NEWS ANALYSIS: Mongolia has much to lose in Rio Tinto clash

August 21 09:11 2013 Print This Article

www.bdlive.co.za  AUGUST 20, 2013

IS RIO Tinto’s dispute with the Mongolian government over the expansion of the Oyu Tolgoi copper and gold mine the signal that the nation’s commodity boom is over?

Certainly, Mongolia’s reputation as a desirable investment destination and one of the few remaining countries ripe for developing natural resources has taken a battering recently.

Rio Tinto, the world’s second-largest mining firm, said last Wednesday it would eliminate 1,700 jobs at Oyu Tolgoi after a $5bn expansion of the project was put on hold last month. The dispute is over how the expansion is financed, and the Mongolian parliament has been recalled from its summer recess for an emergency session to try to find a solution.

But the real issue is how long it will take for Mongolia to get significant amounts of money from the mine, which is predicted to boost the economy by 35% by 2020. Rio Tinto’s Turquoise Hill Resources subsidiary owns 66% of Oyu Tolgoi, while the government owns the other third. The government has said Oyu Tolgoi, which has an operating open pit and a planned underground expansion, is at least $2bn over budget.

Rio disputes the figure, saying it is only $786m over budget. The higher the capital cost of the mine and any expansion, the longer it will take to pay off the investment, thus delaying returns.

The Mongolian authorities are also said to be concerned about the management fees charged by Rio Tinto for operating the facility, and whether local workers should be on the same pay scales as foreigners. So far Rio Tinto has played its cards close to its chest, saying publicly that both it and the government remain committed to expanding the project and resolving any issues.

The stakes are high for both parties, thus increasing the likelihood of an eventual compromise and resolution.

For Rio Tinto, Oyu Tolgoi represents one of the world’s largest untapped copper reserves, and its development will lessen the global miner’s reliance on its iron-ore mines in Western Australia.

Longer term, copper may be a better bet than iron ore, given the paucity of new copper reserves, the ageing of existing mines and still strong demand from industrialisation in China and India.

In contrast, iron-ore supply looks set to swamp demand in the next few years as Rio Tinto, its Australian competitor BHP Billiton and Brazil’s Vale all increase capacity, while demand growth in top consumer China is expected to taper.

For Mongolia, the development of the Oyu Tolgoi copper mine and the Tavan Tolgoi coal mine is the ticket to economic prosperity, with export earnings forecast at a combined $7bn by 2020, a huge amount for a country whose gross domestic product was $10.2bn last year.

It is no surprise that both the Mongolian government and Rio Tinto want to secure the best possible terms for themselves in developing the Oyu Tolgoi deposit. However, both will have to be wary about escalating the dispute to the point where the viability of the mining investment is called into question and investment perceptions are tainted by resource nationalism.

Firing about 1,700 workers is a fairly dramatic step by Rio Tinto, and the company appears to be betting that the Mongolian authorities need it more than Rio needs them.

There may be some truth to that. If the Rio Tinto investment does go sour, it would put Mongolia off the map for virtually any western company for decades. Given the absence of a good relationship with China, it is unlikely Mongolia wants to become dependent on investment from its southern neighbour.

Landlocked Mongolia would love to be able to sell its resources, such as coal, to countries other than China, but a lack of infrastructure to ship through northern neighbour Russia is a major obstacle.

Mongolian President Tsakhia Elbegdorj, who won re-election in June, is keen to exert more control over foreign mining investments. What this is likely to mean in practice is that the government wants a bigger share of the revenues without having to stump up capital for development.

While this can certainly be legislated, it will alter the risk-reward equation for assessing resource projects and potentially discourage new investment.

Both the Mongolian government and Rio Tinto have too much at stake to endure a protracted dispute.

But this does not mean that both parties will work quickly to resolve the issues. This will take leadership on both sides.

The coming emergency sitting of parliament, announced last Friday, and scheduled for September 2-6 sets the stage for a forced compromise. Parliament is to discuss foreign investment rules and could accelerate the approval of financing for the $5bn expansion of Oyu Tolgoi gold and copper mine.

Dale Choi, an analyst at Mongolian Metals & Mining Research, said that the recall was a “long overdue significant message from Mongolian authorities that the country wants back investment, both foreign and domestic”.

But the government is likely to be feeling more pressure than Rio Tinto, given lower commodity prices and coal prices, and a 43% slump in foreign investment in the first half of this year, both of which hurt the budget.

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Saranchimeg Enkhee
Saranchimeg Enkhee

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