Rio faces more hurdles at Oyu Tolgoi, Mongolia shareholder says

ULAN BATOR, July 17 Wed Jul 17, 2013 3:54am EDT

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ULAN BATOR, July 17 (Reuters) - Rio Tinto faces lingering disputes with the Mongolian government over its Oyu Tolgoi copper mine, said a director of the state company that owns a third of the mine, highlighting risks confronting the massive project.

According to Tserenbat Sedvanchig, executive director of Erdenes Oyu Tolgoi, the government still has 22 points of dispute with Rio Tinto, operator of the project which is expected to boost the country's economy by 35 percent by 2020.

Grievances include "four issues related to violations of Mongolia legislation and the investment agreement," he said, adding that capital expenditure was the biggest issue.

"If we don't make clear what was the amount of initial investment, resolution of some of the other 21 issues will be hindered," Sedvanchig told Mongolian online news service News.mn in an interview released on Tuesday.

Rio Tinto, whose Turquoise Hill Resources subsidiary owns 66 percent of Oyu Tolgoi, declined to comment on his remarks.

Oyu Tolgoi, one of the world's five biggest copper mines, began exporting copper to China on July 9 after two delays in June. It won the all-clear to export after Rio Tinto agreed to notify Mongolian authorities of all foreign and local bank accounts that it would be using to deposit Oyu Tolgoi revenue.

"Any action aimed to tax evasion will be strictly prosecuted under our law and Rio Tinto and the company management team probably understand this well. We requested Oyu Tolgoi to register all its domestic and foreign accounts with relevant state agencies," Sedvanchig said.

He said exports were pushed forward despite the unresolved disputes because the project needed the cashflow and stockpiles were getting full.

"All parties agreed that exports should commence immediately to let Oyu Tolgoi have a source of income," he said.

Mongolia will receive at least $100 million in royalties from Oyu Tolgoi this year, he said.

The Mongolian government has said the $6.5 billion project is at least $2 billion over budget. Other issues that remain to be resolved include the government's demand for equal pay for Mongolian and foreign workers, concern about high management fees and fair representation of Mongolians in management.

The company has blamed delays in attaining permits, industry-wide cost increases over the three years of development and inflation in Mongolia for the cost overruns above its early estimates.

Two auditing teams are investigating costs incurred during phase one development of the project, one appointed by the Oyu Tolgoi board and the other by Mongolia's parliament.

"The (Oyu Tolgoi-appointed) working group worked for three months. Some initial conclusions are already emerging. Soon they will be finalized. After that, the parties will discuss them," Sedvanchig said.

The government and Rio Tinto will need to resolve the dispute over the costs of the first phase of the project before agreeing on funding for the second phase, an underground development expected to cost more than $5 billion.

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Comments (3)
Baylag wrote:
Million dollar advice I have for rio tinto is to hire Mongolians in the leadership management team, then the company will have less trouble operating in Mongolia. Another advice is be transparent. rio tinto is a non transparent company and operate like an old traditional person in this young and vibrant economy, be more open to new ideas,hire Mongolians not as junior managers, but as CEO, CFO, COO, and VP of procurement and VP of HR. then I assure you the company could talk to the government much better than current Australians who are clueless

Jul 17, 2013 11:01am EDT  --  Report as abuse
Baylag wrote:
Also, company can save millions of dollars if they could hire local management team.

Jul 17, 2013 11:02am EDT  --  Report as abuse
verdun wrote:
Baylag it is so unfortunate to see a comment such as yours. You evidently have not done research (due diligence) on this topic beyond this article. Rio is using the most modern (newest) underground and processing technology (this is a world class mine not a disco club)The OT team is Mongolian management lead (see previous research on Ubpost News)When hiring, local persons, most are inexperienced, and must start at the bottom, learn and make their way up the ladder. (not easy to do in just 1-week., takes years) If the person(s)is/are in need of training where do they learn out-of-country ?! Skilled, well trained person’s from outsige Mongolia are needed to get this mine moving and properly structured. They are paid equivalent wage per their home countries. Pay scales reflect inexperience, training and experience.(donot put a Mongolian high school grad in a CFO position at $ 160,000 US year, just because person passed intro accounting course) Govt is also learning how not to get caught being corrupt, yet still milk the cow as much as possible……..

Jul 18, 2013 2:57am EDT  --  Report as abuse
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