Mongolian president on Oyu Tolgoi matters

Feb 5 • Business, Mining, News • 832 Views • 2 Comments on Mongolian president on Oyu Tolgoi matters

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Turquoise Hill Resources and the Mongolian government is on a collision course over Oyu Tolgoi which produced its first concentrate only last week.

President Tsakhiagiin Elbegdorj, who is also the architect of draft legislation being considered by Mongolia’s parliament that would place severe restrictions on foreign miners in Mongolia,  accuses Rio of working fast and loose with financing for the project.

Not mincing words Elbegdorj said to the contrary of official forecasts from the Rio Tinto the mine is on track to cost more than $24 billion and that the country has not been kept abreast of “what is taking place”.

The Mongolian leader said the country is reluctant to pay its share without more control over matters including having a say over the project’s bankers, suppliers, workforce and pay for management which it believes is excessive:

As the Mongolian government owns 34 percent of the project, it must also contribute to the costs. The Mongolian government has acquired an 8 percent interest loan to contribute its share of the project. On December 31, 2012, Mongolia made a payment of 705 million USD on the loan.

According to the government task force devoted to auditing Oyu Tolgoi, which is led by the Mining Minister D.Gankhuyag, Rio Tinto, the major stakeholder of Turquoise Hill Resources, intends to raise 6.6 billion USD this year for Oyu Tolgoi. From the raised capital, 4.4 billion USD will go back to Turquoise Hill Resources on the grounds that this was the amount invested by the company in the past, while 2 billion USD will be used for the project operations. Furthermore, the company has informed the task force that they need additional capital of 5.1 billion USD.

President Ts.Elbegdorj noted that Rio Tinto shouldn’t be making such decisions and that the investment agreement does not allow this. Furthermore, even if such actions were allowed, Mongolia would have to pay its share of the raised capital of 6.6 billion USD, even if Rio takes back 4 billion USD for itself.

“The initial estimate for the underground mine’s financing was 14.6 billion USD, but the company is planning to spend 24.4 billion USD. The expenses are 9.8 billion more than the estimates, this must be addressed,” said the president. “The investment agreement is that the initial investment will be used to produce ore concentrates and the commercial profit will be used for operation expenses. There was nothing about raising around 7 billion USD more, from some other source, and the company taking back its expenses from the investment and leaving. The time has come for the Mongolian government to take Oyu Tolgoi matters into its own hands,” said President Ts.Elbegdorj.

The president said that Mongolia must take its rightful place in Oyu Tolgoi and that it is not satisfactory that Mongolia has a 34 percent stake in the project but is excluded from the project and does not know what is taking place.

“Firstly, there needs to be someone on their managing board to represent Mongolia, as well as Mongolian representatives in all the critical departments. Secondly, the project operations need to be audited and reported – they must be transparent – but at the moment they are not. The government and parliament ask for information but the company delays its reports for months at a time. Mongolia has laws and they need to be abided by.

The third issue is the participation of domestic businesses. The issue has been left unaddressed. Mongolian businesses need to participate. Besides investment, Mongolian businesses can be formed by the thousand to provide services and supplies. Mongolians need jobs and salaries,” the president said.

Furthermore, the manner in which Turquoise Hill Resources selects suppliers needs to be transparent and Turquoise Hill must report whether the suppliers are domestic or foreign, and must report the amount of money changing hands.

Another major issue noted in the meeting was the matter of management costs and resource fees. The president observed that 6 percent of the investment is used to pay the salaries of those in management positions in Oyu Tolgoi. This is 2.5 times higher than the international rate. President Ts.Elbegdorj said this is unacceptable, especially because Mongolia only gets 5 percent in resource fees.

The government approved 153 million USD for Oyu Tolgoi management expenses by January 31, 2013, but the company in fact spent 321.4 million USD on management expenses by that date. The president commented that, “Due to irresponsible management, the company’s expenses have increased. Our auditing evaluation has revealed that this is a billion dollar issue.”

Another issue raised was the matter of employment of Mongolian nationals. According to the agreement made with the government, the company promised to ensure that 90 percent of its employees are Mongolian, but at the moment the number of foreign employees exceeds the number of Mongolians by 368. Furthermore, the wages of foreign employees are almost double the wages paid to Mongolian workers in the same positions, which is against the law.

The president also said that all financial transactions of the project should go through Mongolian banks since every other company does this, except Rio Tinto. “Since they operate in Mongolia, they should contribute to the nation’s development,” he noted.

President Ts.Elbegdorj also noted the logistical issues related to the Oyu Tolgoi mine, such as transportation. Turquoise Hill has begun producing ore concentrates, and soon they will need to export it, but they do not have railways or roads to do this. The president said they need to be urged to quickly build the transport routes that are necessary.

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2 Responses to Mongolian president on Oyu Tolgoi matters

  1. John Kennedy says:

    President Ts.Elbegdorj, as an investor in several mines around the world and also in Rio Tinto and former IvanHoe Mines, this whole mess is a result of the lack of respect and integrity for a signed agreement by your government. That is the true measure of honour and worth of your government.

    So far, YOU are failing US, your investors, by forcing a mining giant with technology you can only dream of, to consider leaving your country for good.

    YOU are failing your citizens by depriving them of economic benefits beyond their dreams and where their country could develop into a resource GIANT!

    You may not like the current deal, but that is the deal that was signed and you are being measured on your ability to live by that deal. Rio Tinto management is being judged by us their investors on the success of the projects we invest in. So your actions are making LOSERS out of us all.

    It is only a matter of time and very soon, that western investors will demand that our mining companies abandon these outlaw countries and develop resources in our own back yards where AGREEMENTS are upheld by simple honesty and integrity but also by laws of the land.

    Very unfortunate very disappointing indeed….

  2. bill says:

    Dear John Kennedy

    No matter whatever you say, we will look after the future of MONGOLIA, NOT URS ( since you dont care for sure.Dont like it LEAVE IT

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