Rio Tinto, Mongolia reach deal to replace Oyu Tolgoi expansion plan

Oyu Tolgoi copper mine open pit has been producing since 2012. (Image courtesy of Turquoise Hill.)

Rio Tinto (ASX, LON, NYSE: RIO) and the Mongolian government are said to have reached a new agreement governing the $6.75 billion expansion of the vast Oyu Tolgoi copper-gold mine in the Gobi Desert.

The deal would end a three-month spat between the world’s second largest miner and Mongolia, triggered in part by Rio’s confirmation of a “definitive estimate” budget for the project. The fresh figure was $1.45 billion higher than the original expected cost set up in 2015.

The announcement also showed that Mongolia could not expect to start receiving dividends from its 34% ownership of the mine in 2032 as originally expected. Rather, it fuelled fears that the country would not receive any dividend before Oyu Tolgoi’s reserves were depleted.

This prompted Asian nation to ask Rio Tinto and its majority-owned Turquoise Hill (TSX, NYSE: TRQ) to revisit the economic benefits the expansion will bring to the state’s coffers or face a potential cancellation of the deal.

Sources familiar with the matter had told MINING.COM in early February that Rio was open to table a new deal, without given further details.

Rio Tinto is willing to reduce the interest rate and the fee it charges Mongolia for managing the project’s development.

After weeks of escalating tensions and private talks, the mining giant has worked out a new arrangement with the Mongolian government to finance the costly mine expansion, Nikkei Asia reports.

“Both sides have agreed to work on cancelling the 2015 deal and building a new one,” Mongolia’s deputy cabinet secretariat chief and one of the government’s negotiators told the Asian financial newspaper.

A crucial topic of the new deal will be how to handle further cost increases.

“There is no regulation in the underground mine development contract about what to do if the underground mine construction cost increases in the future,” Bayasgalan Enkhbaatar, a government appointee on Oyu Tolgoi’s board, told Nikkei Asia. “That is why we want to build a new contract, not amend the 2015 deal.”

The official added that Rio was willing to reduce the interest rate and the fee it charges Mongolia for managing the project development.

The news reinforces chief executive Jakob Stausholm’s public commitment to Oyu Tolgoi.

“A potential renegotiation of the mining agreement could result in some value leakage as the government seeks to accelerate its access to cash flows,” Morgan Stanley analyst Alain Gabriel wrote in February.

Rio Tinto has repeatedly said the underground expansion is its most important growth project. Once completed, Oyu Tolgoi will churn out 480,000 tonnes of copper a year from 2028 to 2036.

Problems at home

News of a potential new agreement between Rio Tinto and Mongolia come as the Australian Taxation Office (ATO) has hit the miner with a fresh A$406.5 million ($317m) bill.

The amended tax assessments relate to the denial of interest deductions on an isolated borrowing used to pay an intra group dividend in 2015. This borrowing was repaid in 2018, Rio said.

The miner said the ATO claim for an additional A$406.5 million was on top of more than A$8.4 billion ($6.4bn) of Australian income tax paid during the relevant period and that borrowing to fund the payment of a dividend was a normal commercial practice.

“Rio Tinto is confident of its position and will dispute the assessments,” it said in the statement.

The development means that company and the ATO are now clashing on three matters, totalling almost A$939 million ($732m). The other two issues are currently the subject of talks between Australian and Singapore tax authorities.

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