Geological issues didn’t trigger Oyu Tolgoi cost overruns and delays, probe finds

Geological issues didn’t trigger Oyu Tolgoi cost overruns and delays, probe finds

  • By Dulguun   -   Aug 11,2021
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-- Rio to review report in detail --

An independent review of the Oyu Tolgoi project commissioned by the government rejected Rio Tinto’s explanation for the 1.45 billion cost blowout and 22-month delay of the underground development. The Australian miner had blamed geological issues for the massive cost overrun and delays, but the review said the main cause was mismanagement. Rio Tinto, which holds majority ownership of Oyu Tolgoi LLC through Turquoise Hill Resources, provides management services for the project

Rio Tinto has an indirect interest in Oyu Tolgoi through its 50.8 percent stake in Turquoise Hill Resources, which owns 66 percent of the mine. The rest is owned by state-owned Erdenes Oyu Tolgoi. Mongolia and Turquoise Hill set up a special board committee to investigate the cost overrun and schedule extensions to the underground development of the Oyu Tolgoi project during the period between the 2016 feasibility study and the December 2020 definitive estimate. A group of consultants called “The Independent Consulting Group” was hired to conduct the review on behalf of the special committee.

“Following the Mongolian government’s repeated inquiries on the Oyu Tolgoi project’s 1.45 million USD cost overrun and 22-month schedule delay, an independent review group was established to look into the cause of these issues. For over five months, since March 2021, the group conducted the investigation and released the official conclusion this morning (August 9),” head of the working group reviewing the project and Minister of Justice Kh.Nyambaatar noted. “The review found that the cause of the cost blowout and delays at the underground expansion wasn’t geotechnical issues.”

The Mongolian side is currently negotiating with Oyu Tolgoi’s foreign investors to protect the interests of and increase benefits to Mongolia in the exploitation of Oyu Tolgoi, one of the world’s largest known copper-gold mines located in southern Mongolia. Rio Tinto’s Country Director to Mongolia Kh.Amarjargal recently visited Mongolia with her team as part of the independent review, according to Kh.Nyambaatar.

“We wanted an official explanation (from Rio Tinto) with regard to the conclusion of the independent review. We also demanded that the underground expansion be started quickly. We told them that the government of Mongolia cannot approve the feasibility study for the underground development. In other words, with this kind of review report, it is impossible for (Mongolia) to accept or approve the increased cost for the underground expansion,” stressed the head of the review group. 

Minister of Mining and Heavy Industry G.Yondon shared his position on the matter.

“In July 2019, Rio Tinto informed the government that the project’s key source to resources, the underground mine, had been delayed and its costs had risen. The company told the Mongolian side that the cost increase was due to ‘unpredictable geotechnical conditions’, specifically underground rock conditions. The independent experts, however, said that the increased cost and schedule delay are not connected to geological issues.”

“It was difficult for the government to find experts with no conflicting interests with Rio Tinto. Nevertheless, we managed to set up a team of experts with 20 to 40 years of experience working on large copper projects in March 2021. We had the validity of the review report re-evaluated. As a result, the finding of the independent experts were acknowledged.”

The probe was reportedly conducted by eight independent experts from the USA, Canada, Australia and Mongolia.

Investors said they’re planning to discuss the independent review report.

“The board of directors of Oyu Tolgoi will discuss the report. The main priority will likely be what measures to take to avoid cost overruns and future mismanagement of the project,” said Z.Gan-Ochir, board director of Oyu Tolgoi.

“This confidential report will be considered by the Oyu Tolgoi board and Rio Tinto will engage with the board as soon as we have had the opportunity to review the report in detail,” Rio Tinto said in an emailed statement to Reuters.  

There was no evidence that the quality of the rock and general ground conditions were significantly different to that forecast by the miner’s owners in 2016, according to the report.

The Wall Street Journal reported that the US Securities and Exchange Commission and British regulators were looking into the matter.

In late February, Oyu Tolgoi LLC initiated an international arbitration proceeding at the London Court of International Arbitration in line with the United Nations Commission on International Trade Law Arbitration Rules. This was regarding the tax assessment issued by the Mongolian General Taxation Department relating to an audit on taxes imposed and paid by Oyu Tolgoi between 2013 and 2015 and another decision made by the General Agency of Specialized Inspection on unpaid royalties on Oyu Tolgoi molybdenum. The Mongolian government has raised a counterclaim to include Rio Tinto in the tax dispute.

The legal proceedings is expected to begin later this month, according to Kh.Nyambaatar.

Dulguun Bayarsaikhan