Aug 19 (Reuters) – Is Rio Tinto’s dispute with the Mongolian government over the expansion of the Oyu Tolgoi copper and gold mine the signal that the nation’s commodity boom is over, or is it just a hiccup?
Certainly, Mongolia’s reputation as a desirable investment destination and one of the few remaining countries ripe for developing natural resources has taken a battering recently.
Rio Tinto, the world’s second-largest mining company, said on Aug. 14 that it will cut 1,700 jobs at Oyu Tolgoi after a $5 billion expansion of the project was put on hold last month.
The dispute is over how the expansion gets financed, and the Mongolian parliament has been recalled from its summer recess for an emergency session to try and deal with the matter.
But the real issue is how long it will take for Mongolia to get significant amounts of money from the mine, which is slated to boost the economy by 35 percent by 2020.
Rio Tinto’s Turquoise Hill Resources subsidiary owns 66 percent of the mine, while the government owns the other third.
The government has said Oyu Tolgoi, which has an operating open pit and a planned underground expansion, is at least $2 billion over budget.
The higher the capital cost of the mine and any expansion, the longer it will take to pay off the investment, thus delaying returns.
The Mongolian authorities are also said to be concerned about the management fees charged by Rio Tinto for operating the facility, and whether local workers should be on the same pay scales as foreigners.
So far Rio Tinto has played its cards close to its chest, saying publicly that both it and the government remain committed to expanding the project and resolving any issues.
The stakes are high for both parties, thus increasing the likelihood of an eventual compromise and resolution.
For Rio Tinto, Oyu Tolgoi represents one of the world’s largest untapped copper reserves, and its development will lessen the global miner’s reliance on its iron ore mines in Western Australia.
Longer term, copper may be a better bet than iron ore, given the paucity of new copper reserves, the aging of existing mines and still strong demand from industrialisation in China and India.
In contrast, iron ore supply looks set to swamp demand in the next few years as Rio Tinto, its Australian competitor BHP Billiton and Brazil’s Vale all increase capacity, while demand growth in top consumer China is expected to taper.
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