Rio Tinto Rejects Mongolian Request to Up Stake in Oyu Tolgoi to 50%

---

Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--Resource nationalism has reared its head in Mongolia, where Rio Tinto plc (NYSE:RIO) (London, England) has rejected the government's persistent requests for the terms of agreement on the Oyu Tolgoi copper and gold project to be altered.

The Mongolian government hopes to see the country's mineral wealth directly benefit its population of about 3 million. The government is seeking to raise its stake in the project from 34% to 50% and, at the same time, to alter the terms of royalty payments. The country's mining minister has sent a letter to Turquoise Hill Resources (THR) (Vancouver, British Columbia), Rio Tinto's partner in the project, requesting an amendment to the terms of the agreement signed in 2009.

Rio Tinto holds a 51% controlling stake in THR, which holds a 66% stake in the copper and gold project. THR formerly was Ivanhoe Mines (NYSE:IVR). In this arrangement, Rio Tinto is paying the majority of the development cost.

Another reason for the rejection of the request is that in October 2011, the government struck a deal with Rio Tinto and Ivanhoe not to alter the original terms of agreement for developing the massive mining project.

The plan called for the government to increase its stake in the $10 billion project, but this increase would have been permissible only after 30 years. This concurred with the original document signed in 2009 after six years of negotiations, which provided a stable legal framework between the parties.

"We have invested nearly $6 billion, created thousands of jobs for Mongolians and are on the verge of production based on the investment agreement, which provides a stable legal framework and is a legally binding document," said Kay Priestly, CEO of THR. The site is expected to ready to operate in 2013.

In 2011, Rio Tinto was willing to give a minority stake in the project to Chinalco (NYSE:ACH) (Beijing, China), which is the largest single shareholder in Rio Tinto. The Mongolian government sees this as a precedent for altering the agreement and adds that any such move would need its approval.

Situated in the Gobi Desert, Oyu Tolgoi is one of the world's largest untapped copper and gold deposits. It contains about 37 million tons of copper and 1,300 tons of gold. The estimated average annual output from Oyu Tolgoi would be 540,000 tons of copper and 670,000 ounces of gold over a mine life of 27 years.

The project would account for up to 5% of Mongolia's gross domestic product. The current dispute reflects the risks mining companies now run when host countries invoke the national interest in "their" resources.

For related information, see October 15, 2012, article - Zambia Looks for Mining Sector Transparency and Resource Nationalism Balance, and July 13, 2012, article - Fraud and Corruption Enters Top 10 Mining Risks, with Resource Nationalism at No 1.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.