Rio Tinto’s Mongolian Project Faces Power Setback

on Sep 25, 2012

Rio Tinto’s (NYSE:RIO) Oyu Tolgoi mine in Mongolia is nearly complete, but a power struggle is likely to keep the mine’s operational activity on hold a while longer, The Financial Times reported on 21 September, 2012. The British-Australian mining company is in the middle of complex negotiations between China and Mongolia regarding the commercial terms over the power supply contract for Rio Tinto’s copper-gold mine, located in the Gobi Desert in Mongolia, near the Chinese border.

A spokesperson for Rio Tinto said: “Active discussions are continuing on the commercial agreement. You have to remember this is a complex deal but we are maintaining our focus and working hard towards reaching an agreement.”
!m[](/uploads/story/459/thumbs/pic1_inline.png)Rio Tinto has decided to use the Chinese grid for its Mongolian operations. The power lines from China have even been built and tested, but the two countries are still trying to reach an agreement over the commercial terms of the electricity supply deal. When the mine’s co-owner Turquoise Hill Resources (TSE:TRQ) announced last month that Oyu Tolgoi was 94 per cent complete, they did not consider the ongoing power struggle between China and Mongolia, which is hindering the realisation of further steps in the mine’s development. For now the copper-gold mine sits idle after a three-year, $5.2 billion (£3.2 billion) construction effort. According to the FT, citing rough estimates based on the mine’s first-year production forecast, if the delay persists, the mine will miss out on roughly $8.4 million (£5.1 million) in delayed revenues each day from gold and copper production.

The relationship between China and Mongolia has never been amicable and it is a relationship that is marked by mistrust and suspicion. As a result, Rio Tinto is finding it very difficult to light up its own mine in the Gobi Desert, though the region is very promising, holding untapped copper and gold resources. Although it has not yet begun its operations, the Oyu Tolgoi mine already accounts for about 30 per cent of Mongolia’s $10 billion (£6.1 billion) economy and is the biggest foreign investment in the country to date. The mine is set to produce more than 1.2 billion pounds of copper, 650,000 ounces of gold and 3 million ounces of silver each year with commercial production scheduled for the first half of 2013. Yet, Rio Tinto stated that if a deal on power supply cannot be reached soon, it is unlikely to achieve this start-up target date.

Another problem that the British-Australian miner faces in regards to its Oyu Tolgoi project is the increasing resource nationalism. Earlier this month, an influential group of Mongolian lawmakers urged Prime Minister Norov Altanhuyag to seek talks with Rio Tinto to trim the mining giant’s stake. In a petition to the prime minister a group of 24 members of parliament called for the enforcement of a parliamentary resolution which says that the Mongolian government should own 51 per cent of the project once foreign partners recoup their start-up investment. Rio Tinto responded to the petition by saying that the agreement cannot be changed. Under the current terms of the investment, Rio Tinto owns a majority stake of 66 per cent of the mine, whilst the remaining 34 per cent are held by the Mongolian government.


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