Rio Tinto is to push ahead with its most important growth project after striking a deal with the government of Mongolia to solve the key issues that have dogged the $7bn expansion of the Oyu Tolgoi copper mine.
At a ceremony in the Gobi desert attended by the country’s prime minister Oyun-Erdene Luvsannamsrai, the Anglo-Australian miner on Tuesday fired the detonators that started the underground caving process — known as undercutting — putting the mine on track to start production in the first half of next year.
Rio had previously refused to start the undercut until it had resolved several issues with the government.
The deal comes days after Serbia put Rio’s $2.4bn Jadar lithium project on ice. As such, the agreement will be a relief for Rio chief executive Jakob Stausholm, who has laid out an aggressive plan to align the company with the decarbonisation of the global economy.
However, getting Oyu Tolgoi back on track has come at a price. Under the deal announced on Tuesday in the Gobi desert, Rio and its subsidiary Turquoise Hill Resources have agreed to write off $2.4bn of loans used by Ulan Bator to fund its share of the development costs. They will also terminate an earlier financing agreement.
In return, the government will let Rio extend an existing deal to import power from China to at least 2026, followed by another extension until 2030 if a domestic energy source is not available.
“This is the moment we have been waiting for,” said Dalton Baretto, analyst at Canaccord Genuity. “The two major overhangs on the project . . . have now been answered.”
Rio has mined copper, gold and silver from a small open pit mine at Oyu Tolgoi since 2011, but its goal has always been to unlock the vast natural bounty of metal that lies beneath the surface.
Once the underground expansion is complete, Oyu Tolgoi will be one of the biggest copper mines in the world, producing at peak capacity 500,000 tonnes a year of the metal used in everything from electric vehicles to wind turbines. The project will also provide a big boost to Rio’s copper division, doubling output.
The project has been plagued by rows with the Mongolian government over everything from power to tax and who bears responsibility for the delays and cost overruns.
The underground mine is running more than two years late and the budget has blown out to $6.45bn, up from $5.3bn. The reasons for the overruns are fiercely disputed and are being examined by regulators in the UK and US.
Mongolia has a 34 per cent stake in the project, with the rest owned by Turquoise Hill Resources, which Rio controls. The mine is the country’s biggest source of foreign direct investment and provides thousands of well paid jobs.
“The OT underground development will consolidate Rio Tinto’s position as a leading global supplier of copper at a time when demand is increasing,” Stausholm said in a statement.
Bold Baatar, the Mongolian who heads Rio’s copper business, said he expected first production towards the end of the first half of 2023. “If prices go up it could be an incredibly profitable project,” he told journalists on a call.
From a domestic perspective, Julian Dierkes, an expert on Mongolian civil society at the University of British Columbia, said Mongolia’s prime minister was looking for “something they could present to the public as a concession” as the country grapples with the impact of coronavirus.
“The offer of a debt write-off for the government’s equity stake in Oyu Tolgoi seems to have delivered that, so the agreement to that offer — complete with parliamentary endorsement — has come quickly,” he said.
“It is not clear that this is likely to settle deeper questions around the expectations that many Mongolians have of the project and the longevity of this agreement beyond the construction phase is thus also uncertain.”