International mining giant Rio Tinto has been forced to put the $5.1bn second phase development of the Oyu Tolgoi copper-gold mine on hold after Ulaanbataar announced that approval from parliament - currently on summer recess - on financing for the project will be needed.
Rio Tinto, which owns a majority stake in the mine through its 51% owned Turquoise Hill unit, said in a July 29 statement that it has been notified by the Mongolian government "that the terms of the project financing provisionally secured for the underground development of Oyu Tolgoi will need to be approved by the Mongolian Parliament."
"[I]n view of the current uncertainty, including continued discussions with the government on a range of other issues, all funding and work on the underground development will be delayed until these matters are concluded and a new timetable has been agreed," Rio Tinto's statement adds. It also warns that the Mongolian parliament is on summer recess, and "the parliamentary approval process may take some time to work through". The lower house is expected to reconvene in October.
No reason was given for the decision to submit the financing plan to the parliament; previously only approval from the government had been required. However, the development of Oyu Tolgo - one of the world's largest copper-gold deposits - is a burning political issue, with both the decision to allow a foreign company to develop the deposit and the distribution of revenues a source of conflict.
Rio Tinto and Turquoise Hill have previously come under fire from government officials, who accuse the developers of allowing costs for the initial phase of development to escalate, and the project has seen several delays. However, shipments of copper from Oyu Tolgoi to China - the main market for Mongolian raw materials - finally kicked off in July after several weeks of delays, indicating a thaw in relations.
The second phase development of the deposit, which will including digging the underground mine, will allow production on a much larger scale. According to Reuters, once the second phase of production starts, output is set to reach 425,000 tonnes of copper and 460,000 ounces of gold per year.
Rio Tinto has been in talks with commercial banks and international financial institutions, and has reached agreement on over $4bn of financing for the second phase, including more than $2bn from commercial banks, Reuters reports. This is despite the government concerns over the mounting costs of the project.
However, Visor Capital analysts suggest that a resolution to the stand off between the pair may not be too far away. Although the decision to wait for parliamentary approval may delay the expansion of Oyu Tolgoi, they note, "we consider this announcement by Rio Tinto to be rather an incentive for the Mongolia government to speed up the process of negotiations."
"As we understand from the company, the negotiations with the government are currently centred on technical questions, implying no significant changes to the investment agreement," they point out. "We believe that after coal concentrate shipments from Oyu Tolgoi started earlier in July, the outcome of these negotiations should be positive for Turquoise Hill."
The re-election of Tsakhia Elbegdorj - widely seen as the pro-investor candidate - in the July 2013 presidential elections was seen as a positive sign for international investors in Mongolia. Concerns about slowing GDP in early 2013 are also likely to provide an incentive for agreement on the next phase development of the mine.
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