Rio Tinto makes offer to Mongolia for troubled copper project

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Rio Tinto PLC update

Rio Tinto is ready to make concessions to the Mongolian government because it seeks to complete the development of a huge copper mine in the Gobi Desert, which is its most important project.

In order to accelerate the return on the US$6.75 billion underground expansion project of the Oyu Tolgoi Mine, the Anglo-Australian company is willing to lower the loan interest rate provided to Ulaanbaatar to cover its share of the construction cost.

As far as Rio Tinto is concerned, it hopes to resolve some regulatory and budgetary issues and develop a long-term power agreement in order to start a complex avalanche process (called undercutting) and achieve its revised October 2022 production target.

Last week, Bold Baatar, head of Rio Tinto’s copper sector, and Steve Thibeault, head of Turquoise Hill Resources, the company’s Canadian subsidiary, detailed these proposals in a letter to Mongolian Prime Minister L Oyun-Erdene.

The method comes after the relationship between the company and the government fell to a low point during an independent review earlier this month Rejects Rio Tinto’s explanation for the delay This caused the project to be postponed, estimated to exceed the budget by $1.45 billion. The underground mine was initially expected to be put into operation by the end of 2020.

The 157-page report found that project management issues were the main reason for the delays, rather than the weak ground conditions claimed by Rio Tinto. The report found that only $12 to $90 million in cost overruns can be attributed to geotechnical problems.

Financial regulators in the United Kingdom and the United States also Check Rio Tinto’s disclosures Regarding delays.

Oyu Tolgoi is Mongolia’s largest source of foreign direct investment, creating thousands of high-paying jobs.

Once the underground expansion is completed, it will become one of the largest copper mines in the world, capable of producing nearly 500,000 tons of metal per year.

However, the program has Be troubled by problems and disagreements Negotiations with Ulaanbaatar on taxation and financing agreements to support the project.

Rio Tinto used shareholder loans to fund Oyu Tolgoi LLC, a joint venture company that developed the project. Only when the debt and interest on these loans are paid off can the government begin to receive dividends.

Ulaanbaatar owns 34% of Oyu Tolgoi LLC and the rest is controlled by Turquoise Hill, of which Rio holds a 50.1% controlling stake.

Some officials believe that unless the loan interest rate (Libor plus 6.5%) is lowered, they will never see mine payments. As of the end of June, the outstanding balance of shareholder loans was US$7.9 billion, including US$1.9 billion in accrued interest.

In their letter, Baatar and Thibeault proposed to work with the government to create additional revenue of US$350 million in Mongolia over the next three years; this is in addition to the existing taxes and royalties generated by Oyu Tolgoi’s existing open-pit mine.

Rio Tinto stated that the additional funds can be used to support the delivery of important social and economic projects, which will help Mongolia recover from the coronavirus pandemic.

In addition to lowering interest rates on government loans, Baatar and Thibeault also stated that Rio Tinto is ready to discuss a “fundamental restructuring” of Oyu Tolgoi’s ownership structure.

Rio Tinto said in a statement that it looks forward to further “fruitful discussions” with the Mongolian government and Turquoise Hill to “determine a potential path to achieve the necessary conditions for initiation” weakening.

The Mongolian government declined to comment, but people familiar with the matter said it is focused on finding solutions.

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