pound on Tuesday, having risen 17 per cent over the past four months.
But despite that rise, prices for the conductive metal are still well below the range they traded within during 2014 – between $US3 and $US3.50 per pound.
Copper prices rose above $US4.50 per pound around the peak of commodity prices in early 2011.