Bloomberg News

Rio Says Accord Changes May Alarm Mongolia Investors

September 25, 2011

(Company corrects value of project in third paragraph of story that ran Sept. 25)

Sept. 25 (Bloomberg) -- Rio Tinto Group said that potential changes by Mongolia to an investment accord that at present gives partner Ivanhoe Mines Ltd. control of one of the world’s largest copper mines will alarm investors.

“The most important thing that foreign investors require when they’re making their investment decisions is the feeling of predictability and stability in the country in which they operate,” Cameron McRae, Rio Tinto’s Mongolia country director, said in the capital, Ulan Bator, yesterday. “An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive and uncertain.”

McRae, who is also chief executive officer of Oyu Tolgoi LLC, made the comment after Mongolian Finance Minister Sangajav Bayartsogt said that the government may amend the investment terms for Oyu Tolgoi to boost state ownership. A revision may delay the proposed 2013 start of the project with any increase in the state’s share curbing profits from the $10 billion mine for developers Rio and Ivanhoe.

Rio estimates world demand for refined copper will grow 40 percent to 27 million metric tons by 2020, according to a Sept. 8 presentation. Oyu Tolgoi will be one of the world’s five- biggest copper mines and may have average annual production of 450,000 tons of copper and 330,000 ounces of gold, Rio said. That’s about $4 billion a year in sales at current prices.

‘Mammoth Sum’

The existing agreement has given Rio Tinto the confidence to invest “such a mammoth sum” in the project, said McRae. “What we are demonstrating is the investment agreement is a contract. We’re going to honor it and we expect the government to honor it.”

The project, 66 percent owned by Ivanhoe and 34 percent by the Mongolian government, is half way through completion, according to Rio, which owns 48.5 percent of Vancouver-based Ivanhoe and controls the Oyu Tolgoi management.

Mongolia’s government is also seeking to change the allotment of stakes in the Talvan Tolgoi coal deposit to investors including Peabody Energy Corp., the largest U.S. coal producer. The proposals to revise ownership of the country’s two biggest mineral developments come ahead of parliamentary elections next year.

A group of 20 Mongolian lawmakers wrote to Prime Minister Sukhbaatar Batbold on Sept. 7 demanding the investment accord for Oyu Tolgoi be revised to give the country a 50 percent holding, China’s Xinhua News Agency reported Sept. 20. Mongolia has appointed chief of the cabinet office Chimed Khurelbaatar to start talks with the miners, the news agency said on Sept. 22.

More Talks

Rio would like to have more talks with the Mongolian government as it hasn’t received any formal notification about a proposed revision, said McRae, who was appointed by Rio. The company has managed the project since December.

Oyu Tolgoi, which means “turquoise hill,” will boost the country’s gross domestic product by 30 percent by 2020, when it reaches full production, said Andrew Harding, chief executive officer of Rio Tinto’s copper unit. The project may cost $10 billion in total, Harding said.

Oyu Tolgoi’s shareholders are seeking to raise as much as $4 billion to finance the development, which would make it the biggest project financing in the mining industry, said McRae. Rio has invested more than $3 billion in the past five years.

Ivanhoe spent more than six years negotiating an investment pact with Mongolia before reaching an agreement in October 2009 to allow it to mine the site. Rio’s two biggest development projects are Oyu Tolgoi and the Simandou iron ore project in Guinea, which Rio has said will cost more than $10 billion.

Power Supplies

Rio is also seeking to resolve the issue of power supplies for Oyu Tolgoi. Production may be delayed if the source of electricity isn’t agreed in the coming months, Harding said at the briefing. Talks between the governments of China and Mongolia over power continue, with China the preferred source of initial supplies, he said.

“We believe the power issue is a key risk to the project execution at least in terms on time-line,” Citigroup Inc. analysts Heath Jansen, Clarke Wilkins and Anindya Mohinta wrote in a Sept. 20 report.

Mongolia, a landlocked country between China and Russia, is one of the richest nations in terms of natural resources, and that’s just the known deposits as four-fifths of the nation hasn’t been surveyed. Aside from coal and copper, the country also holds oil, potash, iron ore and uranium, as well as rare earths used in electronics and turbines. Agriculture and mining each account for about 20 percent of gross domestic product.

China Trade

Mongolia has grown increasingly dependent on commerce with China’s 1.3 billion people since the 1991 breakup of the Soviet Union. China accounts for 80 percent of Mongolia’s imports and buys about 85 percent of its exports, according to Mongolia’s central bank data.

President Tsakhia Elbegdorj, a former journalist who led the peaceful revolution that ended more than 65 years of communist rule in Mongolia in 1990, said in June he’s concerned about how to “manage” the surge of foreign investment and ensure the windfall spreads among the nation’s citizens.

More than 33 percent of Mongolians live below the poverty line, and per capita income in the nation of 2.7 million is $2,111, the International Monetary Fund said in 2010.

--With assistance from Jesse Riseborough in London. Editors: Keith Gosman,

To contact the reporter on this story: Soraya Permatasari in Mongolia at soraya@bloomberg.net

To contact the editors responsible for this story: Paul Tighe at ptighe@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net


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