Mongolia's crucial copper mining project Oyu Tolgoi to lay off workers... again

By bne IntelliNews May 28, 2014

Terrence Edwards in Ulaanbaatar -

 

Mongolia's most economically important mining project, Rio Tinto's Oyu Tolgoi copper-gold mine, is suffering the second round of layoffs in two years. This time it's not because of the current dispute with the government over investment, but due to the tougher market conditions in its main customer of China.

Employees of Oyu Tolgoi learned of the layoffs this morning in an internal memo that has been seen by bne, which was dated May 28 and signed by the mine's CEO, Craig Kinnel. The mining operation, located in Mongolia's desolate Gobi desert and predicted to generate a third of the country's annual GDP at peak production, said it was downsizing as it looks to make cost savings amid a worsening market for copper. A source close to Oyu Tolgoi said the layoffs would be between 250 and 300 across the business, or less than 5% of the roughly 7,400 fulltime employees and contractors.

"Given where we are now in the lifecycle of our project, and the urgent need to reduce our costs, it is critical to the success of the business to address this now," reads the memo. "Copper operations around the world are facing significant challenges with volatile markets and prices. Oyu Tolgoi is no different."

The 51%-owned Rio subsidiary of Turquoise Hill, which owns 66% of Oyu Tolgoi, reported net revenue of $108m for the first quarter of 2014 - it began commercial production last July - and that its copper concentrate sales were finally outpacing production after months of delays by customs. Oyu Tolgoi's contribution allowed Mongolia's copper concentrate production to shoot up 92% in April from last year, with copper concentrate making up 32% of total exports for the month, according to data from Mongolia's central bank.

Today's layoffs do not look to be fallout from the ongoing conflict with the Mongolian government, Anglo-Australian miner Rio Tinto's joint venture partner in the mine. That was the case last year in August, however, when the miner laid off 1,700 employees. Mongolia since last year has been squabbling with Rio Tinto over a $4.2bn project financing package that's needed to expand the mine. Currently Oyu Tolgoi is solely an open-pit mining operation. The next stage will be to build underground tunnels that Rio says will grant access to 80% of the wealth at the deposit.

Mongolia, which owns 34% of the copper-gold mine, has become increasingly worried about escalating development costs because it cannot receive dividends until after the initial investments are recuperated. That income will be crucial for the country's finances as its first sovereign bond is due to mature in 2017.

Falling investment

But Mongolia has more pressing problems to consider, argue critics. Government data showed foreign investment had fallen 65% in the first quarter of this year compared with the the same period in 2013. According to Nick Cousyn, chief operating officer at local brokerage BDSec, sudden layoffs are no help when the economy is already putting strains on livelihoods. “These layoffs come at a time when the local economy is very weak - it won’t be easy to find another job that pays as well as [Oyu Tolgoi]."

Worries over the economy have resulted in a shift in stance this year by the government on foreign invetsment in general, and the Oyu Tolgoi project in particular. 

A letter from Mongolia's prime minister dated March 27 was leaked in April to the local publication Mongolia Mining Journal, in which Norovyn Altankhuyag indicated that Mongolia was ready to greenlight the project financing if it meant expansion work would recommence. "While the start of production of Oyu Tolgoi in 2013 was a great achievement and an important milestone, it is of the utmost importance for my Government and for Mongolian people that Oyu Tolgoi proceed as soon as possible with the underground mine development," the PM's letter read. "We are thus most supportive of the Project Financing needed for next stage of this most important project."

A government official familiar with the matter says discussions with Rio Tinto were "going well" and that work was being finalised on a feasibility study for the expansion project.

Observers agree that consensus on the financing package for Oyu Tolgoi - as the largest operation in the country and for many the key measurement of political risk in the country - is crucial to the prime minister's recently announced 100-day economic stimulus plan and restoring foreign investment.

 

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