Home
Spectators
Alan Kohler

Robert Gottliebsen

Stephen Bartholomeusz

Stephen Koukoulas

Jessica Irvine

Rob Burgess

Steve Keen

Michael Gawenda

Oliver Marc Hartwich

Ben Potter

John Lee

Tristan Edis

Supratim Adhikari

Jackson Hewett

The Distillery

Scoreboard

Keith Orchison

The Conversation
Alan Kohler
Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
Economy
Australian News

Global News
European Crisis

Global Financial Crisis

US Economy

Asian Economy

China

Commodities

Interest Rates

Tax

Productivity

Leadership

Innovation

Reserve Bank of Australia
Latest stories
EDITOR'S PICKS
In this week's essential reading guide Bartholomeusz predicts a Ford domino effect, Koukoulas runs the ruler over Australia's economy, Burgess foresees a carbon flip and Irvine surveys a Bernanke brainwave.
Do we want fewer, tougher tax men?
There is room for reform at the nation's tax office but Joe Hockey's proposal to knock tax administration and policing into place could be counterproductive.
Markets
ASX
ASX Indices

Major ASX stocks

Markets Spectator

Breakfast Deals

Currency

ETFs
Latest stories
The benevolent market manipulator
A co-founder of corporate governance firm Ownership Matters, former journalist Martin Lawrence says he wants to help markets function better.
MARKETS SPECTATOR: Cromwell's conquest
Cromwell Property Group has successfully sold stock to help fund the purchase of seven NSW properties.
Politics
Australian Election

Federal Budget

International News
Asia

Europe

USA

National Affairs
Latest stories
EDITOR'S PICKS
In this week's essential reading guide Bartholomeusz predicts a Ford domino effect, Koukoulas runs the ruler over Australia's economy, Burgess foresees a carbon flip and Irvine surveys a Bernanke brainwave.
Do we want fewer, tougher tax men?
There is room for reform at the nation's tax office but Joe Hockey's proposal to knock tax administration and policing into place could be counterproductive.
Technology
NBN Buzz

Mobility

BYOD

Smart Devices

Emerging Tech

Applications

Big Data

Cloud Computing

Data Management

Reviews

Social Media

Start-ups

Security

Data Security

Identity Management

Wireless Security

Telecommunication
Latest stories
Cash splashes and crashes the tech sector way
In the ultra-fluid technology sector, many an acquisition shock has paid off – and vice versa. Yahoo's big cheque for Tumblr isn’t the only deal that may be judged differently in hindsight.
NetSuite aims for 'Cloud Nine'
The cloud ERP vendor is starting to move up the software as a service food chain but it will have to surmount a few hurdles before its ready for big time.
Climate
Carbon markets

Energy markets

Renewable energy

Resources

Solar energy

Wind power

CleanTech

Science & Environment

Green Deals

Policy & Politics

Smart Energy
Latest stories
Stemming a race to the bottom
The Solar 2013 conference in Melbourne carries the theme of an industry trying to prevent a possible race to the bottom, where weaker firms damage the industry in compromising quality for price.
Abbott's billion dollar carbon headache
The reverberations from the Newman government’s bulldozing of Queensland’s vegetation protection laws will be felt in Canberra, with the Coalition's Direct Action plan now at risk of a $1 billion budget blow-out.
Industries
Advertising and Marketing

Agribusiness

Automotive

Aviation

Construction and Engineering

Education

Family Business

Financial Services

Food and Beverages

Gaming and Racing

Health and Pharmaceuticals

HR

Industrial relations

Information Technology

Infrastructure

Insurance

Manufacturing

Media and Digital

Resources and Energy

Professional Services

Property

Retail

Telecommunications

Transport and Logistics

Small Business (SME)

Tourism
Video
CEO Hub

KGBTV

Leadership Lab

Management Insights

Young Leaders

EurekaTV
Latest videos

How to build a service business in China

King and Wood Malleson's China Partner David Olsson explains how Australian companies can tap into the huge demand...

KGB: ANZ CEO , Mike Smith

KGB: Mike Smith
Knowledge Centre
Investment Tips

Webinars

eBooks
Featured stories
Download the December CEO Pulse survey
CEOs outline changing views on corporate spending and profits, their economic expectations and political dissatisfaction, including advice for Julia Gillard and Tony Abbott.

TECHNOLOGY SPECTATOR: The audacious app trying to take over TV
UK-based Zeebox wants to be the intermediary for all social media-television interactions. It will not only have to lure viewers, but the networks themselves.

Rio Tinto's careful Mongolian courtship

With reputation, diversification and a lot more riding on success in Mongolia, Rio Tinto will be carefully courting the nation's government despite its position of strength in the relationship.

You must be logged in to read this article

Not a member yet? Register today ›

Business Spectator is available on all of your devices so you can access the latest news and commentary where and how you like

Register now ›

Rio Tinto’s response to criticism of its management of the giant Oyu Tolgoi copper-gold project in Mongolia has provided a deeper insight into the state of the project and into why Rio appears confident that it can stare down the government’s requests for both a bigger share of the project and far greater involvement in its management.

Oyu Tolgoi, which produced its first concentrate last month, is a critical project for Rio, which invested more than $US5 billion to secure control of Ivanhoe Mines, now Turquoise Hill Resources.

Not only is it the world’s largest undeveloped copper resource but it is the last of the three big projects Rio embarked on in underdeveloped regions still forging ahead. Riversdale Mining and its coal project in Mozambique, of course, cost former chief executive Tom Albanese his job. The Simandou iron ore project in Guinea appears to be on a back-burner.

