Has its largest financial undertaking failed Mongolia?
Mongolia is home to Oyu Tolgoi (OT) the 4th largest known copper deposit in the world. Mining giant Rio Tinto owns 50.8% of Turquoise Hill Resources (TRQ), which owns 66% of OT and has been managing the mine on behalf of the Mongolian Government and TRQ. The Government of Mongolia is adamant about pursuing its international arbitration against Rio Tinto for unpaid taxes, discovered upon auditing their records. To top it off, results of the mine delay review requested by Mongolia came back recently and found that it was not caused by geological issues like Rio Tinto insisted. Recent figures show that Mongolia may never get dividends from its 34 percent ownership.
Mongolian Prime Minister L.Oyun-Erdene received a proposal from Rio Tinto, offering to cut the interest rates of the loan Mongolia took to finance its share of the project. The current arrangement shows the rate at approximately 6.74 percent. Mongolian officials say they will carefully review the new plan, which suggests it could take a long time until an agreement is reached between the parties. There are mixed feelings amongst Mongolians regarding the OT agreement, and there was talk among the government in 2019 about whether Mongolia should sell its shares and receive royalties and taxes instead.
Mongolia will begin to receive dividends once the loan from Rio Tinto is finished being paid off. However, since the project is 2 years behind schedule and 1.5 billion USD over budget. Initially, Mongolia was to start receiving dividends as of 2032. Increasing the benefits to Mongolia is not possible if it compromises the interests of OT’s investors. If all talks and negotiations are completed before the underground mine begins its operation, this would be the best-case scenario for Mongolia to salvage its standing.
When the results of the evaluation came back, Western media reported that the delay was likely to be caused by management issues that could have been avoided. Later, it was revealed that this was true Rio Tinto remained silent for a few weeks following the announcement but said that they are ready to cut the loan interest rates of Mongolia.
The Mongolian Government finances 34 percent of OT’s loans, and Rio Tinto receives a management fee as a percentage of the investment cost. It is being questioned across Mongolia whether Rio Tinto is inflating the investment costs to turn it to their advantage. The issue of overspending in OT was first brought up during Former Prime Minister N.Altankhuyag’s Government in 2013, and the Dubai Agreement had concluded.
At the time, the current Prime Minister of Mongolia, L.Oyun-Erdene was chairing a working group set up by the Government under Resolution No. 92. At the time, he said “Doubts need to be answered. To get an answer, we need an unbiased expert opinion.”
The Parliament passed Resolution No.92 in November 2019 to ensure Mongolia’s interests in developing the OT deposits, and the working group was established within the framework of the resolution. The Parliament’s main task for the working group is to bring the Oyu Tolgoi investment, the shareholders’ agreement, and the Dubai Agreement in line with the current legislation of Mongolia according to the Government.
Subsequently, the Government Working Group formally proposed that the inspection be initiated by the board, which is responsible for overseeing the executive management. This was supported by Turquoise Hill Resources. The role of the special committee was to appoint external experts and present their findings. The committee was set up in December 2020, and its rules of procedure were approved. Seeing as Rio Tinto Group operates in many countries around the world, it took a significant amount of time to find a consulting company that has no conflict of interest with them. The members of the special committee looked for a company that would be as unbiased as possible in making an independent assessment.
The people appointed for the evaluation were those with international experience in the field of underground mining who seemed to possess the skills and professional experience adequate to evaluate why the project costs were exceeded and delayed. The team consists of eight people from Australia, United States, and Canada, specializing in geotechnics, project procurement, and geology, and have 30-40 years of experience in the sector.
The findings of the external experts were reviewed by two independent consultants. Both the consultants agreed with the conclusions of the external experts. According to B.Solongoo, Deputy Cabinet Secretariat Chief and a Leading Negotiator in the talks with Rio, “The conclusions of the world’s leading experts were confirmed by two highly qualified consultants. The consultants are reputable and recognized in the industry.”.
A.Nyambaatar, the Minister of Justice and Home Affairs, who heads the Government's working group met with Rio Tinto Group's representative in Mongolia and demanded an official explanation. Rio Tinto said that it was reviewing the report. Later, regarding the proposal from Rio Tinto, he commented “Negotiations may take 3 to 4 years”
“I think that the investors of Turquoise Hill Resources should take the opinion of the external experts seriously. This is because there is a lot of information that can affect the value of the company's shares. We are waiting for comments and information from project stakeholders regarding the findings of the external experts.” continued B.Solongoo.
The whistleblower had claimed that the cost has risen significantly due to mistakes in purchasing.
Rio Tinto provided a report with 175 pages explaining the details as to why the deadline was postponed. External analysts suggested that an impartial financial audit be carried out to determine why the costs have increased. The delays may have led to overall increased costs alongside procurement errors. This perhaps suggests that Rio Tinto and its subcontractors were not well coordinated.
