It has been almost a week since the iconic Oyu Tolgoi logo lights are out on Monnis Tower in central Ulaanbaatar where the main Oyu Tolgoi LLC and Rio Tinto Mongolia offices are located. Month of February, 2013 has been very turbulent for the world’s second biggest mining company. All the optimism Rio Tinto and Oyu Tolgoi LLC public relations teams were feeding international news agencies throughout last year seems to take a different turn after the Mongolian parliamentary session and open discussion on Oyu Tolgoi project this month.
Cost overruns, failure to update the feasibility study, Entree Gold profit-sharing arrangements, 2% royalty to Turquoise Hill Resources, lack of Mongolian shareholder involvement in the day-to-day activities, lack of transparency to the government were the main issues that triggered the fierce dispute.
Finding a common language with Mongolians has become difficult for Rio Tinto after their aggressive takeover of Turquoise Hill Resources and Oyu Tolgoi LLC.
Proposed over USD7 billion project financing was refused support by the government. Mongolia is not willing to support to project finance in the ground of solving the outstanding issues mentioned above. Moreover, Mongolian government is not interested in pledging the project license and involve costly loans while there are many unsettled issues.
Perhaps Rio Tinto should have chosen a different strategy approaching Mongolia that once has been a Great Empire and still managing to be an independent and democratic state with gigantic neighbors. The blame should be weighed mostly on Rio Tinto and Turquoise Hill Resources, because it has failed to adhere the laws and regulations, and to build trust-based relationship with their Mongolian partners.
The feasibility study update has been delayed 3 times previously and it is the 4th time. You cannot develop and operate a mine on the fly. Either the Oyu Tolgoi LLC management is ditching to disclose the document on purpose or the study team has been underestimating the scope of the project. Both of the cases are not acceptable by Mongolian laws and regulations.
We must not forget the positive effects the Oyu Tolgoi project is bringing to Mongolia internationally. Mongolia drew a lot attention from international investors and various sectors of the country is booming. However, we must not forget the trade-offs and think of the long-term economic diversification. It is in our best interest to welcome companies with good international reputation and best track record on social responsibility.
Meantime on last Monday, Standard and Poor warned that it is considering to lower the credit rating of Rio Tinto if it does not lower its’ debt. Surely, it will negatively reflect on project financing process for Oyu Tolgoi project that has been in negotiation with international financial institutions and commercial banks for over 2 years.
However, change in strategy, more transparency, efficient usage of resources, compliance with Mongolian laws and regulations could amend the relationship with the government. It is worth to note that Mongolia is not asking for higher stakes in project. It is all about compliance and improved partnership.
We all hope that Rio Tinto would not give up on company’s long-term plans. It is early to say if Rio Tinto is considering a withdrawal from the project and settling the matters by arbitration process. It will not do good for any of the sides. Tomorrow, on 27th of February, the shareholders’ meeting will resume in attempt to solve the issues.