Intertwined destiny of L.Oyun-Erdene and Oyu Tolgoi

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Chief Copper Executive of Rio Tinto B.Bold has arrived in Mongolia. Mining experts are saying that he came to Mongolia on vacation, but as most are aware, the government is in the midst of a negotiation with Rio Tinto to ensure Mongolia’s interests in the development of the Oyu Tolgoi deposit. Last spring, the designated government taskforce met with the Rio Tinto delegation led by B.Bold. The meeting didn’t go as planned and it became clear that the talks would be difficult.

It is quite obvious that B.Bold didn’t come to Mongolia just to rest. The former member of the Mongolian People’s Party Conference is influential among the local authorities. Therefore, many experts suspect that he is likely to be meeting with the taskforce and other powerful politicians and strategizing for the next round of negotiations.

Investors in Canada-listed Turquoise Hill Resources, which owns a 66 percent stake in Oyu Tolgoi, filed a lawsuit against Rio Tinto on the grounds of fraudulent concealment. In short, the investors believe that its stock price fell and caused losses to the company due to the alleged concealment of information.

Former Chief Advisor at Rio Tinto Copper and Diamonds in the UK Richard Bowley “blew the whistle” and reported about Rio Tinto suppressing and delaying the release of certain information relating to the Mongolian project. Bowley and his team previously came to Mongolia and met with officials of the government, Erdenes Mongol LLC and Erdenes Oyu Tolgoi LLC. He later became an adviser to the Mongolian government for the negotiation process.

When the “whistleblower” arrived in Mongolia, the conclusion of an independent review on the cost overrun and 22-month delay of the underground development of the Oyu Tolgoi project was made public. Rio Tinto had blamed the cost blowout and schedule delay on geological issues, but the independent review found that geological issues did not trigger the Oyu Tolgoi cost overruns and delays, as confirmed by Deputy Chief of the Cabinet Secretariat B.Solongoo.

The arrival of “whistleblower” Bowley and the conclusion of the independent review, which rejected Rio Tinto’s explanation, may have ushered B.Bold to make a hasty visit to Mongolia. In fact, he was appointed as copper chief executive to remedy damages caused by former CEO of Rio Tinto Jean-Sebastien Jacques.

Jacques signed the Oyu Tolgoi Underground Mine Development and Financing Plan (commonly known as the Dubai Agreement) with former Prime Minister Ch.Saikhanbileg when he was acting chief executive of the Copper and Coal product group. He was promoted to CEO of Rio Tinto before he resigned. Turquoise Hill investors have accused Jacques of concealing information about the Oyu Tolgoi cost blowout and failing to take precautionary measures. There is good reason to suspect him too.

Is the recent independent review final? Sources close to the matter say it is not. The conclusion must be presented to the board of directors of Oyu Tolgoi LLCso that it can make its own conclusion. Only then will the conclusion be considered “final”. The Mongolian mining industry view that the increase in costs may have been partly caused by geotechnical conditions. Therefore, it is highly probable that Rio Tinto’s explanation will be supported.

B.Solongoo said that two highly qualified independent consultants evaluated the findings of the independent experts and that both consultants agreed with the results. However, some people suspected that two “whistleblowers” were hired to review the conclusion. It should be made clear that independent experts, not whistleblowers, evaluated the conclusion. There are also people who can’t believe B.Solongoo’s statement, especially when Rio Tinto hasn’t made their own conclusion. The government’s rather hasty statement can be interpreted as a negotiation tactic as well.

The board of directors of Oyu Tolgoi will make a final conclusion one day. However, it is uncertain whether this will become a key document in the negotiations. It may not have much impact.

The most important thing is for both sides to clearly express their positions during the talks. The Mongolian proposal is not vague. It is likely proposing to make the investment, shareholder and financing agreements of the Oyu Tolgoi project in line with the Mongolian legislations, clear misinterpretations of the tax environment, and increase Mongolia’s yield from the project to 53 percent.

The government might push Rio Tinto to take full responsibility for the overspending and reduce management fees and interest rates on investment loans in order to raise its total return to 53 percent.

