Rio Tinto rejected a request from the government of Mongolia to renegotiate the current deal that is established for the $6.2 billion Oyu Tolgoi copper mine.
Mongolia’s new government is in the process of passing a 2013 budget whose draft proposal includes increasing taxes and royalties on the mine by $300 million.
The Minister of Mining sent a letter requesting amendment of the investment agreement that became effective in March 2010, Vancouver-based Turquoise Hill Resources Ltd. (TRQ), Rio Tinto’s partner in the Oyu Tolgoi copper and gold mine, said in a statement. “Rio Tinto is fully aligned with Turquoise Hill’s position,” said Illtud Harri, a Rio Tinto spokesman. London-based Rio owns 51 percent of Turquoise Hill, formerly Ivanhoe Mines Ltd, Businessweek reported.
Mongolia’s government said last year it wanted to boost its stake in Oyu Tolgoi to 50 percent from 34 percent as well as make changes to royalty payments. Turquoise Hill owns 66 percent of the project in southern Mongolia, with first output expected in the first half of 2013.
The mining industry has been a boon for the sparsely populated Mongolia, driven in large part after an agreement in 2009 for the copper mine at Oyu Tolgoi.
The agreement in 2009 froze tax rates over the life of the mine. It safeguarded the project for Rio Tinto and its suppliers, which began spending billions of dollars to build a vast copper mine in the Gobi Desert.
Even an attempt at renegotiation could hurt Rio Tinto. If the company seeks international arbitration to resolve the issue, it could delay the start date for the mine. Construction is almost complete, with commercial production expected to start in 2013, The New York Times reported.
In Ulan Bator, however, investors and foreign governments are more worried about the effect of renegotiation on the country’s growth rate.
“If there appears to be an attempt at renegotiating or somehow reneging on the investment agreement, that could have a possibly catastrophic effect on the country,” said David Wyche, the economic section chief at the United States Embassy in Ulan Bator. “It could stop the flow of foreign capital into Mongolia.”
The caucus of Mongolia’s Democratic Party, which leads a coalition government in place since August, passed a budget proposal that called for a new sliding royalty on Oyu Tolgoi’s revenue that would rise to 20 percent depending on the copper price. The 2009 investment agreement set the royalty rate at 5 percent.
The new plan would also raise Oyu Tolgoi’s effective tax rate by eliminating income-tax allowances. The government would bring in 221.3 billion tugriks, or $160 million, from the royalty and 224.5 billion tugriks, or $163 million, from corporate income tax, according to estimates in the draft budget proposal.
Parliament will decide whether to adopt or modify the proposal.
The budget is crucial for Mongolia, which faces a fiscal deficit this year that is expected to widen next year. Revenue from coal, the country’s biggest export, plunged over the summer, national statistics show, because of a drop in both price and volume. Mongolia’s mining boom depends on commodities demand from China, whose economy has slowed this year.
To date, Rio Tinto and its partners in the Oyu Tolgoi project have spent $6.2 billion building the mine. The project still requires billions of dollars to expand the mine, which is taking shape 1,300 m (4,200 ft) beneath the surface of the Gobi Desert.