Mining News

Rio Tinto Strikes a Deal with Mongols

Posted by Cheryl Rutledge on 5/27/2015 4:44:17 PM

By Kristine Ramsbottom, Taylor Jackson and Kenneth P. Green

Mining superpower Rio Tinto struck a deal with the Mongolian government after over two years of negotiations surrounding the initiation of Phase 2 of the Oyu Tolgoi mining project.

Phase 1 of the project has been in production since 2013. The main issues holding up the next phase between the mining company and government have been the allocation of costs and revenues, which they have now resolved.

The two parties have worked together tackling shareholder issues and funding arrangements. They officially signed the Oyu Tolgoi Underground Mine Development and Financing Plan mid-May.

These negotiations have slowed the project down considerably, as there is still a 5-7 year development period in order to construct the Phase 2 initiative. Rio Tinto has estimated that this will delay production from the expansion until 2020.

Phase 2 of the project is speculated to provide 80 percent of the mines value in its $5 billion underground expansion, showing how integral this phase is to the operations long term success. This is substantial considering the mine sits atop one of the world’s largest copper deposits.

Based on feasibility reports from September 2014, the mine has estimated reserves of copper of 24.9 billion pounds, 11.9 million ounces of gold and 78 million ounces of silver over a mine life of 41 years. Based on present day mineral prices, that adds up to a total projected mineral valuation of $92 billion.

When at full capacity, Oyu Tolgoi is estimated to produce an average of 450,000 metric tons of copper and 330,000 troy ounces of gold in a year. The impact of the proceeds from this level of production could amount to totaling one third of the Mongolian GDP based on the government’s 34 percent equity holding in the project.

Due to this progress, the agreement may have a positive impact on the investment attractiveness of the region. According to The Fraser Institute’s 2014 Survey of Mining Companies, Mongolia ranked 85/122 for investment attractiveness, lower than some of its direct regional counterparts, India, Kazakhstan, and Kyrgyzstan.

This measure combines both policy and mineral potential.

In 2014, Survey respondents mentioned how there is “uncertainty regarding taxation of foreign operations” and that the “political processes and lack of regulatory structure have led to companies being in limbo regarding future projects.”

The issues brought up in these responses are highlighted in the survey’s results. With regards to political stability, 29 percent of respondents said that Mongolia’s current policy poses a mild deterrent to investment, 35 percent a strong deterrent, and 24 percent that they would not pursue investment because of this factor.

In the category of socioeconomic agreements and community development conditions, 41 percent of respondents indicated that this is a mild deterrent to investment in the region, 24 percent a strong deterrent, and 12 percent would not pursue investment in Mongolia because of their interactions with this category.

Yet, when it comes to pure mineral potential (assuming world class regulatory environment, highly competitive taxation, no political risk or uncertainty and a fully stable mining regime), 50 percent of respondents indicated that it encourages investment, and 25 percent report that it is not a deterrent to investment.

These policy issues are factors that contributed to the region’s lower investment attractiveness rating.

While this recent announcement is a step in the right direction, Mongolia may want to also look at its policies if it wants to attract more mining investment in the future.

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