Oyu Tolgoi faces power struggle

In the middle of the Gobi Desert in Mongolia, Rio Tinto’s flagship $5.2bn copper-gold mine stands nearly completed except for one thing: the mine is waiting for the power to be switched on.

The Oyu Tolgoi mine, which holds the world’s largest undeveloped copper deposit, has been caught in the middle of a complex negotiation between China and Mongolia. The two sides are trying to reach a deal under which the mine, which is located close to the Chinese border, would buy electricity from the Chinese grid.

A spokesperson for Rio Tinto said: “Active discussions are continuing on the commercial agreement. You have to remember this is a complex deal but we are maintaining our focus and working hard towards reaching an agreement.”

But for now, the copper concentrator at Oyu Tolgoi sits idle after a multibillion-dollar, three-year construction effort. The power lines from China to the mine have been built and tested, according to Rio Tinto, but the two sides have not been able to reach an agreement over the commercial terms of the power supply contract despite several years of negotiations.

The mine is 97 per cent completed and further steps in the construction, such as fine-tuning the copper concentrator, will require increasing power.

“In the absence of a power supply agreement they can’t turn the plant on and start producing metal,” says Andrew Driscoll, an analyst at CLSA, a brokerage. However, he adds that he is still thinks that the power supply will come through without being a big disruption to commissioning plans.

If the delay persists, the mine stands to miss out on roughly $8.4m each day in delayed revenues from copper and gold production, according to rough estimates based on the mine’s first-year production forecast. The mine is co-owned by Rio Tinto, Turquoise Hill Resources (formerly known as Ivanhoe Mines) and the government of Mongolia, and run by Rio.

The case of Oyu Tolgoi highlights the uneasy relations between Mongolia and China, which is virtually Mongolia’s only customer for commodities exports. Ties between the two countries soured this year when Chalco, a Chinese state-owned metals company, attempted to purchase a large coal mine in the Gobi desert and was met with fierce political opposition. Chalco eventually dropped its bid.

The Oyu Tolgoi mine has also been coming under pressure from Mongolian lawmakers who want to raise the country’s stake in the mine. This month, 24 members of parliament submitted a petition to the prime minister seeking to renegotiate the investment agreement that governs the mine.

Even though it has not yet begun production, the Oyu Tolgoi mine already accounts for about 30 per cent of Mongolia’s $10bn economy and is the biggest foreign investment ever in the mineral-rich country.

Source: Financial Times

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