Rio Mongolian Mine Failure Would Be ‘Catastrophe,’ Minister Says

Mongolia’s businesses could face a “catastrophe,” if Rio Tinto Group and the government cannot resolve a dispute over funding the Oyu Tolgoi copper and gold mine, the deputy minister for economic development said.

While the two parties met last week to decide on financing the project through this year, disagreements on taxes, cost overruns and management control resulted in a one-month stop-gap budget. Rio Tinto in March will shoulder all the costs for a mine that at full production will account for 30 percent of Mongolia’s economy.

“Rio is funding the project for daily, weekly, monthly operations but not for the big structural investment,” said deputy minister Ochirbat Chuluunbat at a forum in Ulan Bator yesterday. “It will be a catastrophe if it stops.”

Illtud Harri, a Rio Tinto spokesman in London, declined to comment on whether the company was providing all of the funding for the $6.6 billion Oyu Tolgoi mine this month.

Rio controls 66 percent of the project through its unit Turquoise Hill Resources Ltd. and the Mongolian government the rest. The shareholders are squabbling even as the mine is expected to start commercial production by June. Turquoise Hill rallied 10 percent to C$7.25 in Toronto on March 1 after news of the month extension.

The next round of formal talks between Oyu Tolgoi’s shareholders will take place in late March, Finance Minister Chultem Ulaan said at the forum.

Contractors Hurt

The dispute is damaging contractors who supply the mine known as OT, said the head of a leading business group.

“Things are in slowdown mode because the government is not able to get along with the other investor in the project,” said Bayanjargal Byambasaikhan, chairman of the Business Council of Mongolia, which represents 244 companies and organizations.

“Members of BCM are complaining about the fact that the contracts that they want to get from OT are not being awarded, because of the uncertainty and the disputes.”

Byambasaikhan said 80 percent of Business Council members are directly tied to the project, which employs around 12,000 workers, through procurement contracts or via other companies doing business with Oyu Tolgoi.

“Revenues are not there and as a result companies have very high burn rates,” he said. “They prepare to supply services or goods to OT and they are not able to do that because of an unconfirmed contract.”

Funding Pipeline

New funding could be in the pipeline. The boards of International Finance Corp. and the European Bank for Reconstruction and Development granted approval to join a $4 billion project-finance deal for Oyu Tolgoi.

Directors of IFC, the World Bank’s funding arm, on Feb. 28 approved its participation and will work with Rio, Mongolia and other lenders to complete the accord, according to a statement on the lender’s website. While the EBRD’s board gave the go-ahead to participate on Feb. 26, a final commitment has yet to be signed-off, the bank said in an e-mailed statement.

“While the news cycle around Oyu Tolgoi has been negative, due to political rhetoric surrounding negotiations over budget issues, the commitments from the IFC and EBRD send a completely different and positive message,” said Nick Cousyn, chief operating officer at BDSec, a brokerage in Mongolia.

Still, Mongolia’s presidential election in June continues to create uncertainty as politicians argue for more Mongolian control at Oyu Tolgoi.

“While Armageddon has been averted there is no assurance it will not reemerge very soon and unexpectedly,” Eric Zurrin, director general at Resource Investment Capital Ltd., a corporate finance adviser in Ulan Bator, said by e-mail.

“As much as I would like to say there has been a real and obvious step forward I can’t, as the time-line to key risks have just been delayed and remain an overhang.”

Before it's here, it's on the Bloomberg Terminal.