Recently, Turquoise Hill Resources has released 2013 Technical Report prepared by AMEC consultants. The AMEC has been preparing and analyzing OT since the start of the deal as far as 2005. The first Technical report we could find came out in 2010 just after the signing of the Investment Agreement.
If we compare the 3 reports’ key figures we could clearly see why the Mongolian government is concerned about the cost overruns. The latest Technical Report can be downloaded here ( 2013 Oyu Tolgoi Technical Report).
We compiled a sheet using the reports as follows:
The 2010 Technical Report key figures match with the Feasibility Study that had been approved by the Mineral Resources Authority of Mongolia back in 2010.
The actual initial capital or Phase-I of the mine development coincides with what has been reported in the 2012 Technical Report. It is what the government has been asking for over 2 years – the updated Feasibility Study. The update of the feasibility study is set to be released soon for approval after the value engineering process according to the 2013 Technical Report.
The report states that OT LLC has decided to go on with the 100 ktpd capacity until 2015. Also, the power plant is out of the current financing plan. Thus, the Phase-II 5.1 billion USD is the bare minimum.
The logic of the government is simple. The more you invest to develop the mine the more shareholder loan plus interest Mongolian shareholder will accumulate, thus prolonging the timing of the dividend. Here is where the 34% participation becomes a horror story. When the cost is running high, the management of OT LLC will charge higher on top of 2% NSR. The hosting country gets the taxes and royalty of 5%, however having a 34% ownership in the project seems to make the project even more expensive and even meaningless for over a decade.
Commercial principle should be adhered. Efficiency of the management should be credited, not cost overruns. After all, Rio Tinto is not a construction or a procurement company. It is an operation company. All the work is done by the expensive EPC contractors. The supervision of these projects should not be as expensive as capex+opex 3%, and 6% after it hits production.
One could imagine that the agreement entirely was not signed in good faith. The equitable defense can be applied if the Mongolian government finds enough evidence of fraud in the inducement.