Rio Tinto in hot water over 4th largest copper reserve

The Oyu Tolgoi Copper-Gold Mine (OT) is the largest mining project in Mongolia and the 4th largest known copper reserve. Jointly launched by Rio Tinto Group, ranked as the third-largest mining company in the world, OT is the first-ever established deal between Mongolia and the West without Russian intervention. Without a doubt, OT is the most important project for Rio Tinto and the biggest mega-project to take place in Mongolia.

By the first quarter of 2021, the underground mine was set to begin operations. However, in July 2019, Rio Tinto announced that the project will be delayed until 2023 due to geological issues. This escalated tension between the Rio Tinto Group and the Government of Mongolia. When Rio Tinto announced that the mine was running 16-30 months behind schedule and would require an additional 1.2 to 1.9 billion USD, TRQ shares lost over 50 percent of its value but has regained it since. 


To determine the cause of the increased budget and delay for the mine, a group of external experts was hired. This review was requested by the Government of Mongolia. The results of the evaluation came back in August 2021 and found that the mine delay was not caused by geological issues like Rio Tinto insisted. 


As the world makes a rapid shift towards renewable resources, copper as a precious metal is becoming more important with each passing day. The open-pit mining began in 2011, and the 6.75 bn USD expansion of the underground mine started immediately following the Dubai Agreement between the parties. As 80 percent of OT’s total resources lay deep in the earth’s sediments 700-1800 meters underground, it is the most important part of the development. Upon its completion in a little more than a year, 500,000 tonnes of copper will be mined on an annual basis, making it the 4th largest copper mine in the world. 


Ownership of the mine is divided between three parties, Rio Tinto, Turquoise Hills Resources (TRQ), and the Government of Mongolia. TRQ owns 66 percent of OT, while Rio Tinto owns 50.8 percent of Turquoise Hills Resources and manages the mine on their behalf. The remaining 34 percent of the mine is owned by the Government of Mongolia.


In 2010, the world’s eyes were on Mongolia due to its vast natural resources, expecting it to be the “next resource success story” according to World Politics Review. Mongolia’s GDP was expected to increase as much as 10 percent per year, from the current 5 billion USD (back in 2010) to 30 billion by 2020 due to the revenue from resources. The OT mega-project alone is larger than Mongolia’s entire GDP by one and a half. In addition, there are other large deposits of coal, gold, copper, and natural gas that are being mined with foreign investment. As Mongolia is the largest untouched natural biome in the world, there are expected to be many more resource deposits to be discovered in the nomadic nation.


It seemed as though all was set in stone for the former Soviet nation, and the road to development was smooth. However, as the case with most LEDCs with foreign-operated mining sectors, Mongolia had a difficult time circulating the investment and fell trap to the curse of natural resources, the same way many African nations did. By the end of 2021, the Mongolian GDP is expected to be at 13.70 billion USD according to Trading Economics. The current figure suggests that Mongolia did not play their cards right from 10 years ago. 


The whistleblowers and lawsuits

In addition to the tension with the Government of Mongolia, Rio Tinto was facing much backlash from its investors and lawsuits. A former employee of OT claimed that the management was aware of the delays months before it was announced. The whistleblower is Richard Bowley, who worked at OT between 2017, and 2019. Bowley is also suing Rio Tinto for unfair dismissal from his position as head of strategic projects. He stated that he first told the executives about the issues in February 2018 and continued to do so until January 2019. Eventually, Bowley’s contract was terminated in March 2018 effective immediately and four months later, Rio announced the delay. 


Another senior manager who worked at OT from 2013 to 2019 said geological reasons for the delays are “One hundred percent pure horseshit.”


Pentwater Capital Management is the largest minority shareholder in TRQ and the lead in the 163-page complaint class-action lawsuit against Rio Tinto filed in New York. At around this time, Mongolia and Rio Tinto were amid a new agreement regarding the mine. The complaint said that the cause for the delays and cost overruns were due to deficient engineering, procurement, and construction. Even though the investors were aware of the issues with the construction of the underground mine, Rio Tinto was insistent that the project will be completed in 2021, and that the total cost will be at 5.3 billion USD. 


In response to this, Rio Tinto and TRQ both stated that the complaint is “without merit”. 


The mine repeatedly had problems and told its investors geotechnical conditions, and issues with shafts sinking are “expected result in a revised ramp-up schedule to sustainable first production” in October 2018. Rio Tinto explained that there were issues related to an important part of the underground development called Shaft 2, constructed to carry waste materials upwards and bring the workers and equipment 1.3 km underground. 


Jacobs Engineering Group, which operates at OT, announced to the management the number of issues with Shaft 2 in February 2019, stating that the complications there resulted in a shutdown of the area. This had already started to affect the tight schedule of the underground mine development. 


The lawsuit led by Pentwater Capital Management mentioned this in their complaint as a defining cause for the delay and additional costs. The complaint quotes “As a result . . . managers were effectively forced to rebuild much of Shaft 2 from scratch — a project that required workers to replace more than 40,000 bolts and approximately 95 percent of the steel in the shaft’s headframe — and predictably caused costs and schedule delays to skyrocket,”


Concerning the lawsuit, the Financial Conduct Authority, or the UK’s financial watchdog is investigating whether Rio Tinto breached the disclosure rules regarding OT, and the timing information was shared. 


Aside from the class action lawsuit and its dispute with the Mongolian Government, Rio Tinto has several scandals in Australia. In late May 2020, Rio Rinto blew up a 46,000-year-old Aboriginal cave system which showed continual human habitation dating back to a long time ago. Rio Tinto Chief Executive Jean-Sébastien Jacques stepped down from the company on January 1 following the scandal but received a 7.2 million USD bonus. Rio Tinto was also accused of throwing away hundreds of irreplaceable Indigenous cultural artifacts from Pilbara to a landfill.