Rio Tinto Group (RIO), the second-biggest mining company, is considering a temporary halt to construction work at its $6.2 billion Oyu Tolgoi copper and gold project in Mongolia as the government demands a greater share of profit from the mine, according to two people familiar with the plans.
The London-based company is discussing the suspension to protest the central Asian nation’s demands for a bigger stake in the project and new mining royalty rates, said the people, who asked not to be identified because they aren’t authorized to comment publicly. A suspension of work, which may halt mining and processing, isn’t certain and is among options that managers are discussing in London, one of the people said.
“We continue to work together with all stakeholders including the government of Mongolia to bring the benefits of Oyu Tolgoi to all parties,” said Bruce Tobin, a spokesman for Rio in Melbourne. He declined to comment on whether it’s considering a temporary halt.
The dispute comes as Mongolian Prime Minister Norovyn Altankhuyag’s government tries to maintain support for foreign investment amid growing nationalism and wealth disparity. In October, Rio rejected a second move by Mongolia to renegotiate a 2009 investment agreement for the development of Oyu Tolgoi, which is currently the world’s biggest copper project under construction.
“Whilst a shutdown would be negative in the short term, the fact such a move is under consideration suggests Rio is prepared to play hardball to retain its stake in the project,” Richard Knights, a mining analyst at Liberum Capital Ltd. in London, said yesterday.
Rio declined 1.1 percent to close at A$66.36 in Sydney trading. Bigger rival BHP Billiton Ltd. fell 0.4 percent. Turquoise Hill Resources Ltd. (TRQ), the Rio unit through which it controls Oyu Tolgoi, fell 3.4 percent yesterday to close at C$7.87 in Toronto.
At full capacity the mine will account for almost a third of Mongolia’s economic output. It’s on schedule to start commercial production in the first half, Tobin said. The first ore has been mined and the concentrator, which processes the raw material at the site, has been switched on, he said.
The mine may contribute 2.2 percent of the company’s earnings before interest, tax depreciation and amortization this year, Knights said. Rio’s 2013 Ebitda will be $22.2 billion, according to the average of 25 analysts’ estimates compiled by Bloomberg.
Any delay in reaching commercial production may increase pressure on copper prices. The metal will advance 7.6 percent in 2013 as demand in China, the U.S. and Europe rises amid a supply deficit, Morgan Stanley said in a Jan. 24 report. Global demand will exceed supply by 17,000 metric tons in 2013, the fourth straight annual deficit, according to the bank.
“Companies juggle between trying to justify operating in a higher-risk growth market like Mongolia or Africa and then looking to expand existing assets but at lower ore grades,” Mark Pervan, ANZ Banking Group Ltd.’s head of commodity research, said by phone. “The two combined to me say higher prices.”
Copper in London rose 1.5 percent to close yesterday at $8,226 a metric ton ($3.73 a pound), the highest since Oct. 11. It traded little changed at $8,225 at 1:30 p.m. Shanghai time.
Foreign investment in Mongolia, which relies on minerals for more than 90 percent of its exports, has cooled since a law last year restricted state-owned companies from controlling strategic assets. The nation of 2.8 million people broke off from Communist rule and dependence on the Soviet Union in 1990.
The government said in 2011 it wanted to boost its stake in Oyu Tolgoi to 50 percent from 34 percent as well as change royalty payments.
Those demands highlight the risks from so-called resource nationalism that global mining companies face in the developing world. The issue is a top concern for mining companies, along with skill shortages, infrastructure access and costs, according to a report from Ernst & Young last year.
The Democratic Republic of Congo, Poland, Peru and the U.S. are among other countries that have either proposed or imposed tax or royalty gains on mineral projects in 2011 or the first half of 2012, E&Y said.
“Resource nationalism might start to rear its head more often as the easy-to-get-at supply has been exhausted or is mature,” said ANZ’s Melbourne-based Pervan.
The escalating dispute with Mongolia also comes at a time of upheaval at the company. Rio said Jan. 17 it appointed Sam Walsh as chief executive officer to replace Tom Albanese, who left after the company took $14 billion of writedowns on aluminum and coal assets.
Rio has a 51 percent interest in Vancouver-based Turquoise Hill, formerly known as Ivanhoe Mines Ltd., which holds a 66 percent stake in Oyu Tolgoi. Ivanhoe spent more than six years negotiating with Mongolia before reaching the deal on development in 2009.
Any suspension of operations at the project won’t be permanent partly because if Rio took that course it would then forfeit certain rights to the project under the terms of the government accord, one of the people said.
Rio is considering expanding the mine and expects to conclude a study of the proposal in the first half of this year. The expansion would involve building an underground mine, a power station and enlarging the concentrator. The work may cost $5.1 billion, Turquoise Hill said in a March report.
To contact the reporters on this story: Christopher Donville in Vancouver at email@example.com; Todd Baer in Mongolia (NON BLP LOC) at firstname.lastname@example.org; Yuriy Humber in Tokyo at email@example.com
To contact the editors responsible for this story: Andrew Hobbs at firstname.lastname@example.org; Simon Casey at email@example.com; Jason Rogers at firstname.lastname@example.org