A HOTLY contested tax dispute between Rio Tinto and the Mongolian government threatens to further delay a $US5.1 billion ($5.4bn) underground expansion of the Oyu Tolgoi copper-gold mine.
The Mongolian Tax Authority has slapped a tax bill of $US130 million on the project. This is strongly contested by Rio and its 50.8 per cent-owned subsidiary and 66 per cent operating partner in the mine, Canadian-listed Turquoise Hill.
Turquoise Hill warned that if a resolution of the tax dispute was not reached by the end of the month, the completion of the critical feasibility study into the underground expansion was likely to be delayed.
The underground development is crucial to the joint venture — the Mongolian government is a carried 34 per cent partner — maximising the returns from the deposit, one of the world’s biggest.
Rio shares were weaker than BHP Billiton in yesterday’s market. But that was put down to the 1.2 per cent iron ore price retreat in Asian markets. Rio is more leveraged to iron ore than BHP.
Analysts said if anything, the prospect in delays in moving on to the underground expansion could have positive benefits in Rio’s ability to step up its returns to shareholders earlier than expected.
But Rio too wants a resolution. The tax bill flows from an audit over a number of months to determine any additional tax liabilities in 2010-12 from the initial $US6.2bn open-cut development at Oyu Tolgoi.
As it is, a March 31 expiry date on project finance commitments from lenders for the underground expansion was previously extended to the end of September because of a dispute which Rio has previously said was about “shareholder issues and the finalisation of the project’s finance’’. It has not expanded on what the shareholder issues are.
Turquoise Hill is required to fund Oyu Tolgoi until September 2016. Oyu Tolgoi must first repay all debt, standing at $US6.8bn, before it can pay the dividends that Mongolia is banking on.
But the $US2bn cost rise in the initial open-cut development, and how that will delay the timing and scale of dividends on Mongolia’s 34 per cent interest, are thought to be front and centre of the so-called shareholder issues dispute.
Turquoise Hill said it was of the firm view that all taxes and charges required under the project’s investment agreement and Mongolian law had been paid.
Chief executive Kay Priestly said the company — and by extension Rio — strongly disagreed with the tax claim in the audit report, and that it was now reviewing all options to resolve the matter.
“Any element of the claim that amounts to a breach of the investment agreement will trigger the dispute resolution process outlined in the investment agreement, including possible international arbitration,’’ Ms Priestly said.