Mongolia to Rio Tinto: fund Oyu Tolgoi mine expansion with cash flow

Mongolia wants the planned US$5.1 billion expansion of Rio Tinto's Oyu Tolgoi mine to be financed from cash flow until a dispute over the cost of the biggest foreign investment in the country is resolved.

Cost overruns at the copper and gold mine, 34 per cent owned by Mongolia, are increasing the debt the government owes to Rio's Turquoise Hill Resources unit, which operates the project, the minister of mining, Davaajav Gankhuyag, said on Friday.

Rio delayed work on the underground expansion last month amid the dispute over financing that contributed to production delays at the first stage of the mine. Outstanding issues that need to be resolved include taxes and the right to a royalty stream from the project.

"The positions are still far away from each other. There is still a lot of work to do," said Dale Choi, the founder of Independent Mongolian Metals and Mining Research. "There needs to be substantial political will to reach an agreement, but at the moment there are a lot of arguments against the project financing."

Oyu Tolgoi, located in the Gobi Desert 550 kilometres south of Ulan Bator, began shipping concentrate last month and was forecast to be a key revenue earner for Mongolia, where foreign direct investment slumped 43 per cent in this year's first half.

"Until the project financing is resolved, I think it is proper to continue the underground mine with revenues from concentrate," Gankhuyag said in a letter to Rio that he showed reporters.

"The costs specified in the feasibility study are creating a high risk of reducing profits to the Mongolian side," he told them.

David Luff, a Melbourne-based spokesman for Rio Tinto, declined to comment on the mine minister's letter and referred to last week's remarks by chief executive Sam Walsh, who said both parties "want phase two to go ahead".

Oyu Tolgoi has shipped 4,000 tonnes of concentrate, Gankhuyag said. The company plans to export 300,000 tonnes of concentrate this year with revenue of US$1 billion, he said.

The project's finance package, with funding from the International Financial Corp, among other lenders, must be approved by the Oyu Tolgoi board, which includes three Mongolian directors.

This article appeared in the South China Morning Post print edition as Mongolia wants mine expansion funded from cash

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