Another Speed Bump for Rio Tinto in Mongolia?

Remember that green light that miner Rio Tinto (NYSE: RIO  ) supposedly got last week from the Mongolian government to get the Oyu Tolgoi project going again? Well, like a cop sitting at a traffic light manually changing the sequence to catch motorists running a red light, the massive copper and gold mine apparently has been brought to a screeching halt once more. Bloomberg's Mongolian TV operation reports some 2,000 miners who were performing the underground expansion work at Oyu Tolgoi received layoff notices.

Rio Tinto and its subsidiary Turquoise Hill Resources (NYSE: TRQ  ) , which owns two thirds of Oyu Tolgoi, have been battling the Mongolian government over how they'll split the profits from the mine. While the government accuses the miner of cost overruns and breaking leases, Rio says no promises have been broken, and the project is only $786 million more expensive than when it signed onto a feasibility study with the government, a fairly insignificant amount when considering the size and scope of what they're undertaking in the middle of the Gobi desert.

The problem for Rio Tinto, Turquoise Hill, and other players tapping into mineral, oil, and gas resources around the globe, is governments have become greedy, and beset with resource nationalism as the value of the resources have skyrocketed.

While countries like Venezuela and Argentina have simply expropriated the rights and property owned by corporations through nationalization, others, particularly those in South America, have erected steep roadblocks to thwart their advance.

Barrick Gold continues to wrangle with the Chilean government over its Pascua-Lama gold mine over the rights of indigenous tribes, Newmont Mining was brought up short with its Conga project in Peru, and Kinross Gold (NYSE: KGC  ) recently walked away from what should have been a lucrative gold mine at Fruta del Norte after Ecuador imposed a windfall profits tax that would have expropriated 70% of all profits above a negotiated base price for the metal.

Oyu Tolgoi is one of the five largest copper projects in the world, and over the life of the mine, it's expected to annually produce more than 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver.

Mongolia and Rio Tinto are simply engaged in a chess match over those riches, with the mine workers likely pawns in a larger strategy. The government is on the hook for a third of the costs of the project's expansion, and the two sides have been locked in negotiations over its financing. When the miner said the project would be delayed until the government got its act together, Mongolia was apparently caught off guard, causing the prime minister to respond that parliament had made its decision, and work could continue apace. 

These layoffs would seem to be Rio Tinto's next move to secure a checkmate, but now we need to see if Mongolia has laid a speed trap for the miner to get it to give up more of the profits from the mine.


Read/Post Comments (3) | Recommend This Article (5)

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  • Report this Comment On August 17, 2013, at 7:50 AM, minn117 wrote:

    This is so old news is almost misleading! The latest is that the Mongolian National Economic Council met and Thursday and is considering recalling parliament for and emergency session to discussion the funding issue for the underground mine development.

    One could take the view from this LATEST development that it is a very positive sign that things could move rapidly forward in favor of the OT mine.

    Here's link to the article in Reuters. The story also aired on BBC world news on Thursday night.

    http://www.reuters.com/article/2013/08/15/mongolia-riotinto-...

  • Report this Comment On August 19, 2013, at 8:12 AM, minn117 wrote:

    Mongolian parliament has actually been recalled for the emergency debate to discuss the funding issue and is scheduled for Sept 2-6.

    This is very good news!

  • Report this Comment On August 26, 2013, at 4:40 PM, rfaramir wrote:

    "governments have become greedy, and beset with resource nationalism"

    Exactly! Although I'd argue that 'become' is rather naive; 'are always' would be more appropriate.

    "Mongolia and Rio Tinto are simply engaged in a chess match over those riches"

    Not really. It is a completely unfair match, with the government possessing unopposable force (guns) on its side. Trying to dance with an 800 llb gorilla is not much like chess.

    "layoffs would seem to be Rio Tinto's next move to secure a checkmate"

    A 'checkmate' is not a desirable outcome for either side. Cooperation to create an enterprise that is profitable for society should be the goal.

    The corporation wants to create wealth for its shareholders by providing needed resources for world customers. The government wants wealth production to occur within its domain so it can leach tax revenue off it (and possibly to honestly increase the well-being of its citizens). Both sides' goals can be accommodated if they work nicely together.

    (Long a tiny position in TRQ)

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