Feb. 26 (Bloomberg) -- Rio Tinto Group’s crucial meeting with Mongolia tomorrow follows weeks of disputes over control of the world’s biggest copper and gold mine under construction, according to two people familiar with the situation.
Financing for the $6.6 billion Oyu Tolgoi mine runs out in three days and tomorrow’s talks to extend the funding come amid allegations of unpaid taxes, and frozen and then unfrozen bank accounts that raise doubts about the project’s future.
Mongolia’s government blocked some of London-based Rio’s bank accounts in the capital Ulan Bator over unpaid tax claims, said the people, who asked not to be identified because the information isn’t public. The accounts were unfrozen yesterday, the people said. That may help improve relations at the talks, one of the people said.
President Tsakhia Elbegdorj this month criticized Rio for cost overruns and said Mongolia wants more control of a project that will represent 30 percent of the economy once in full production. Rio, the world’s second-biggest mining company, has considered suspending work until these issues are resolved, two people familiar with the matter said last month. Oyu Tolgoi is scheduled to start production in June.
A spokesman for Rio Tinto in London declined to comment. An assistant to Puntsag Tsagaan, the senior adviser to the Mongolian president on mining, yesterday said Tsagaan was out of the country and unavailable. Tsagaan didn’t reply to e-mailed questions sent yesterday. Finance Minister Chultem Ulaan said he couldn’t discuss the issue when contacted by phone today.
Rio fell 0.8 percent to close at 3,500 pence in London trading. It earlier slid 0.9 percent to A$65.57 in Sydney.
The company is paying for most of its operational needs in Mongolia through offshore accounts while the dispute continues, two of the people said.
The tax disagreement hinges on $150 million in payments made by Rio in 2010 and 2011, which the company said entitled it to tax credits from 2012, one of the people said. When Rio sought to use the credits, Mongolia’s tax authorities said that the payment wasn’t completed correctly and needs to be renegotiated, the person said.
“Some people incorrectly accuse Oyu Tolgoi of not paying its taxes,” Oyu Tolgoi LLC, the unit that operates the project, said in a Feb. 5 statement on its website, following the president’s remarks. From January 2010 through November 2012, Rio paid $803 million in taxes and payments to the government, as well as $150 million in the form of a tax pre-payment, according to the statement.
Rio Tinto won’t start commercial production as planned until matters such as implementation of the investment and shareholder agreements and project finance are resolved, the company said this month.
“I’m concerned by recent political signals within Mongolia calling into question some aspects of the investment agreement,” Chief Executive Officer Sam Walsh said on Feb. 14 during a webcast presentation, remarks that he repeated yesterday at a mining conference in Florida. “This undermines the partnership we’ve built and the stability on which a project of this size and scale depends,” he said.
Mongolia owns 34 percent of Oyu Tolgoi and Rio the rest through its Turquoise Hill Resources Ltd. subsidiary. 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 Mongolian banks.
The country should have representation “in all the most important decision making departments, for example the financial department, procurement department, legal department, sales and project services department,” Elbegdorj said this month.
The mining ministry today said it canceled two licenses held by Canada’s Entree Gold Inc. on land that forms part of the Oyu Tolgoi deposit. Elbegdorj this month requested Rio Tinto to transfer all licenses connected to the mine to the venture between the government and Rio. That included Entree Gold, which is 23.6 percent owned by the company.
Entree Gold in 2009 upgraded its exploration permits to mining licenses, the ministry said today in a statement on its website. Only the Mineral Resource Authority is allowed to award mining licenses by law and so therefore those are invalid, according to the statement.
Oyu Tolgoi, Mongolia’s biggest foreign investment project, was the sixth-largest taxpayer in 2011. The country is seeking extra revenue from the mine to fill budget gaps, one of the people said.
“The Oyu Tolgoi investment agreement that was signed in October 2009 was a game changer for Mongolia,” said Jackson Cox, CEO of Woodmont International, an Ulan Bator-based consultant. The conflict over the accord is damaging to Mongolia’s economy, he said.
At the same time, “Rio has failed miserably at winning the hearts and minds of the Mongolian people,” Jackson said. “This support should have been built and cultivated over the years.”