Mongolia and Rio Tinto agree on phase two of mine

Mongolia says it has broken the deadlock in negotiations about phase two of Rio Tinto's $12.6 billion (€11.5 billion) Oyu Tolgoi gold and copper mine, as the resource-rich country seeks to draw back foreign investors.

Foreign investors, whose dollars make up a big component of Mongolia’s $11.7 billion economy, have been put off by a combination of falling commodity prices and quixotic policy making in Mongolia.

Expansion of the mine – which has been under discussion for two years – is a symbol of frustrations on both sides.

Rio Tinto, the Anglo-Australian miner, and the Mongolian government have clashed over a tax dispute and cost overruns during the first construction phase. However, on Sunday evening the Mongolian prime minister said agreement "in principle" had been reached with investors for building on the next stage of Oyu Tolgoi and the smaller Tavan Tolgoi coking coal mine.

For Mongolia, much rests on resolving the Oyu Tolgoi dispute. Foreign direct investment fell last year with the downturn in commodity prices. The currency is weakening steadily and debt payments are looming.

Between March 2017 and January 2018, external debt amounting to $1.08 billion matures. Mongolia’s aim to roll this over will depend on the creditworthiness of its balance sheet.Negotiations with Rio Tinto have centred on the $6 billion underground extension to the Oyu Tolgoi copper mine. Mongolia receives no dividends from its 34 per cent stake in the mine until borrowings on the original mine are repaid, but it can contribute little to financing the expansion.

Rio Tinto earlier rejected a proposal for the government to take a smaller stake than its legally mandated 34 per cent in return for higher royalties. For its part, Rio Tinto has been reluctant to commit to a remote and expensive copper mine when low prices are forcing spending cuts elsewhere. – Copyright The Financial Times Limited 2015