Rio Tinto casts doubts over Mongolian project

RIO Tinto’s big near-term growth project, the $US5 billion ($5.38bn) Oyu Tolgoi copper and gold mine expansion in Mon­golia, is looking increasingly uncertain, with a recent tax dispute headed towards arbitration and adding to a long list of disagreements that have halted the ­project.

Continued delays and increasing arguments with Mongolia led Rio’s chief financial officer Chris Lynch to say this week the project may not go ahead at all. And mine operator and Rio subsidiary Turquoise Hill has had to defend itself against investor concerns that the mine may not be a going concern because of uncertainties around the expansion.

Toronto-listed Turquoise Hill on Tuesday revealed it had started a second dispute resolution process after the government slapped it with a $US127 million ($136.7m) tax bill.

The first dispute, filed on June 25, which alleges Mongolian government breaches of the Oyu Tolgoi investment agreement, is approaching the end of a 60-day negotiation process with no hint of progress. The next step is international arbitration, which means the prospect of a resolution by the September 30 project finance extension that lenders agreed to is dwindling.

The second dispute, lodged with the Mongolian tax department and revealed in Turquoise Hill’s second-quarter earnings report, also alleges breaches of the Oyu Tolgoi investment agreement.

Turquoise Hill chief Kay Priestly said the expansion project, an underground mine in which most of Oyu Tolgoi’s value sits, would not go ahead without agreement on the tax, in addition to four other issues that halted work on the expansion in November.

“The tax issue is key and they (Mongolia) understand that the investment agreement and the fundamentals of it are important and critical for us to continue to invest,” Ms Priestly said.

She added that the other issues, which include Mongolia’s take from the project, access to water, and a $US2bn cost blowout on the operating open pit mine, were being narrowed.

But Mr Lynch gave a decidedly more downbeat view. Analysts who went to a roundtable with the Rio chief financial officer said he had raised the prospect of the expansion not going ahead.

“The CFO noted the Oyu Tolgoi underground project will not be approved until the tax dispute has been completely resolved through the arbitration process, which is likely to take some time, in our view,” JPMorgan analyst Lyndon Fagan said.

“He also noted that if there is a significant deferral of the project, the company will need to question whether it will ever get done.”

Citi analyst Clarke Wilkins had a similar feeling.

“With the existing investment agreement not being honoured, reaching a new agreement is not necessarily a solution as there can be no confidence that it would be honoured,” Mr Wilkins said.

On the Turquoise Hill conference call, Ms Priestly said: “Clearly, the underground mine is a significant part of the value of this mine and right now, we’re ­focused on progressing the underground.”

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