Asia Economy

Mongolia Has Concerns About Rio Tinto's Management of a Major Copper Mine, Official Says

Taylor Weidman | Bloomberg | Getty Images
  • Mongolia is concerned about Rio Tinto's management of the Oyu Tolgoi copper and gold mine in the south Gobi desert, a government official told CNBC.
  • Oyu Tolgoi's underground expansion has been hamstrung by delays, development issues and cost overruns for years.
  • While Rio Tinto blamed the delays and rising costs on challenging ground conditions, an independent review this year contradicted that explanation.

Mongolia is concerned about Rio Tinto's management of the Oyu Tolgoi copper and gold mine in the Gobi desert in the southern part of the country, a government official told CNBC.

"We have concerns about the transparency and we also have concerns whether this mine is being operated efficiently," Solongoo Bayarsaikhan, deputy chief of the Mongolian government's cabinet secretariat, said Friday on CNBC's "Squawk Box Asia."

The open-pit and underground mining project is being jointly developed by the government, which owns about 34% of Oyu Tolgoi, and Rio Tinto's Canadian subsidiary Turquoise Hill Resources that has a 66% stake in it.

The Anglo-Australian miner owns nearly 51% stake in Turquoise Hill Resources.

What happened?

Oyu Tolgoi's underground expansion has been hamstrung by delays, development issues and cost overruns for years.

Rio Tinto and Turquoise Hill Resources signed a development and financing plan with Mongolia in 2015 that provided basis for funding the project — but six years on, production has yet to begin in a sustainable way.

Once the underground expansions are completed, Oyu Tolgoi is expected produce more than 500,000 tonnes of copper per year.

Initial projections estimated that the mine would be able to sustainably produce copper from 2021 onwards.

However, last December, Rio Tinto pushed the timeline back and said "sustainable production" was expected to commence in October 2022. The miner also said the underground expansion would cost $6.75 billion, higher than previous estimates.

On Friday, Rio Tinto again delayed that forecast and said sustainable production will happen "no earlier than January 2023."

The company cited the impact of Covid-19 and outstanding issues around caving operations. It warned that Mongolia's additional Covid restrictions this year to tackle community transmission is set to add an estimated $140 million to the budget as of the end of September.

While Rio Tinto blamed the delays and rising costs on challenging ground conditions, an independent review this year contradicted that explanation.

The Independent Consulting Group's report, commissioned by Rio Tinto's partners on the project, concluded that poor management was the main reason the mine's underground expansion was running almost two years late and $1.45 billion over budget, the Financial Times reported.

Mongolia reacts

Rio Tinto reportedly challenged the findings of the report in a letter to Mongolia's justice minister and said the review did not fully recognize the full impact of weaker-than-expected conditions that forced the mine to be redesigned.

"We asked Rio Tinto to explain the discrepancies between the independent review report and Rio Tinto's position," Bayarsaikhan told CNBC on Friday.

"We didn't find the letter satisfactory, in terms of responding to our specific queries and specific concerns over why there is a cost overrun and scheduled delays, why there's very different conclusions in the independent review report," she said. "Rio Tinto didn't provide sufficient responses."

Bayarsaikhan explained that the Mongolian government wants to find a "mutually beneficial solution" and avoid further surprises in terms of further cost increase and delays.

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