By Clyde Russell
LAUNCESTON, Australia Aug 19 Is Rio Tinto's
dispute with the Mongolian government over the expansion of the
Oyu Tolgoi copper and gold mine the signal that the nation's
commodity boom is over, or is it just a hiccup?
Certainly, Mongolia's reputation as a desirable investment
destination and one of the few remaining countries ripe for
developing natural resources has taken a battering recently.
Rio Tinto, the world's second-largest mining
company, said on Aug. 14 that it will cut 1,700 jobs at Oyu
Tolgoi after a $5 billion expansion of the project was put on
hold last month.
The dispute is over how the expansion gets financed, and the
Mongolian parliament has been recalled from its summer recess
for an emergency session to try and deal with the matter.
But the real issue is how long it will take for Mongolia to
get significant amounts of money from the mine, which is slated
to boost the economy by 35 percent by 2020.
Rio Tinto's Turquoise Hill Resources subsidiary
owns 66 percent of the mine, while the government owns the other
The government has said Oyu Tolgoi, which has an operating
open pit and a planned underground expansion, is at least $2
billion over budget.
The higher the capital cost of the mine and any expansion,
the longer it will take to pay off the investment, thus delaying
The Mongolian authorities are also said to be concerned
about the management fees charged by Rio Tinto for operating the
facility, and whether local workers should be on the same pay
scales as foreigners.
So far Rio Tinto has played its cards close to its chest,
saying publicly that both it and the government remain committed
to expanding the project and resolving any issues.
The stakes are high for both parties, thus increasing the
likelihood of an eventual compromise and resolution.
For Rio Tinto, Oyu Tolgoi represents one of the world's
largest untapped copper reserves, and its development will
lessen the global miner's reliance on its iron ore mines in
Longer term, copper may be a better bet than iron ore, given
the paucity of new copper reserves, the aging of existing mines
and still strong demand from industrialisation in China and
In contrast, iron ore supply looks set to swamp demand in
the next few years as Rio Tinto, its Australian competitor BHP
Billiton and Brazil's Vale all increase
capacity, while demand growth in top consumer China is expected
MONGOLIA NEEDS MINES
For Mongolia, the development of the Oyu Tolgoi copper mine
and the Tavan Tolgoi coal mine is the ticket to economic
prosperity, with export earnings forecast at a combined $7
billion by 2020, a huge amount for a country whose gross
domestic product was $10.2 billion last year.
It's no surprise that both the Mongolian government and Rio
Tinto want to secure the best possible terms for themselves in
developing the Oyu Tolgoi deposit.
But both will have to be wary about escalating the current
dispute to the point where the viability of the investment is
called into question.
Firing some 1,700 workers is a fairly dramatic step by Rio
Tinto, and the company appears to be betting that the Mongolian
authorities need it more than Rio needs them.
There may be some truth to that.
If the Rio Tinto investment does go sour, it would put
Mongolia off the map for virtually any Western company for
Given the lack of a good relationship with China, it's
unlikely Mongolia wants to become dependent on investment from
its giant southern neighbour.
In fact, landlocked Mongolia would love to be able to sell
its resources, such as coal, to countries other than China, but
a lack of infrastructure to ship through northern neighbour
Russia is a major obstacle.
Mongolian President Tsakhia Elbegdorj, who won re-election
in June with a slim majority, is keen to exert more control over
foreign mining investments.
What this is likely to mean in practice is that the
government wants a bigger share of the revenues without having
to stump up capital for development.
While this can certainly be legislated, it will alter the
risk-reward equation for assessing resource projects and
potentially discourage new investment.
Both the Mongolian government and Rio Tinto have too much at
stake to endure a protracted dispute.
But this doesn't mean that both parties will work quickly to
resolve the issues. This will take leadership on both sides.
The upcoming emergency sitting of parliament on Sept. 2-6
sets the stage for compromise all round.
But the government is likely to be feeling more pressure
than Rio Tinto, given lower commodity prices and a 43 percent
slump in foreign investment in the first half of this year, both
of which hurt the budget.