Rio Tinto and Mongolia reach agreement on new Oyu Tolgoi copper mine expansion plan

Rio Tinto and the Mongolian government have reached a new agreement to spend US$6.75 billion to expand the Oyu Tolgoi copper-gold mine in the Gobi Desert.

The transaction will end a three-month dispute between the world’s second-largest miner and Mongolia, partly because Rio Tinto confirmed the “final budget” for the project. The new figure is $1.45 billion higher than the initial projected cost set in 2015.

The announcement also showed that Mongolia cannot start to receive dividends from its 34% mine ownership in 2032 as originally expected. On the contrary, this has heightened concerns that the country will not be able to receive any dividends until Oyu Tolgoi’s foreign exchange reserves are exhausted.

This prompted the Asian country to ask Rio Tinto and its holding company Turquoise Hill to re-examine the economic benefits that expansion will bring to the national treasury, or the transaction may be cancelled.

People familiar with the matter told MINING.COM in early February that Rio Tinto is willing to propose a new deal, but did not disclose more details.

According to a report by Nikkei Asia, after weeks of escalating tensions and private talks, the mining giant reached a new arrangement with the Mongolian government to fund a costly mine expansion.

The Deputy Secretary-General of the Mongolian Cabinet and one of the government’s negotiators told the Asian financial newspaper: “The two sides agreed to work to cancel the 2015 agreement and establish a new agreement.”

A key issue of the New Deal will be how to deal with further increases in costs.

Bayasgalan Enkhbaatar, the government appointed official of the Oyu Tolgoi board of directors, told Nikkei Asia: “In the underground mine development contract, there is no stipulation on what to do if the construction cost of the underground mine rises in the future. This is why we hope to sign a new contract. Rather than amending the 2015 agreement."

The official added that Rio Tinto is willing to lower interest rates and lower the project development management fees charged to Mongolia.

This news reinforces CEO Jakob Stausholm's public commitment to Oyu Tolgoi.

Morgan Stanley analyst Alain Gabriel wrote in February this year: “As the government seeks to accelerate cash flow, the potential renegotiation of the mining agreement may result in some value loss.”

Rio Tinto has repeatedly stated that underground expansion is its most important growth project. Once completed, Oyu Tolgoi will produce 480,000 tons of copper per year from 2028 to 2036.

Domestic issues

As news broke that Rio Tinto and Mongolia might reach a new agreement, the Australian Taxation Office (ATO) issued a new fine of 406.5 million Australian dollars (317 million US dollars) to mining companies.

The revised tax assessment involved a separate loan used to pay group dividends in 2015 and was denied interest deduction. Rio Tinto stated that the debt was repaid in 2018.

The mining company said that the Australian Taxation Office's request for an additional A$406.5 million was made on the basis of more than A$8.4 billion ($6.4 billion) in Australian income tax paid during the relevant period. Borrowing money to pay dividends is normal business practice.

Rio Tinto said in a statement: “Rio Tinto is confident in its position and will raise objections to the evaluation.”

This development means that the company and the Internal Revenue Service are currently in conflict on three issues, totaling nearly 939 million Australian dollars (732 million US dollars). The other two issues are currently the subject of negotiations between the Australian and Singaporean tax authorities.