Terrence Edwards in Ulaanbaatar -

Rio Tinto secured an essential agreement for the construction of a power generation plant to feed its $6.5bn Oyu Tolgoi copper project on August 14. While the news is positive for the investor, it doesn't guarantee that the $5bn expansion that holds the key to 80% of the booty buried in the mine will get the green light.

The Oyu Tolgoi LLC mining unit will be the primary consumer of energy generated from the new power station, which is planned to be built near the state-owned Tavan Tolgoi coal mine. Currently Oyu Tolgoi sources power from China's state-owned Inner Mongolia Power Corporation, but the 2009 investment agreement on the project requires that it secure a local power source by 2017.

After the signing of the Power Sector Cooperation Agreement (PSCA) - attended by Prime Minister Norov Altankhuyag - Rio Tinto Copper CEO Jean-Sebastien Jacques said in a statement: “The PSCA is a positive development for Oyu Tolgoi. It demonstrates how the Government and we can work together to achieve shared objectives—in this case, developing a long-term, economically competitive, and reliable power supply in the South Gobi.”

Energy Minister M.Sonompil also sounded happy, adding: “Successful implementation of the PSCA will add significant domestic power capacity, strengthening Mongolia’s energy supply network. It will also encourage investment and jobs – both during construction and in operation.”

However, analysts are wary of suggesting the deal will see the two sides pull closer on more important points. "It's a positive step, but not a major development" said Bontoi Munkhdul, head of the market intelligence firm Cover Mongolia. "It's just a contractual agreement. I wouldn't call it an achievement, really."

Rather, the major victory, suggests Munkhdul, would be approval of a $4bn project financing agreement supplied by investors such as the European Bank for Reconstruction and the World Bank's financing arm, the International Finance Corporation (IFC). That funding would be used to power the underground mine expansion that Rio says will allow it to extract 80% of the deposits wealth. However, the government has been fighting against the plan.

Race against time

However, the move does demonstrate that Mongolia and its Western partners are at least moving forwards, despite a $130m bill recently handed to Oyu Tolgoi by the tax man, who claims it underpaid in 2010-2012. Turquoise Hill Resources - through which Rio Tinto holds its 66% of the mine - responded by triggering a "notice of dispute". 

Under the terms of the investment agreement on the mine, that gives the pair until mid-September to negotiate a resolution before it can be escalated to arbitration. However, negotiations are stalled while Rio waits to see if Mongolia decides to change its mind.

Officials suggested that could be possible, but of course that would just gobble up more precious time. "When auditors conclude findings, it's not the final opinion of the General Tax Authority," Tunrev Batmagnai, Mongolia's tax commissioner, told bne. "If the taxpayer [Oyu Tolgoi] confirms the conclusion, that's the final word. If not, there's a tax dispute council."

All of which just puts yet another obstacle in the way of the swift effort needed to get the project financing back on track. A pre-feasibility study on the mine expansion also needs to get approval from the Oyu Tolgoi board, as well as Mongolia's mining authorities. Economic Development Ministry officials will also have to sign off on the terms to receive the funding from the IFC.

"With respect to timing, it's [the pre-feasibility study] virtually complete, and we are just waiting on a little more clarity on the other issues that we are working through to distribute it to the government," said Kay Priestly, Turquoise Hill's CEO told investors on August 12.

However, Turquoise Hill is racing against a September 30 deadline to secure that financing. Should it not make it, it will be up to investors whether or not to extend until December 30. Given that the deadline has already been extended three times, patience on all sides may be wearing thin.