Founded in 1873 with just a small cluster of mines in Spain, Rio Tinto (NYSE: RIO) has grown to span the globe. “Most of our assets are in Australia and North America, but we also operate in Europe, South America, Asia and Africa,” the company’s website informs. “Our businesses include open pit and underground mines, mills, refineries and smelters as well as a number of research and service facilities.”
One of its newest projects, scheduled to enter commercial production in the middle of this year, is the Oyu Tolgoi copper and gold operation located in the Gobi Desert of Mongolia.
“The mine is currently estimated to contain around 25 million economically viable tonnes of copper,” the company boasts, “and is expected to last for more than 50 years.”
Although commercial production at Oyu Tolgoi has not yet started, the headaches have. Despite the company’s heavy investments in the region, the Mongolian government wants more.
The company has invested “more than US$20 million in environmental, social, and community projects”, its website reports. With a “peak construction workforce … over 18,000 … at least 90 per cent of full time jobs will go to Mongolian nationals once operations are under way.”
What is more, “US$146 million has been committed for education and training projects and programmes through to 2015. These include building three training facilities and updating four existing facilities in seven cities across Mongolia. In addition, we are training 3,300 young Mongolians for vocational education in mining and other sectors.”
But the Mongolian government isn’t satisfied. “Lawmakers have argued for a bigger share of profit,” Bloomberg reports, “while President Tsakhia Elbegdorj wants more management control.”
Why these sudden demands now? “He faces elections in June,” explains Bloomberg, “with a fifth of the nation’s 3 million people in poverty.”
“’I don’t think nationalism is growing, it’s always been here’ in Mongolia, said Vidur Jain, an analyst at the Ulan Bator-based Monet Capital Investment Bank. ‘The government has an eye on the upcoming elections. Foreign investors don’t vote so the government could be aiming its rhetoric and actions at the electorate,’” the article elaborates.
This pattern has been growing throughout the mining industry. Governments want bigger shares of the wealth from the resources within their borders.
Yet the vice minister of Mongolia’s Ministry of Economic Development, Ochirbat Chuluunbat, says it’s not simply that, citing “the absence of respect by the Oyu Tolgoi management toward the government”, noting that “a lot of decisions and resolutions of the OT management came without any prior consultation with the Mongolian government.”
The Mongolian president complained about “irresponsible management” leading to cost overruns. “Oyu Tolgoi should help Mongolia prosper, not leave it with a scar,” he said in a speech, as reported by the Wall Street Journal.
Head of Rio Tinto’s local unit Cameron McRae told WSJ the company has “always been fully transparent with all our shareholders regarding our project finances, costs and operations.” “We will continue to hold as many frank and open discussions as needed to help clarify issues raised by the government of Mongolia.”
Indeed, mining companies experience this with increasing regularity. And everyone knows the outcome, as Hayden Bairstow at brokerage firm CLSA Asia-Pacific Markets foresees… “At some point there will be a showdown”, quotes WSJ.
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At one end of the street we have the Mongolian president facing re-election. At the other end of the street is the newly appointed Rio Tinto CEO, Sam Walsh.
“Less than two months into the job,” Bloomberg says, describing the stakes, “[Walsh] has to appease shareholders angered by a $14 billion writedown in Rio’s coal and aluminum operations that cost the previous CEO Tom Albanese his job.”
Just last October, Rio Tinto was asked by the Mongolian government to renegotiate their 50-year investment agreement signed in 2009. But the then company head Tom Albanese responded with a polite yet firm “No”.
We can be certain both sides know how important this deal is. For the company, the massive copper and gold deposits—right next door to China, the world’s largest consumer of copper and buyer of gold—will generate ginormous profits over the next 50 years.
For the country—which generates a mere $10 billion annual gross domestic product—its 34% ownership stake in the project would bring in a hefty amount of royalties, not to mention the jobs and investments delivered by the company as mentioned here at the top.
Dorjdari Namkhaijantsan, manager at Open Society Forum Mongolia, although critical of the agreement between the two parties, seems to accept that a compromise must be reached, admitting, “It’s too big to fail for Mongolia.” WSJ confirms, “The government earns money through royalties and taxes and will earn dividend payments after a loan … in exchange for the 34% stake is paid back.”
“I don’t think Rio will renegotiate the agreement,” predicts Vidur Jain, an analyst at the Ulan Bator-based Monet Capital Investment Bank. He believes some sort of behind-the-scenes, quiet little deal will see both men shake hands and get on with the business of building—one man his country, the other man his company.