RPT-Mongolia tries to calm fears Rio wrangle will delay giant mine

Thu Mar 14, 2013 4:34pm EDT

* Important that production start on time-official

* Some politicians believe Rio taking advantage of country

* Government concerned rising costs will delay payoff for citizens

By Rujun Shen

SINGAPORE, March 14 (Reuters) - Mongolian officials tried on Thursday to calm fears that disagreements between the government and miner Rio Tinto Ltd would delay a planned June start of commercial production at the giant Oyu Tolgoi copper and gold mine.

Rio and Mongolia are at loggerheads over the future of one of the world's largest untapped copper deposits just as the mine ramps up output and the Rio subsidiary that owns it tries to line up $4 billion for the next stage of development.

The mine is operating under a temporary budget after the two sides failed to agree on a deal last month, having disagreed over taxes and rising costs that Mongolia fears will erode prospective earnings. They are set to meet again next week.

"The Mongolian government and the investor both highlight the importance that the production should start on time," Dorjsuren Javkhlanbold, a senior official at Mongolia's mines ministry, told Reuters on the sidelines of a conference.

"We have a joint understanding of what we are going to do. We need to make several clarifications (to) our investment agreement and we are confident the revision will soon be successful."

The high-stakes tussle is a major test for Mongolia's ambitions to become a destination for mining investment, but also for Rio and its new boss, pushing to diversify earnings away from steelmaking ingredient iron ore.

Rio Tinto and Oyu Tolgoi owner Ivanhoe Mines - now called Turquoise Hill Resources - signed an investment agreement with Mongolia in 2009. The government last year stood by the deal despite calls from politicians to amend it.

That agreement gave Mongolia a 34 percent stake in the project and allows the government to increase that to 50 percent after the first 30 years of operation. It provided for the state to receive a 5 percent royalty on sales and set the company's effective corporate tax rate at 25 percent.

The government has now raised concerns about rising costs that will delay the state receiving its share of profits from the mine and is looking for ways to increase the benefits for the country's impoverished population.

Nationalist politicians believe Rio is taking advantage of the country and want independent experts to ensure operating and capital costs are being properly controlled.

Javkhlanbold said the amount of initial investment - which he said had risen from $4.7 billion to $7.1 billion - was key to the discussion. Oyu Tolgoi puts total capital required for the project's first phase at $6.6 billion.

"It is important to make the rules of the game clear," he said in Singapore. "If we don't have clear rules, we will misunderstand each other and after a long time this misunderstanding will become conflicts between the investor and government."

Rio is the largest single investor in Mongolia - a country where livestock outnumber people 15 to one - and one of few with the financial might and technological know-how to build and run a giant mine.

Rio Tinto has already delayed a feasibility study on the project's second stage, which could cost some $7 billion according to analyst estimates.

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