Rio Writes Down $4.7 Billion of Unit Operating Mongolia Mine

Rio Tinto Group wrote down the value of a “cash-generating” unit developing Mongolia’s Oyu Tolgoi copper and gold mine by $4.7 billion as an impasse with the government persisted over starting underground operations.

The $1.1 billion pretax impairment of goodwill and $3.6 billion property and equipment writedown are the result of Oyu Tolgoi remaining an open-pit only operation, Rio Tinto said in its annual report published yesterday. A further $800 million may be written down should underground mining fail to begin in the next 12 months, Rio said.

London-based Rio, the world’s second-biggest mining company by value, and Mongolia have been at loggerheads over the mine’s cost overruns and the long-term financing of Oyu Tolgoi, being developed by unit Turquoise Hill Resources Ltd. The construction of the underground section was suspended in August. Mongolia holds 34 percent of the Oyu Tolgoi mine, with Rio-controlled Turquoise Hill owning the remaining stake.

“Given the delays, this move should have been widely anticipated by the market, with the caveat being that if things get back on track the value of those assets could also be written up,” said Nick Cousyn, chief operating officer of Ulaanbaatar-based brokerage BDSec.

The suspension of the mine’s expansion led to 1,700 staff layoffs at the site, Rio said Aug. 15. The company’s post-tax discount rate on cash flow from Mongolia rose to 8.7 percent last year from 8.3 percent in 2012, Rio said in the annual report.

“A slightly higher discount rate is probably justified,” Cousyn said. “Frankly, 8.7 is not overly high, but increasing the discount rate is a reasonable thing to do considering how long the dispute between Rio and the government has gone on.”

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