ULAN BATOR/MELBOURNE, Feb 1 (Reuters) – Rio Tinto faces tough negotiations next week in Mongolia, where the government is under pressure to plug a budget deficit and increase its share of the wealth from the $6.2 billion Oyu Tolgoi copper and gold mine.
Oyu Tolgoi, 34 percent owned by Mongolia and controlled by Rio Tinto, produced its first concentrate this week and is on track to start supplying metal and paying royalties by June.
The success of the mine is crucial for both sides as, at full tilt, Oyu Tolgoi will account for nearly a third of Mongolia’s economy, while Rio Tinto is depending on the mine to drive growth beyond its powerhouse iron ore business.
Rio Tinto is not expected to have to give up a bigger share of the mine, but some analysts say it could end up agreeing to provide more funding in areas like infrastructure to remove uncertainty over a project that is expected to produce 425,000 tonnes of copper and 460,000 ounces of gold a year. Rio Tinto and its subsidiary, Turquoise Hill Resources Ltd , last year fended off an attempt by Mongolia to renegotiate their 2009 investment agreement on Oyu Tolgoi.
The government is drafting a law that would require Mongolians to hold at least a 34 percent stake in mines, however talk that this would apply to Oyu Tolgoi has died down.
Instead, there is speculation the government may press Rio for more funding outside the agreement, which includes a 5 percent royalty on all sales, as Mongolia faces a revenue squeeze despite being touted as the world’s fastest growing economy as recently as 2011.
“It looks as if the government of Mongolia will run a large budget deficit in 2013,” said Nick Cousyn, chief operating officer at BDSec, an investment bank in Mongolia.
“How they will close this gap is anyone’s guess, but we think unilaterally changing the OT agreement is off the table,” he said.
In meetings scheduled for next week, the government could question why project costs have blown out, raising concern that Rio Tinto may want to slow development due to the steeper costs, as it has done with other major capital projects.
Rio Tinto executives in Ulan Bator and a spokesman declined to comment on the upcoming talks.
Turquoise Hill last year put the total project cost at $13.2 billion, including developing an underground mine and sustaining capital costs, up from a 2010 estimate of $9.55 billion.
A Bloomberg report this week said Rio was considering a temporarily halt of construction to protest against demands by the government for a bigger stake in the project and new royalty rates.
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