* Differences on keeping income in Mongolian banks, sales
* Oyu Tolgoi to account for almost a 3rd of Mongolian
* Weak Mongolian currency, falling commodities demand raise
By Terrence Edwards
ULAN BATOR, July 4 The Mongolian government and
Rio Tinto have not yet reached an agreement on
whether the miner can repatriate earnings from the $6.2 billion
Oyu Tolgoi mine, the country's mining minister said, delaying
first copper shipments.
The dispute could heighten investor concerns about the risks
of mining in Mongolia and threaten Rio Tinto's plans to grow its
copper portfolio to ease dependence on iron ore.
Metals traders have been closely watching whether Rio gets
official approval to export concentrate from Oyu Tolgoi amid a
shortfall in shipments from the Grasberg mine in Indonesia, run
by Freeport McMoRan Copper & Gold.
The unlocking of ore shipments would increase supply in top
copper consumer China and boost treatment and refining charges
charged by smelters there.
Exports from the copper and gold mine were initially due to
start on June 14, but were then postponed to June 21, before the
Mongolian government told Rio to delay them again without
setting a date. Uncertainty over the reasons for the delay has
slashed the share price of other Mongolian miners.
Analysts had expected Rio to be able to start first
shipments after elections which saw incumbent president, Tsakhia
Elbegdorj, win a second term last week.
But Mongolia said it is still in talks with Rio to keep the
money generated from Oyu Tolgoi in local banks and both parties
also have disagreements over the disclosure of the mine's $8
billion sales agreements.
"The delay caused is because the OT LLC (Oyu Tolgoi) didn't
seek approval from its Mongolian board on the sales agreements,"
Mongolia's Mining Minister Davaajav Gankhuyag said, according to
a transcript of a June 28 press conference published on news
"Secondly, OT LLC is putting the sales income into offshore
accounts. We asked them if they are not going to show us the
agreements, they must process its transactions through
Mongolia-based banks," the minister added.
It was not immediately clear how the two parties plan to
sort out their differences.
Mongolian government officials could not be reached for
comment. An Oyu Tolgoi spokesman in Mongolia and a Rio Tinto
spokesman in Melbourne were not immediately available to
Sources with knowledge of the matter say the 2009 investment
agreement for Oyu Tolgoi allows Rio to choose where funds are
Rio Tinto, operator of the mine, owns a 66 percent stake in
the mine through its subsidiary Turquoise Hill Resources Ltd
, while the Mongolian government owns the remainder.
Copper accounted for 13 percent of Rio's revenues for the
half-year ended December 2012, while iron ore made up 46
percent, according to Thomson Reuters data.
President Elbegdorj has said Mongolia should have greater
control of Oyu Tolgoi, which will account for almost a third of
the nation's economy once in full production.
Mongolia's battle with Rio to keep the Oyu Tolgoi mining
revenues at home comes amid a rising deficit, a weakening
currency, high inflation and a gloomier outlook for commodities
demand. A weaker currency could hamper its ability to pay back
the $1.5 billion worth of government bonds issued last November.
For Rio and other investors, however, volatility in the
Mongolian tugrik pose a major currency risk, with few
The tugrik fell 14 percent against the dollar in 2010,
before swinging back up 12 percent the following year. It was
flat in 2012 and has gained 4 percent so far this year.
Moves by the government to briefly freeze bank accounts of
Rio and Canada's SouthGobi Resources have also added to
investors' jitters, analysts said.
"The government's request that Oyu Tolgoi revenue stay in
the local banking system is a non-starter, given the system's
poor credit rating," Nick Cousyn, Chief Operating officer at
BDSec, an investment bank in Mongolia, said in a note to
"Furthermore, it was only a few months back when the
government froze OT's bank accounts, over a tax dispute."
Moody's and Standard & Poor's both downgraded their outlooks
on Mongolia to negative in April. Moody's said in its report
that the country's banking system has high loan concentrations,
weak risk-monitoring systems and regulatory framework.