By Rhiannon Hoyle
SYDNEY--A US$5.4 billion expansion of one of Rio Tinto PLC's
biggest mining projects looks set to go ahead, after the company
reached a deal with the Mongolian government that ends two years of
tense negotiations.
The Anglo-Australian company described the agreement--which
paves the way for construction of an underground mine at the site
of an existing open-pit operation--as a significant step forward
for the Oyu Tolgoi project. Oyu Tolgoi is mostly owned by Turquoise
Hill Resources Ltd., which in turn is controlled by Rio Tinto.
The deal with the government settles disagreements around tax
and royalty payments that had held up the underground expansion of
the copper-and-gold deposit. It also lays out how the further
development of the mine will be funded.
The first convoy of trucks carrying copper to China departed
from the existing US$6.2 billion open-pit mine in July 2013. The
project's expansion has been delayed since then as talks
floundered, among other things, over Mongolia's demand for higher
royalties from the sale of resources.
Oyu Tolgoi, 66%-owned by Turquoise Hill, is central to Rio
Tinto's efforts to tap new minerals in developing countries to help
reduce its dependence on iron ore, the price for which has fallen
sharply over the past year. For the government, which owns the rest
of the project, proceeds from the mine at full capacity could
account for as much as a third of the country's gross domestic
product.
"Mongolia is back to business," said Prime Minister Chimediin
Saikhanbileg in a statement Tuesday, after three-way talks between
Rio Tinto, Turquoise Hill and the government finally yielded fruit.
"Unlocking Oyu Tolgoi's underground mine will have a significant
impact on the Mongolian economy, which will benefit Mongolian
citizens for generations to come."
Under the agreement, the trio reached an accord on the past cost
of developing the open-pit mine. That issue was a central part of
the dispute, after the government became concerned that cost
overruns on that first stage of the project would eat into its
profit and accused Rio of overspending.
But Rio Tinto copper Chief Executive Jean-Sébastien Jacques said
that all sides now agreed "all the costs were legitimate."
Rio Tinto meanwhile agreed a 5% sales royalty from resources dug
up at the mine would be based on Oyu Tolgoi's gross revenue, rather
than calculating it off net revenue as the miner had proposed, he
said.
The agreement also resolved that Oyu Tolgoi LLC, which oversees
the project, would pay roughly US$30 million to settle a continuing
tax dispute, a fraction of an earlier estimate of US$127
million.
Rio Tinto said the deal means that expansion work can now get
under way. "With a new pathway to development of the underground
mine agreed, the focus now shifts to finalizing the project
finance, the feasibility study and securing all necessary permits
so that the underground mine development can proceed," it said in a
statement.
Mr. Jacques said the underground mine would take between five
and seven years to get up-and-running once all finances and
approvals were in place.
Turquoise Hill said it was already holding talks with global
financial institutions, export-credit agencies and commercial banks
to secure roughly US$4 billion in project finance. The company has
estimated that up to 80% of the value of the project--located in
the southern Gobi Desert, about 50 miles north of the border with
China--is tied to its underground operations.
When fully operational, Oyu Tolgoi is set to produce an average
of 450,000 metric tons of copper and 330,000 troy ounces of gold a
year, in addition to vast quantities of silver and molybdenum.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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