Rio Tinto Group and the Mongolian government broke another deadline set by lenders for the $US4.2 billion ($4.8 billion) expansion of their Oyu Tolgoi project, raising concerns over the earnings outlook for Rio’s copper business.
Commitments from project finance lenders expired September 30, Rio’s unit in Canada, Turquoise Hill Resources Ltd., said in a statement yesterday. Oyu Tolgoi’s shareholders haven’t asked for those commitments to be extended, although “engagement” with lenders continues, it said.
“With iron ore in decline, the market is looking for Rio’s other businesses to fill the gap,” said David Radclyffe, a Sydney-based analyst at CLSA Asia-Pacific Markets. “The market is concerned from the point of view that Rio needs to do the expansion to give its copper business relevance.”
Underground development at Oyu Tolgoi, the largest foreign investment in Mongolia, has been held up for more than 18 months on disputes between Rio and the government over taxes due and cost overruns, among other issues. Copper accounted for 11 per cent of Rio’s revenue in the 2013 fiscal year, behind iron ore and aluminum.
Oyu Tolgoi, 80 kilometers (50 miles) north of the Chinese border, is forecast to contribute about a third of Mongolia’s economy when in full operation and will be the world’s third- biggest copper mine, Turquoise Hill said in a January presentation.
Financing for the underground development was set to involve 15 banks. The financing package had already been extended three times during the course of the dispute.
Without expansion, Rio would need to consider a writedown of the mine, Radclyffe said. The project had a book value of $US4.96 billion at the end of June, according to an August filing.
“Rio doesn’t want to do that, as they’ve just had to make some pretty embarrassing writedowns as it is,” Radclyffe said. London-based Rio in July sold Mozambique coal assets for $US50 million, after writing down the mines acquired in a $3.9 billion deal in 2011.
Rio spokesman Bruce Tobin in Melbourne couldn’t immediately be reached for comment. Its stock was down 0.4 per cent in Sydney at 10:48 a.m., less than the wider market’s losses.
Rio owns a 51 per cent stake in Vancouver-based Turquoise Hill, which in turn holds 66 per cent of Oyu Tolgoi. The Mongolian government has the remainder.