$6 billion Oyu Tolgoi copper mine is under threat after the government of Mongolia said it was considering whether to renegotiate an investment agreement.
The new Mongolian government is in the process of passing a 2013 budget whose draft proposal includes increasing taxes and royalties on the mine by $300 million.
The 2009 deal awarded a 66 percent share of the mine to Turquoise Hill Resources, formerly Ivanhoe Mines, whose majority owner is Rio Tinto, the multinational mining company with headquarters in Melbourne and London. The agreement in 2009 froze tax rates over the life of the mine. It safeguarded the project for Rio Tinto and its suppliers, which began spending billions of dollars to build a vast copper mine in the Gobi Desert.
Last week, the caucus of Mongolia’s Democratic Party, which leads a coalition government in place since August, passed a budget proposal that called for a new sliding royalty on Oyu Tolgoi’s revenue that would rise to 20 percent depending on the copper price. The 2009 investment agreement set the royalty rate at 5 percent.
The new plan would also raise Oyu Tolgoi’s effective tax rate by eliminating income-tax allowances. The government would bring in 221.3 billion tugriks, or $160 million, from the royalty and 224.5 billion tugriks, or $163 million, from corporate income tax, according to estimates in the draft budget proposal.
Even an attempt at renegotiation could hurt Rio Tinto. If the company seeks international arbitration to resolve the issue, it could delay the start date for the mine which the commercial production expected to start in 2013.
This week, the plan is expected to reach Parliament, which will decide whether to adopt or modify the proposal.