Rio Says Mongolian Project’s Start Depends on End to Dispute

Rio Tinto Group, the world’s second- largest mining company, said its $6.6 billion Oyu Tolgoi copper mine in Mongolia won’t start until disagreements with the government are resolved.

“A number of substantive issues have recently been raised by the government of Mongolia, including the implementation of the investment and shareholder agreements and project finance,” London-based Rio said today in a statement. “Subject to the resolution of these issues, first commercial production from Oyu Tolgoi is scheduled to commence by the end of June 2013.”

Rio, which today named Jean-Sebastien Jacques as the new head of its copper unit, twice rejected Mongolia’s demands in the past 18 months for a greater share of profits from the mine. President Tsakhia Elbegdorj said this month Mongolia should have more control of the copper-gold operation that will be the biggest contributor to its economy once it’s in full production.

“I’m concerned by recent political signals within Mongolia calling into question some aspects of the investment agreement,” Rio Chief Executive Officer Sam Walsh said during a webcast presentation today. “This undermines the partnership we’ve built and the stability on which a project of this size and scale depends.”

Rio and Mongolia, which held talks on Feb. 7 in the capital Ulan Bator, plan to resume discussions this month to resolve concerns that spending at Oyu Tolgoi is overshooting and the country isn’t benefiting enough from the development.

Mongolian Talks

The government is seeking to boost Mongolian participation in management and increase the number of local companies that can benefit from the project, including the use of a Mongolian bank.

“Jean-Sebastien has already been involved in the discussions in Mongolia and in fact he was there last week as part of the shareholder meeting and part of the discussions with the Mongolian government,” Walsh said today on a conference call after reporting the company’s first annual loss.

Rio slipped 0.3 percent to 3,745.5 pence by the close in London, with 8.09 million shares changing hands, double the daily average volume for the past three months.

Rio is considering a temporary halt to work to protest government demands for a greater share of profit, two people familiar with the plans said last month. The mine, the biggest copper project currently under construction, is 66 percent-owned by Rio unit Turquoise Hill Resources Ltd. and 34 percent by Mongolia’s government.

Beat Expectations

Rio would continue to engage with the government to implement its 2009 investment and shareholder agreements “in their current form,” the company said in its statement.

Rio reported a better-than-expected second-half loss as earnings at its iron ore unit beat analyst estimates and it raised its dividend.

The loss was $8.9 billion in the six months ended Dec. 31, from a $1.76 billion loss a year ago, Rio said today in an e- mail. That’s better than the $10 billion median estimate of five analysts surveyed by Bloomberg. The loss, the biggest in at least 15 years, was driven by $14 billion in writedowns on the value of its aluminum and coal businesses and offset by an almost $1 billion benefit from its minerals sands operations.

The writedowns saw Walsh last month named as CEO, replacing Tom Albanese who signed off on the $38 billion takeover in 2007 of Alcan Inc. Rio, which reported full-year underlying earnings of $9.3 billion that beat analyst expectations, said today it boosted its full-year dividend by 15 percent and accelerated expansion at its iron ore mines in Australia.

Pilbara Acceleration

Rio said it has accelerated “phase one” of its Pilbara iron-ore expansion to be completed in the third quarter. The expansion will boost production to 290 million metric tons a year, while a second increase in output to 360 million tons will be operational in the first 6 months of 2015.

The company will pursue an “unrelenting focus” in creating better value for shareholders, Walsh said in the presentation. The company said it is cutting capital expenditure to $13 billion in 2013 from $17 billion last year, while targeting cash cost savings of more than $5 billion by the end of next year.

Rio said its disciplined capital management will help maintain its single A credit rating. Walsh ruled out acquisitions for the moment, saying deals are “not on my radar.” Chief Financial Officer Guy Elliott also said the return of cash to shareholders in the form of a buyback shouldn’t be expected this year.

Costs History

“The group appears to have taken its major writedowns this year and looks well set to pass on the benefits of its cost reduction program through 2013,” John Meyer, a mining analyst at SP Angel in London, said in a note. “Rio has a good long- term history of managing its costs and should realize significant benefit going forward.”

Rio said iron-ore production would be 265 million tons this year, while it would produce 8.5 million tons of hard coking coal, 20.5 million tons of thermal coal and 665,000 tons of copper. The production outlook is “weaker” than Liberum Capital Ltd. had estimated, the brokerage said in a note to investors.

Rio’s second-half earnings from its iron ore unit fell as prices for the steel making ingredient declined. Iron ore prices averaged 27 percent lower during the six months to Dec. 31 than a year earlier, at about $116 a ton, data from The Steel Index shows.

Prices have since recovered from a three-year low in September to a 15-month high of $158.50 a ton last month on signs of economic recovery in China, the biggest consumer of industrial metals.

“We see positive momentum in the fourth quarter last year being sustained into 2013 with Chinese GDP growth returning to above 8 percent in 2013,” Walsh said in a statement. “We expect market uncertainty and price volatility to persist as long as the structural issues in Europe and the United States remain unresolved.”

To contact the reporters on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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