Mongolia puts pressure on Rio Tinto ahead of Oyu Tolgoi talks

Wed Feb 27, 2013 2:12am EST

The cancellation follows a string of complaints by the Mongolian government over Oyu Tolgoi, which is controlled by Rio Tinto through its Turquoise Hill Resources unit, in the lead-up to a presidential election due in June.

The fight is crucial to both sides. At full tilt, Oyu Tolgoi will account for nearly a third of Mongolia's economy, while Rio Tinto is dependent on Oyu Tolgoi to drive growth outside its massive iron ore business.

Mongolia's Mining Ministry this week said it had cancelled a decision made in 2009 when it converted into mining licenses the Shivee Tolgoi and Javhlant exploration licenses held by Oyu Tolgoi and Entrée Gold.

Mongolia is now reviewing the decision, originally part of the 2009 investment agreement for Oyu Tolgoi, to ensure the move was valid.

Oyu Tolgoi owns an 80 percent interest, and Entree a 20 percent interest, in production from the mining licenses.

"At this time, the company has not received formal notification from any government agency regarding the status of the licenses and is seeking clarification," Entrée told the Toronto stock exchange.

The move on the Shivee Tolgoi and Javhant mining licenses adds to other issues unsettling Oyu Tolgoi just as it ramps up for commercial production, due to start in June.

Rio Tinto has vowed to negotiate hard to protect the pact and said it would not start selling copper from the project until the problems were resolved.

"Subject to the resolution of these issues, first commercial production from Oyu Tolgoi is scheduled to commence by the end of June 2013," Rio said in a results announcement on Feb. 14.

Among the issues raised by the Mongolian government, it has accused Oyu Tolgoi of failing to pay taxes and overspending on the project, which is eventually expected to produce 425,000 tonnes of copper and 460,000 ounces of gold a year.

Following the first meeting of Oyu Tolgoi shareholders on February 8, which was adjourned for the Lunar New Year holiday, Finance Minister Chultem Ulaan said no tax had been paid for the mine in 2012.

Rio said that was incorrect, adding that it had agreed in 2010 to lend the government $250 million in the form of a "tax pre-payment, with repayment coming in tax credits."

There was also a dispute over development costs, which Mongolia's president said had surged above $7 billion. Rio contends the project is on budget at $6.2 billion.

The government says the additional costs would mean waiting 14 years more to collect on dividends, whose distribution is blocked by the terms of the pact until investors have recouped their original investments.

There are also reports that the government has antagonized the company by temporarily freezing the project's bank accounts.

An Oyu Tolgoi spokesman declined to comment, and Mongolia's tax authorities could not be immediately reached for comment.

Mongolia fears the agreement may not be in its best interests. Some within government would like a majority stake in the project, in which Mongolia now has a 34 percent stake.

Others feel the aggressive actions are designed to play to nationalist concerns ahead of this year's presidential election.

Promises to close the mining sector to foreign investment were used by candidates at Mongolian parliamentary elections last year to try and attract votes.

Disputes would continue until after the election, said Chris MacDougall, managing director of Mongolian Investment Banking Group.

"Then we'll see the rhetoric change and Oyu Tolgoi progress. I don't think we will see any material changes for Oyu Tolgoi," MacDougall said.

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