“The Board of Directors at Oyu Tolgoi will probably consider the external experts to conduct a financial audit. The Rio Tinto Group manages the project, earning more than 200 million USD annually. As the leading company in the world with high experience, know-how, and ability, we have entrusted them with project management. However, the fact that their conclusions differ from their interpretations is a matter of concern.” - B.Solongoo
Ongoing disputes with Mongolian Government
There have been many different agreements and arrangements made between the Government of Mongolia, and Rio Tinto;
- Initial investment agreement
- Shareholder agreement
- Underground development agreement
- Dubai agreement
The Parliament explains that there are a series of issues with them starting with how the investment agreement was signed with little to no clarification on the feasibility study. As a result, the project costs doubled since and the investment party collects three percent of the cost as a management fee. A report made by the parliamentary working group highlights that there has been a tax violation of 3.2 trillion MNT from 2009-2015.
When the underground development plan was signed, it was never approved by the Mongolian Government. The Dubai Agreement was signed by former Rio Tinto Chief Executive Jean-Sebastien Jacques, and former Mongolian Prime Minister Ch. Saikhanbileg. Within their agreement, they decided on two key factors;
- The interest rate on the funds Mongolia is borrowing to finance its share of the mine
- Fee Rio Tinto is to receive for project management as a percentage of ownership
Every time an election nears in Mongolia, populists politicians make it their electoral campaign to take OT back, and kick Rio Tinto out.
Likewise, the ruling Mongolian People’s Party and new Prime Minister L.Oyun-Erdene have received much pressure from the Parliament to make changes to the agreement for underground development. Regarding this, B.Solongoo, Deputy Cabinet Secretariat Chief and a Leading Negotiator in the talks with Rio
"I think that local politicians will be united because the parliament is monitoring our work. If the Parliament submits a specific proposal, it is possible to take into account and include it in the negotiations. Mongolia needs to attract foreign investment. There is a need to use investors' money, know-how, and technology to grow the economy inclusively. They have a biased view of Mongolia when it comes to attracting investors. One of the reasons for this is the misunderstanding and controversy surrounding the Oyu Tolgoi project. This negatively affects Mongolia's international image. Therefore, we hope that the investment environment will improve if we resolve the misunderstandings and disputes related to the Oyu Tolgoi project. It is not in our best interest to stop the project or to make an emotional decision.”
Despite the multitude of issues, the partnership with Rio Tinto faced, if Mongolia were to cancel the project, it will negatively affect potential future foreign investment. The OT project has made up for most of Mongolia’s FDI, accounting for around three billion USD in taxes and fees throughout the past 10 years.
Foreign investors, diplomatic allies, and investment banks have been watching whether Mongolia will carry out its commitments to OT.
The OT executives have done much to change negative public sentiment by sponsoring content on many Mongolian media platforms, and developmental projects in Mongolia as a part of their corporate social responsibility. Still, there is a conflict of interest issues with Mongolian authorities, directly or indirectly. Leading Mongolian economist Jargal de Facto explained that civil society needs better transparency and that once this is achieved, the OT benefits will be felt strongly by the Mongolian people.
Has Oyu Tolgoi been beneficial to Mongolia?
Whether Mongolia has been scammed by Rio Tinto or not has become an issue that is debated through different economic theories and political ideologies. Rio Tinto itself has a special page dedicated to their website titled “Myths and Facts about Rio Tinto in Mongolia”. To the supposed myth that Mongolia is not benefiting from Oyu Tolgoi, they say “OT has been an economic game-changer for Mongolia. Since 2010:
- OT operations spend eight out of every 10 tugriks in Mongolia
- OT had paid more than 2.7 billion USD to the government of Mongolia in taxes, fees, and other payments
- OT employs more than 13,000 Mongolians (94 percent of the total workforce) directly and indirectly
- OT has spent 10.7 billion USD in-country, of which, more than 3.3 billion (MNT 9.2 trillion) has been with 700+ Mongolian suppliers
- OT has spent more than 310 million USD on infrastructure development in the South Gobi” - Rio Tinto
They also explain that the amount of total payments OT made to the government of Mongolia in 2019 is more than the entire national Health Ministry annual expenditure.
Royalties based on production as such are the main ways profits are distributed in a mining-rich country like Mongolia. Royalties, the right to ongoing use of OT, are the earliest form of income from the mine. Throughout the preparation of the underground mine, such payments are meant to support the economy of Mongolia with few negative effects on the economy. It takes an international company of large scale to carry out a project like OT, and thus only becomes economically viable if there is a steady investment over many years.
Royalties are set at a lower rate, similar to those of other sectors of the country’s economy to avoid market distortions and to keep investment and expansion steady. In the past, the mining sector in Nigeria has gone into debt, and profit loss by trying to increase their property rights. According to Mongolian officials, they are prioritizing the continuation and fruition of the project despite previous setbacks.
“To increase the efficiency of foreign investment in mining, it should be tied with other sectors of the economy; to introduce world-class technology, business methods, and skills, and to train the people. Alongside the time the resources are to be exported, the government should race to build the railways, power plants, and accelerate the development of financial markets, and small and medium-sized enterprises based on large incomes.” - Batbold Tserenpuntsag, Mongolian economist, and international lawyer
In the case of Tavan Tolgoi, one of the world's largest untapped coking and thermal coal deposits, located in the Ömnögovi Province in southern Mongolia, many losses have been faced amid disputes between the Mongolian Government and its investors as the price of coal has decreased drastically with each passing day. It is unlikely that OT will face the same fate as copper is an increasingly valuable precious metal due to the global technological and renewable resource movement.
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