Making contracts consistent with the Mongolian law and clearing tax-related misunderstandings is ideal for both sides. As B.Bold previously said, these issues can be easily discussed and resolved. However, the two sides are likely to engage in long talks regarding the project’s investment and financing terms.

Of course, Rio Tinto will not concede to all of the government’s demands. If it were so easy, the talks would have already ended. The Rio Tinto Group and its representative B.Bold are highly experienced in negotiating international agreements, while Minister of Justice and Internal Affairs Kh.Nyambaatar, who is leading the taskforce, has inferior experience. Two sides with very different negotiation skills and experience will negotiate. Therefore, the Mongolian government needs to prepare well for it.

The taskforce led by then-Chief Cabinet Secretariat L.Oyun-Erdene was established to enforce Resolution No. 92, approved by Parliament in 2019, to protect the interests of Mongolia in the Oyu Tolgoi project. After L.Oyun-Erdene was appointed as prime minister, Minister Kh.Nyambaatar took on his position as the head of the taskforce. The taskforce has been working on this matter for almost two years. So far, no financial or legal advisers have been selected to assist the negotiation process. It can be viewed that the Mongolian side is making slow progress in this work.

The taskforce asked many questions during the meeting with the Rio Tinto delegation led by Copper Chief Executive B.Bold last April. Eighty percent of them were general questions about the project, according to a source close to the matter. Does this mean that Mongolian politicians weren’t very knowledgeable or informed about the Oyu Tolgoi project?

If negotiations are not initiated in a professional manner, a complicated situation will inevitably arise. That condition could lead to the suspension of the underground development. Under the Dubai Agreement, the expansion of the underground mine was estimated to cost 5.3 billion USD. However, it is now estimated to require additional 1.4 billion USD. The underground mine was initially planned to be commissioned by October next year. 

Reports indicate that the Oyu Tolgoi underground mine requires expenditure of around 1 billion USD per year. Five years have passed since the construction of the mine began. Based on the estimation, the funding will likely run out this year. It should be noted that unless negotiations start immediately and an agreement is reached, refinancing may be impossible.

In accordance with the instructions of the government taskforce, the board members of Oyu Tolgoi have not approved the company’s budget. The Mongolian government will be to blame if the underground mine is halted due to lack of funding because it is the Mongolian side that hasn’t approved the Oyu Tolgoi budget or reached a negotiation in this regard.

It is clear that Rio Tinto is not interested in stopping the development of the underground mine. Considering this, the government could be devising its future plans in view that Rio Tinto will likely concede so as not to stop the development of the underground mine, which is unbeneficial for both sides. But what if Rio Tinto takes the risk and stops developing the underground mine? Tens of thousands of people will lose their jobs and their families will suffer during the economic downturn stemming from the COVID-19 pandemic. This is the first of many problems Mongolians will have to face. It could bring many negative consequences to economic links. If the construction of Oyu Tolgoi underground mind halts, Mongolia’s economy will suffer considerably. Generally, this project has become a mainstay of the country’s economy and foreign investment. Therefore, this matter must be approached carefully. 

It will not be just Kh.Nyambaatar or B.Solongoo who are held accountable if the negotiations to ensure Mongolia’s interests in the development of the Oyu Tolgoi deposit fail. The one to take the biggest blame will be L.Oyun-Erdene. In other words, the term of L.Oyun-Erdene’s government will depend on what happens to Oyu Tolgoi. If the negotiation isn’t beneficial to Mongolia, L.Oyun-Erdene may have to resign. If he is not able to reach a negotiation with Rio Tinto and the economy continues to worsen, the public will not stay put. The prime minister will need to raise his game if he wants to protect his position.

Lawmakers have begun collecting signatures for the resignation of L.Oyun-Erdene’s government. There is chance for the government to avoid resignation this time. A government with the support of the people rarely resigns. This will depend on how much support can the government led by L.Oyun-Erdene gain from the people throughout the negotiation process with Rio Tinto. The prime minister and the taskforce need to remember that Rio Tinto isn’t an easy opponent and never underestimate it if they are to succeed in this negotiation.

Misheel Lkhasuren