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LAUNCESTON – Looking for a long-term bullish signal for copper? So look no further than the struggles of Rio Tinto with the Oyu Tolgoi mine and its expansion project in Mongolia.
The latest news regarding the giant copper-gold project is that the production of the underground extension will be delayed for more than a year between May 2022 and June 2023, and that costs have increased by 1.9 billion additional dollars.
The capital cost of the project is now estimated at $ 6.5 to $ 7.2 billion, up from $ 5.3 billion originally.
Rio Tinto, through its subsidiary Turquoise Hill Resources, owns 66% of the Oyu Tolgoi mine, which could become the third copper mine in the world in terms of production in 2025 as part of the current development plan.
The problem that is weighing more and more on the mine is that the Mongolian government holds the remaining 34%, and it seems that in Ulaanbaatar there is growing concern about the conclusion of an agreement between the landlocked country between Russia and China.
The Mongolian parliament is expected to approve measures that would put an end to the 2015 agreement on the extension of the Oyu Tolgoi subsoil, aimed at advancing the moment when it will receive the dividends of the project, would require more transparency on copper prices and push Rio Tinto to power plants.
At present, Mongolia will not begin to receive dividends until around 2041, when its share of project debt will be repaid.
"At the moment, the agreement Oyu Tolgoi does not benefit the Mongolian citizens," Battumur Baagaa, a member of the parliamentary working group charged with examining the project, told Reuters. "It's good to attract foreign investment, but that does not mean that foreign investment should only benefit the profits of foreign investors."
The sentiment expressed in the quote above goes to the heart of the Rio Tinto problem in Mongolia, as well as any mining company considering a major investment in a developing or frontier market.
BALANCING RISKS
The Oyu Tolgoi project changes the game for Mongolia. Its capital budget makes it the largest ever undertaken in the country, but it also accounts for more than half of the annual gross domestic product (GDP) of $ 13 billion.
By way of comparison, the $ 200 billion spent on eight liquefied natural gas (LNG) projects in Australia over the past decade, the largest single investment ever made by any single industry in the country's history, accounted for about 17% of annual GDP.
A country like Mongolia can not afford the initial costs of participating in a project the size of Oyu Tolgoi. He therefore pays his share by deferring the dividends.
While this sounds like a good solution in theory, it also means that the government and the public see the mine under construction and start their operations, but they do not necessarily see the benefits that flow from it.
Rio Tinto points out on its website that between 2010 and the third quarter of 2018, it spent "$ 8.3 billion in the country in the form of salaries, payments to Mongolian suppliers, taxes and fees. 39, other payments to the government ".
The question is whether this is enough and the answer that the Mongolian authorities seem to give is no.
The obvious risk for Rio Tinto is that it spends billions of dollars on an investment that takes longer to produce returns, or even in the worst case, the badet is seized by the state.
More and more companies in the natural resources sector are facing this situation.
Mozambique and Tanzania want to see international oil and gas companies spend billions of dollars to develop an LNG industry for their neighbors in East Africa.
But will the authorities remain satisfied with the conditions initially imposed when it becomes clear that the benefits to the government coffers will take some time?
More and more valuable product deposits are found in countries with higher country risk, but it does not appear that project developers consider the likelihood of having to renegotiate conditions once larger quantities have become available. already been spent.
It will always be necessary to find the right balance between a company that evaluates the value of the project it can afford to give to the host country and the government of this country that strives to work hard before it leaves the country's reputation investment is badly damaged.
For the market, the risk is that much of the new supply of several key resources comes from countries such as Mongolia, and the question is what is the probability that this resource is actually developed and meets the expectations? . (Edited by Christian Schmollinger)
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