Mongolia Wants Mine Stage 2 Funded by Cash Amid Talks (Correct)

August 13 07:02 2013 Print This Article

bloomberg.com  2013-08-13

By Michael Kohn
Mongolia wants the planned $5.1
billion expansion at Rio Tinto Group’s Oyu Tolgoi mine to be
financed from cash flow until a dispute over the cost of the
biggest foreign investment in the nation is resolved.
Cost overruns at the copper and gold mine, 34 percent owned
by Mongolia, are increasing the debt the government owes to
Rio’s Turquoise Hill Resources Ltd. unit, which operates the
project, Minister of Mining Davaajav Gankhuyag said on Aug. 9.
Rio delayed work on the underground expansion last month
amid the dispute over financing that contributed to production
delays at the first stage of the mine. Outstanding issues that
need to be resolved include taxes and the right to a royalty
stream from the project.
“The positions are still far away from each other, there
is still a lot of work to do,” said Dale Choi, the founder of
Independent Mongolian Metals and Mining Research. “There needs
to be substantial political will to reach an agreement but at
the moment there are a lot of arguments against the project
financing,”
Oyu Tolgoi, located 550 kilometers (340 miles) south of
Ulaanbaatar in the Gobi Desert, began shipping concentrate last
month and is forecast to be a key revenue earner for Mongolia,
where foreign direct investment slumped 43 percent in the first
half.

‘High Risk’

“Until the project financing is resolved I think it is
proper to continue the underground mine with revenues from
concentrate,” Gankhuyag said in a letter to Rio Tinto that he
showed reporters on Aug. 9. “The costs specified in the
feasibility study are creating a high risk of reducing profits
to the Mongolian side,” he told reporters.
David Luff, a Melbourne-based spokesman for Rio Tinto,
declined to comment on the mine minister’s letter, and referred
to last week’s remarks by Chief Executive Officer Sam Walsh, who
said both parties “want phase two to go ahead.”
Since deliveries began last month, Oyu Tolgoi has shipped
4,000 metric tons of concentrate, Gankhuyag said. The company
plans to export 300,000 tons of concentrate this year with
revenue of $1 billion, Gankhuyag said.
The project finance package, with funding from the
International Financial Corporation, among other lenders, must
be approved by the Oyu Tolgoi board of directors, which includes
three Mongolian nationals.

Royalty Dispute

Another point of dispute is a royalty on production to be
collected by Rio Tinto, he said. “Mongolia believes that only
the state has the right to take a royalty,” he said.
When construction is complete, including the tunnels that
will make up the underground portion of the mine, the total cost
to build Oyu Tolgoi may exceed $24 billion, significantly higher
than the $14 billion that Mongolia had first anticipated,
Gankhuyag said.
To pay for its 34 percent stake, Mongolia borrowed $800
million from Rio Tinto and pays interest of 7 percent to 8
percent a year, said Chuluuntseren Otgochuluu, the Director-
General of the Mining Ministry’s Department of Strategic Policy
and Planning.
Mongolia is also concerned about cost overruns on
infrastructure for the mine which Otgochuluu said have topped $1
billion. A planned power station for the project hasn’t yet been
built, he said.
“We don’t understand why the main jobs are not yet done
but the financial overrun is so high,” said Otgochuluu.
A task force is currently conducting an audit of $2
billion spent during the first phase. The results of the audit
will be available in two to three weeks, Otgochuluu said.

For related news and information:
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Rio Delays $5.1 Billion Expansion Pending Mongolia Approval NSN
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–Editor: Jason Rogers

To contact the reporter on this story:
Michael Kohn in Ulaanbaatar at +65-6212-1000 or
mkohn5@bloomberg.net

To contact the editor responsible for this story:
Jason Rogers at +65-6231-3673 or
jrogers73@bloomberg.net

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Saranchimeg Enkhee
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