Rio Tinto is leaving $US4.2 billion in financing needed to move forward its troubled Oyu Tolgoi project in limbo until the miner can get greater clarity from the Mongolian government.
Rio copper boss Jean-Sebastien Jacques told Fairfax Media on Tuesday that the miner had not requested a formal extension to a lapsed deadline for project financing because the ball was in the Mongolian government’s court.
“Either they want to do it or they don’t want to do it,” he said. “If they want to do it, we can move with pace, but it is really their call now.”
Rio has been in a long-running stand-off with the Mongolian government over their joint venture, the massive Oyu Tolgoi copper and gold mine, and let a September 30 project financing deadline pass for $US4.2 billion ($4.8 billion) to fund the underground expansion.
Mr Jacques said the miner was considering submitting a formal extension request to the 15 commercial banks in the lending consortium financing the next development phase.
“The main reason why we have not submitted a formal request yet is that we want to understand where the government of Mongolia is coming from,” he said.
“Because after 18 months of conversation with the government, there is a deal on the table. We believe it is a well-balanced deal, it is beneficial for all parties.
“Now really the ball is with the government.”
Mr Jacques, who took the helm of Rio’s copper division 18 months ago, was confident the commercial banks would sign off on a formal extension. The lapsed September 30 deadline was an extension on an initial deadline of March 31.
The first stage of Oyu Tolgoi is in operation but the much bigger second stage – the underground mine – is where the bulk of the project’s value lies.
“We all agree that 80 per cent of the value is sitting underground,” he said.
“However, we will do [develop] it only if it is value accretive for our shareholders. The government fully understands that.”
The lending consortium fronting $US4.2 billion for the second phase also includes development banks, who Mr Jacques says are open to an extension until at least Christmas.
Led by the World Bank’s International Finance Corporation, the line-up also includes the European Bank for Reconstruction and Development and the Australian government’s Export Finance and Insurance Commission.
Rio controls the Oyu Tolgoi project through a 66 per cent stake held by its Turquoise Hill subsidiary. The Mongolian government owns the other 34 per cent.
Tax issues, as well as compensation for cost blowouts associated with the first phase of Oyu Tolgoi, are among the key stumbling blocks.
“We will only deploy this level of capital if the investment environment is the right one,” Mr Jacques said.
“If there is no stability about taxes, or if we have concerns about a few other issues, then it could be very difficult to convince our shareholders to deploy another $US6 billion in the country.”
In June, the Mongolian government slapped Oyu Tolgoi with a bill of about $US130 million in unpaid taxes. But they later settled for a $US30 million payment.
Mr Jacques, who was this week made chairman of the International Copper Association, said Rio had to be patient.
He said there had been good progress on Oyu Tolgoi since he took the top job.
“They may need more time – what we are talking about here is the GDP of the country for the next 30 or 40 years. It’s a very big decision for them, and that’s why we need to be patient.”
He stressed that copper is not a short-term game, and Oyu Tolgoi has been 17 years in the making, and so far cost $US7 billion in investment.
“There is no short-term fix as far as copper is concerned. It’s a long story to get there, but when you have the right assets in your portfolio … you print money.”
He pointed to the largest copper mine in the world – Escondida, which Rio owns in a joint venture with BHP Billiton – as an example of the long lead times on copper projects.
“We all love Escondida but it took us more than 20 years to get there,” he says.