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Rio and Mongolia agree to replace $7bn plan to expand copper mine

New leaders to work out deal to better share rising project costs

ULAANBAATAR -- After weeks of escalating tensions and leadership turmoil, Mongolia and Rio Tinto have agreed to work out a new arrangement to finance the costly expansion of the vast Oyu Tolgoi copper mine, Nikkei Asia has learned.

The rising cost of the new underground phase of the mine, one of the world's biggest copper deposits, played a role in bringing down both Mongolia's previous prime minister and Rio's last chief executive. This appears to have helped set the stage for changing the terms of how the two co-owners of the project will share the expense.

Public irritation has been running high in Mongolia after new figures emerged late last year showing that the government could not expect to start receiving dividends from its 34% ownership of the mine in 2032 as originally expected. Rather, due to a new two-year delay and a $1.5 billion jump in the project's cost to $6.8 billion, the government is concerned it may not receive any dividend before the mine's reserves are depleted.

While Rio has solely financed the construction and operation of the mine and provided Mongolia with a loan to finance its share of the mine's ownership, it also gets all the profits for now, with Rio taking a management fee and payments on its loan out of Oyu Tolgoi's earnings. Under the expansion arrangement reached in 2015, Ulaanbaatar has to wait until the loan is fully repaid before receiving a dividend though it does collect royalties on the minerals mined.

Now both sides are ready to scrap that deal and put a new one in place.

"Both sides have agreed to work on canceling the 2015 deal and building a new one," Solongoo Bayarsaikhan, one of the government's negotiators as deputy cabinet secretariat chief, told Nikkei Asia. "Rio expressed its willingness to reduce the interest rate and its management fee."

A source close to Rio confirmed the company is now willing to set aside the 2015 deal and redraft terms.

A key point will be how to handle further cost increases.

"There is no regulation in the underground mine development contract about what to do if the underground mine construction cost increases in the future," Bayasgalan Enkhbaatar, a government appointee on Oyu Tolgoi's board, told Nikkei. "That is why we want to build a new contract, not amend the 2015 deal."

In a related development, the government said Friday that Rio had paid 230 billion tugrik ($87.55 million) of some 1 trillion tugrik founding owing after audits of past annual tax filings by Turquoise Hill Resources, the Canadian mining company through which Rio controls the other 66% of Oyu Tolgoi's shares. The government, which last year launched international arbitration claims for the sums, said it expects to receive another 420 billion tugrik this week.

Open-pit mining at Oyu Tolgoi, which also produces gold, started in 2012. The underground section is now set to open in October 2022.

Oyun-Erdene Luvsannamsrai, a longtime critic of the project's costs, took office as Mongolia's prime minister on Jan. 27 after his predecessor resigned in the face of protests over his handling of the coronavirus pandemic.

The escalating costs at the mine also played some role in the departure of Jean-Sebastien Jacques as Rio's chief executive. Jakob Stausholm took over as successor on Jan. 1, appointing Mongolian Bold Baatar to head up the company's copper operations, with a brief to work things out with the government in Ulaanbaatar.

"Bold Baatar has already set his team and they have commenced discussions with the government of Mongolia," Stausholm told Nikkei in a statement last week.

"I remain convinced that we will be able to find mutually acceptable solutions as the Oyu Tolgoi development is not only an impressive engineering achievement delivering the needed copper to the world, but it is fundamentally a development for the benefit of the Mongolian people," he said.

Mongolia and Rio Tinto have a long history of disputes over how to develop Oyu Tolgoi. Rio Tinto operates the project without owning it directly, although it has control through its majority ownership of Turquoise Hill.

Rio Tinto has collected $1.3 billion in management fees since 2013 while Mongolia still owes $2.2 billion on its loan from Rio. Rio says the mine project pays around $300 million in taxes annually to the Mongolian government, including royalties.

Turquoise Hill and Rio Tinto, and their respective shareholders, have also clashed in recent months over the rising costs and delays with Oyu Tolgoi.

Former Mongolian Prime Minister Saikhanbileg Chimed, who signed the 2015 contract, is under investigation over his handling of the deal but is in exile. Bayar Sanj, a predecessor, was sentenced in 2020 to five years' imprisonment for abuse of power in another case related to the mine.

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