Rio Tinto: out of steppe in Mongolia

Rio Tinto thought Ivanhoe was trouble enough. The Canadian miner, in which Rio has patiently built a dominant stake, accused it last week of saying more than it should about a Rio-run copper and gold complex in the South Gobi desert. Now the government of Mongolia – 34 per cent partner in Oyu Tolgoi, with the rest held by Ivanhoe – seems to want to redraft the investment agreement signed less than two years ago. It has sent Ivanhoe a revised proposal accelerating the time frame in which the state’s share is increased to half.Rio, Ivanhoe and the hordes of other mining groups marauding over the steppe may want to see this as a piece of theatre. Mongolia has parliamentary elections next June. The move could be designed to appease a cross-party group of 20 lawmakers who have petitioned the prime minister to revise the accord. But the miners cannot be too sure. Politicians in this young republic have a habit of following through on big gestures. In 2008, for example, after the Democratic Party promised a handout of 1m tugrik to every citizen, the Mongolian People’s Party – dominant in the current coalition – hit back with 1.25m ($990). Monthly cheques have begun to trickle in.

For Rio, this dispute could be serious. Since 2006 the world’s third-largest miner has indirectly funded Oyu Tolgoi by buying shares in Ivanhoe, often when cash flow was tight. Scheduled to start producing in 2013, the asset is the obvious highlight of a copper portfolio that has produced about a fifth of net income in recent years; other growth options in Arizona and Peru are at least a decade away. The rationale for preserving the agreement in its original form may look compelling enough: since October 2009, when it was signed, no stock exchange in the world has got anywhere near Ulan Bator’s 145 per cent return, while foreign direct investment has soared. But since when has logic won votes?

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