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Rio Tinto, Mongolia reach agreement in principle over Oyu Tolgoi Mine
April 6, 2015

Mongolian prime minister Saikhanbileg Chimed announced that his government has reached an agreement, in principal, with Rio Tinto about the second phase of the Oyu Tolgoi gold and copper mine.

The two sides have been deadlocked for two years as Rio Tinto and the government clashed over a tax dispute and cost overruns during the first construction phase, The Financial Times reported.

Chimed said the agreement had been reached with investors for building on the next stage of Oyu Tolgoi and the smaller Tavan Tolgoi coking coal mine.
“The two sides have reached agreement, in principle, on the main points of dispute. Soon we will officially announce these results to the international community, after bureaucratic levels finalize relevant steps,” said Chimed.

For Mongolia, much rests on resolving the Oyu Tolgoi dispute. Foreign direct investment fell last year with the downturn in commodity prices. The currency is weakening steadily and debt payments are looming.

Between March 2017 and January 2018, external debt amounting to $1.08 billion matures. Mongolia’s aim to roll this over will depend on the creditworthiness of its balance sheet.

Mongolia is not the world’s most resource-dependent economy — it is outranked by some Opec countries — but it is among the top when it comes to mining. The commodities boom initially lifted its economy almost 12-fold from just over $1 billion when the supercycle began a decade ago.

Negotiations with Rio Tinto, whose annual revenues are about five times Mongolia’s gross domestic product, have centred on the $6 billion underground extension to the Oyu Tolgoi copper mine. Mongolia receives no dividends from its 34 percent stake in the mine until borrowings on the original mine are repaid, which it hopes to be able to do via increased output.

But it can contribute little to financing the expansion. Rio Tinto earlier rejected a proposal for the government to take a smaller stake than its legally mandated 34 per cent in return for higher royalties.

For its part, Rio Tinto has been reluctant to commit to a remote and expensive copper mine when low prices are forcing spending cuts elsewhere. It has cut about $5 billion in operating expenses globally since 2012.

 

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