Oct. 27 (Bloomberg) -- Mongolia and Rio Tinto Group have resolved some of the disputes that have stalled the expansion of their $6.6 billion Oyu Tolgoi copper mine, a Mongolian board member of the venture said.
“Within the last 10 days we could resolve certain issues; we have reduced the state of urgency,” Davaadorj Ganbold, one of three Mongolian nationals on the Oyu Tolgoi LLC board, said in an interview in Ulaanbaatar yesterday, adding that some points remain to be agreed on.
“Issues related to cost overruns, the feasibility study and project financing are large and broad issues that cannot be resolved in four or five days,” said Ganbold, a board member since September and also executive director at Erdenes Oyu Tolgoi LLC, the company that holds the government’s 34 percent stake in the project.
Rio in July delayed work on the expansion, which is expected to cost about $5.1 billion, until wrangles with the government on funding and other issues are resolved. While open-pit work continues, the dispute has led to the suspension of underground construction and the layoff of about 1,700 workers.
The saga has taken its toll on Turquoise Hill shares, which have fallen 34 percent in Toronto over the year to date. It has also hurt Mongolia by weakening investor confidence and delaying other projects. Foreign Direct Investment fell 47 percent over the first eight months of the year.
London-based Rio, the world’s second-biggest mining company by market value, manages the venture through its 51 percent stake in Turquoise Hill Resources Ltd., which owns 66 percent of the mine. Oyu Tolgoi, located 80 kilometers (50 miles) north of the Chinese border, is forecast to account for about a third of Mongolia’s economy when in full operation.
Mongolia had listed 30 points of dispute with its partner over the mine. Chief among these have been criticism of cost overruns on the open-pit operation and objections to the mine being used as collateral for the financing of the underground portion.
Facing down problems in a project of this size is inevitable, Ganbold said. Oyu Tolgoi wouldn’t be the first big project to experience delays or ownership tiffs, he said.
“The construction of the Panama Canal took 100 years,” said Ganbold, who holds a Ph.D.in economics from Moscow State University. “How many companies were bankrupted? How many people died? How many financial collapses occurred? But finally the project was completed.”
On Oct. 1, Mongolian board members said the number of outstanding issues was down to 15 following discussions with Rio in London, conceding that some Oyu Tolgoi assets could be used as collateral.
Mongolia has also sought guarantees that the mine expansion won’t be subject to cost overruns, a reset of Rio’s management fees to be based on revenues earned rather than money spent, and a pledge that all money raised against Oyu Tolgoi assets be spent within the country.
“No one wanted to see any cost overrun or project delay,” Ganbold said. “No one wanted to see any decreasing of the profits and benefits. But life is life and that is why we have to solve these issues.”
Issues related to water use, transportation of the concentrate, exports to China and company management are closer to resolution, said Ganbold.
“Both sides are being very tolerant and cooperative towards each other,” said Ganbold, who was deputy prime minister from 1990 to 1992. “Solving one thing may bring some movement or success in other items.”
Resolving the terms of the $4 billion project financing package remains the biggest hurdle as development of the second phase of the mine relies on another influx of cash. The deadline to approve the financing is Dec. 12.
Ganbold declined to comment on the deadline, saying details of the financing are in the hands of the investors.
The second phase of the mine includes extensive underground tunneling needed to reach the richest parts of the ore body. The open pit section currently in operation will only yield about 20 percent of the mine’s total wealth.
Commercial production at the mine started in July although Chinese customs delayed deliveries to customers for more than three months before releasing the first batch of concentrate from a bonded warehouse in China last week.
“The concentrate started to go last week, so the first official, touchable, visible cash flow has started to go to this joint venture company. That is big progress,” said Ganbold, adding that so far Mongolia has received more than $1 billion from the mine in the form of taxes and other payments.
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