Turbulence at Oyu Tolgoi could help sustain an upward pressure on the copper price for years to come


Is the arguing between Rio Tinto (LON:RIO)(ASX:RIO) and the Mongolian government over?

That’s hard to say in any definitive way.

Mongolia hosts the giant Oyu Tolgoi project, the underground portion of which is set to be Rio Tinto’s flagship copper development in the coming years.

That it’s huge, there’s no disagreement about. The open pit portion of Oyu Tolgoi began producing in 2011, and produced nearly 150,000 tonnes of copper in 2020, of which Rio’s share was just over 50,000 tonnes.

But the project has been the source of off-and-on tension between the government and its mining company partners since before it first produced.

And now, with plans to spend nearly US$7bn going underground, the arguments have once again flared up and died away again.

“Most of the value lies deep underground,” says Rio Tinto’s corporate literature, and on that score the Mongolian government doesn’t disagree – it’s reckoned that underground operations will produce around 480,000 tonnes of copper per year between 2028 and 2036.

What has been at issue is how much of that money comes back to the government of Mongolia, and – what’s been a particular source of tension this time round – when.

Because under Rio’s latest estimates, the underground portion is actually going to cost US$1.45bn more than was originally thought, and that in turn means that the timetable of the dividends the Mongolian government were entitled to expect from its 34% share in the operation, was pushed out much further than the originally envisaged date of 2032.

Indeed, there was much talk that the dividends would not actually be forthcoming until after the resource had been depleted. One Mongolian prime minister has already been toppled as a result of dissatisfaction with his handling of the Oyu Tolgoi situation, and the current government is not keen for a repeat.

Rio, for its part, has found itself in a tricky position too. Costs escalate, to be sure, but not as much as public relations disasters.

The company’s had its fair share over the past year or two and although the recent departure of its chief executive is widely held to be a direct consequence of the Rio’s destruction of sacred Aboriginal sites in Australia, there are some whispers that deteriorating relationships in Mongolia were a factor too.

Accordingly, it’s now been reported that Rio Tinto has said it is willing to reduce the interest rate on the financing it has been providing for the government’s share, and also to cut the management fee it charges the government for managing the project.

In short, a compromise deal is likely to be reached, and the two parties will return once again to their state of uneasy truce.

The saga raises wider issues, though, both about the copper and market and about the investment environment in Mongolia. It’s notable that in spite of its prospectivity, junior companies have not been particularly keen to get on the ground in Mongolia. Even Kincora Copper (CVE:KCC), one of the country’s great cheerleaders in the past, is now increasingly focussing on Australian gold. Because, if even Rio Tinto finds Mongolia hard, how’s it expected to be for junior miners? Or to put it another way, with Rio Tinto continuously dragging down the reputation of the mining industry, how is anyone else expected to get anything done with good will?

And as far as copper is concerned, the issues with Oyu Tolgoi just underline in yet one more way how the market is right to be skittish about supply with demand set to run so high in a post-coronavirus stimulus-addicted world. Earlier this month the Biden administration subtly but effectively put the kybosh on another big Rio Tinto development, the Resolution project in Arizona, jointly-owned with BHP.

Another world-class copper project, this time held by Antofagasta (LON:ANTO) is also up for permitting soon in the US, and may also run into trouble. And while this hostility to big projects is a headache for the majors, for copper juniors like Power Metal Resources (LON:POW), Kavango (LON:KAV), Atalaya Mining (LON:AYTM), Central Asia Metals (LON:CAML), Castillo Copper (LON:CCZ), KEFI Gold and Copper (LON:KEFI) and Strategic Minerals (LON:SML) will all be reaping the benefits of a continuing upward pressure on the copper price, and the growing desirability of safe and workable assets.


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