With Rio, after the shock departure of Albanese, reaffirming its commitment to projects in jurisdictions regarded as higher-risk, the smooth progress of Oyu Tolgoi is important to the credibility and stability of the Rio board and new chief executive Sam Walsh. It is also potentially an important source of diversification away from Rio’s current near-total reliance on the Pilbara and iron ore.

The Mongolian government has been agitating for some time for a greater share of the project and a greater say in Oyu Tolgoi’s affairs. Last year Rio politely declined an invitation from the government to renegotiate their agreement.

In response to the latest debate about the project in Mongolia’s parliament and statements from its president, Tsakhia Elbegdorj, that the government is concerned about cost escalation and wanted representation in all of the key decision-making departments of the project, the Turquoise Hill subsidiary developing the mine, Oyu Tolgoi LLC, issued a statement.

It did show that the cost of the first phase of the project is now $US6.6 billion, compared with the $US5.7 billion estimated at the time of the 2010 feasibility study for the project, which isn’t particularly surprising given what has happened to the cost of developing new projects around the globe.

The statement also explained the Mongolian government’s financial involvement in the project.

It bought a 34 per cent interest in Oyu Tolgoi with funds lent by the other shareholders. The loan carries an interest rate of LIBOR plus 6.5 per cent. The loan isn’t repayable unless the project is profitable – if it isn’t the loan will never be repaid. Before the government will actually get its hands on cash from its shareholding in the project the loan will need to be repaid from its share of the project’s profits.

That arrangement perhaps explains the government’s concerns about the increase in capital costs – and why Rio appears unconcerned about the apparent tensions within its relationship with the government.

It is in the government’s interest, obviously, to get the mine into profitability as quickly and substantially as possible to repay the loan and start getting its hands on its share of the profits as quickly as possible. An increase in capital costs would delay that moment.

As Oyu Tolgoi LLC said, however, while Rio as the recipient of cost-based management fees might benefit from increased capital costs, the loss of dividends and the higher financing costs would erode far more value than it would gain from those increased fees, estimated at between $US60 million to $US80 million a year once the mine achieves commercial production. It, too, wants to get the mine into profitability as quickly as possible.

The structure of the Mongolian exposure to the project means delays damage its own interests, which helps explain why Rio doesn’t feel threatened by calls for more Mongolian equity or deeper engagement in its operations. Any threat to the timelines damages the government’s interests in a project that will, when the first phase has been completed, represent about 35 per cent of the Mongolian economy.

Oyu Tolgoi LLC also responded to the suggestion that the project wasn’t contributing much to Mongolia, including a view that it wasn’t going to pay its fair share of taxes. It said that between 2010 and November last year – before the mine was operational – it had paid $US803 million in taxes and other payments to the government. In 2010 and 2011 it had also lent the government $US250 million, with $US150 million of it a tax pre-payment that generates tax credits that it could use from 2012.

Apart from the way its interest has been funded and will be paid for, the government would be very aware that Oyu Tolgoi has pumped more than $US1 billion into its economy through procurements from local suppliers, has built an international airport, a 100km road, developed a water supply, is building a power station and is investing $US126 million over five years in vocational education centres.

It would also, presumably, be conscious that Oyu Tolgoi is a very high-profile project and that the way it deals with it will send signals to the big resource groups and international investors about Mongolia’s attraction as a destination for mining and other investment.

There is a presidential election due in the middle of this year and perhaps the rhetoric and apparent rise in tensions between the government and Rio have more to do with politics than substance.

While Rio can’t afford to be complacent about its relationships with the Mongolian government, it would also be aware, as would the government, that there is powerful and very valuable mutuality built into their existing relationship. Any significant dispute and delay would threaten that, and cost both of them dearly.

Comments on this article

Comments Policy

Dean Sorley, Fri, 2013-02-22 04:21

If only Tavan Tolgoi had such an arrangement.......(Rio Tinto's careful Mongolian courtship, February 7.)

The Spectators

A silver leadership bullet that may hurt the head
Financial Times 24 May, 6:30 PM
Moves to subject chief executive candidates to frontal lobe testing is a step too far – and may create more problems than its solves.
WEEKEND ECONOMIST: June jitters
Bill Evans 24 May, 6:30 PM | 6
Consumer sentiment in decline suggests dissatisfaction with the federal budget has outweighed May's interest rate cut. Despite the currency's easing effect, there is scope to cut again in June.
A succinct Sunshine Coast boast
Lorraine Elliott 24 May, 6:30 PM
Being on the Sunshine Coast for just 24 hours leaves very little time to stop and take in the scenery – but a stay at Escape House provides the perfect silver bullet.

Index	Last	Chg	% Chg
DOW JONES	15294.50	-12.7	-0.1
S&P 500	1650.51	-4.8	-0.3
NASDAQ	3459.42	-3.9	-0.1
FTSE 100	6654.34	-42.5	-0.6
NIKKEI	14612.45	+128.5	+0.9
Hang Seng	22618.67	-51	-0.2

Latest stories

Latest stories

Latest stories

Latest stories

Latest stories

Latest videos

Featured stories

Rio Tinto's careful Mongolian courtship

You must be logged in to read this article

Not a member yet? Register today ›

Already a member? Sign in here

More from Stephen Bartholomeusz

Connect with Stephen Bartholomeusz on Google+

Related articles

More from Business Spectator

Comments on this article

Information

Policies

Advertising

BS Main menu

User login