Turquoise Hill Tarnished Again by Mongolia

The ongoing impasse at Turquoise Hill's (NYSE: TRQ  ) Oyu Tolgoi project in Mongolia is causing a bit of a cash flow problem at the miner, forcing it to hit up the equities markets for financing to meet its debt obligations.

Under an agreement it has with Rio Tinto (NYSE: RIO  ) , which owns 50.8% of the miner and operates the massive Mongolian copper mine, it was required to repay to Rio a $600 million bridge funding facility, and a $1.8 billion interim funding facility by the end of the year.

Oyu Tolgoi, Mongolia. Source: Rio Tinto

Oyu Tolgoi is one of the five largest copper projects in the world, and over the life of the mine, it's expected to produce more than 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver annually. But because Turquoise Hill hasn't been able to secure $4 billion in provisional project financing in 2013 for the next phase of expansion due to the dispute with the Mongolian government over who should pay for what -- the government owns 34% of the project, while Turquoise Hill owns the other 66% -- it doesn't have the money available to repay Rio Tinto.

Earlier this month, Turquoise Hill announced it had completed its divestiture of its 56.1% stake in Inova Resources to Shanxi Donghui Coal Coking & Chemicals Group for approximately $85 million.

As part of the rights offering it filed this week from which it hopes to receive up to $2.4 billion, Turquoise's parent agreed to extend the repayment deadline by two weeks to give it time to finish the offering, which includes a provision that Rio Tinto buy any shares left over. Turquoise Hill will have to pay back $2.02 billion within the next 12 months.

Rio put the $5 billion underground expansion project at Oyu Tolgoi on hold in August after trying to resolve disputes with Mongolia over how they'll split the profits from the mine. The government accuses Rio Tinto of cost overruns on the project, though the miner says that, considering the scope of the endeavor in the middle of the Gobi Desert, the fact that it's only $786 million higher in cost than its original estimate is not unreasonable.

Now Turquoise Hill says it's suspending work on the project. "Given uncertainties surrounding the timing of resolution of issues with the Government of Mongolia," it wrote in a press release, "including obtaining all required approvals and completion of the Oyu Tolgoi expansion feasibility study, Turquoise Hill is unable to complete project financing in 2013."

It remains committed to the project, and of reaching an amicable resolution with the government, which is a process it says is moving forward in a positive manner. Of course, it has to say that; but the reality is that the country has morphed from "Minegolia" into a ghost town. Other miners have given up hope of working there.

While work still continues on optimizing Oyu Tolgoi's design, as well as on its construction plan and the finalization of the feasibility study, Turquoise Hill is nevertheless forced to resort to the rights offering because of all the delays.

However, the miner says the open pit mine consistently achieved throughput capacity of more than 95% of its capacity during the quarter, and is now operating at nameplate capacity of about 100,000 tonnes of ore processed a day, while progressively ramping up to produce between 72,000 and 77,000 tonnes of copper in concentrates this year.

While the rights offering gets Turquoise Hill over the latest hurdle, there doesn't appear to be a resolution to the impasse' and despite the riches the mine could bring to all the parties involved, this becomes a deeper morass that investors might want to avoid for now.

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