B.Solongoo: We are open to have honest and transparent discussions with Rio TintoPolitics
Ulaanbaatar /MONTSAME/ The following is an interview with Solongoo Bayarsaikhan, Deputy Chief of the Cabinet Secretariat.
Minister Kh.Nyambaatar made comments on the recent developments regarding the Oyu Tolgoi project and the letter from Rio Tinto. Can you elaborate on this?
-We received a letter from Rio Tinto and Turquoise Hill Resources addressed to Prime Minister L.Oyun-Erdene. As reported in media, the letter said that the investor side is sorry that the relationship between the Government and investors has been impacted by significant impacts of the schedule delays and cost overruns and that they are committed to repairing it so that the project can progress based on ‘true partnership’. Given the negative impact of the schedule delays of the underground expansion and COVID-19 pandemic, the investors are offering to pay MNT 1 trillion or USD 350 million as additional revenues to the Government in the next three years. The letter also suggests that Rio Tinto is open to exploring ways to reduce Erdenes Oyu Tolgoi state-owned entity’s exposure to shareholders’ loan to finance its 34 percent equity interest in Oyu Tolgoi LLC and accelerate returns to the Government. The Government Working Group will give due considerations to the proposal by the investor side and send our responses in due course. Obviously, we need to carefully review and understand the letter in more detail and discuss the content with the investor side. We need to examine what Rio Tinto is actually offering and specific proposals on paper. We welcome willingness of Rio Tinto and Turquoise Hill Resources to resolve issues related to the project. We always welcomed to have honest and transparent discussions regarding the issues at hand so that we can find a mutually beneficial solution to move forward with the project. The completion of the underground expansion is in the best interests of Oyu Tolgoi LLC and all stakeholders involved. Accordingly, we are continuing our discussions with Rio Tinto and Turquoise Hill Resources to resolve issues and come to a common understanding.
Do you think an agreement can be reached soon?
-We think it is possible to reach a mutually beneficial agreement and find a way forward. We will work towards reaching an agreement with the investor side that provides mutual benefits for all parties. As we move forward together, it is important that it is built on mutual respect and trust. As partners in developing this world-class mine, it is important that we are honest and transparent with each other. In the best interests of Oyu Tolgoi LLC, we want to work together in a collaborative way. That said, it is concerning that we are receiving reports that Rio Tinto as a project manager may not have been fully transparent and honest about the progress of the project to date. As reported earlier, the final report on the independent review on the cost overruns and schedule delays is available by early August. While we are reviewing the report in detail, conclusions of the report are different from Rio Tinto’s position regarding the reasons for the schedule delays and cost overruns.
It was reported that geotechnical issues did not contribute significantly to the cost overruns and schedule delays?
-Indeed, the final report concludes that geotechnical issues or ground conditions were not main causes of the schedule delays and cost overruns. Given differing explanation provided by Rio Tinto so far, we asked Rio Tinto to provide official responses on the findings of the final report. We have not yet received responses from Rio Tinto. As we told the investor side multiple times, it is important that we are open, honest and transparent with each other. If there are contradictory reports, we believe Rio Tinto should explain the contradictory reports and discrepancies.
We trusted Rio Tinto as a global mining company with the Oyu Tolgoi project. We appreciate that the Oyu Tolgoi underground expansion is a complex project and cost overruns can be common in the development of large-scale projects. But we believe that the reasons for cost overruns and schedule delays and problems with the project progress should be reported transparently and openly, especially when the Government is a shareholder in the project. Based on the final report and information available to us from various sources, it is concerning that Rio Tinto may not have been honest about the progress of the project to date. We hope that Rio Tinto adheres to its commitment to be transparent and open about this project and its operations in Mongolia.
What actions can be taken after the independent review?
-While we are reviewing the independent review report, there are certainly a room for improvement of Oyu Tolgoi LLC’s management and operational efficiency. The board of directors of Oyu Tolgoi LLC held a special meeting to discuss the independent review report on 25 August 2021. We understand from the meeting minutes that Oyu Tolgoi LLC’s management talks about an improvement plan. We believe that the board of directors should have more effective control over the management in accordance with good corporate governance principles. The Government Working Group is working on proposals to improve project control and effective supervision over the management. We are reviewing options to have better project control and mechanisms to review the project performance on a regular basis with Oyu Tolgoi LLC and our partners. Also, there are certain recommendations in the independent review report, which should be discussed at Oyu Tolgoi LLC’s board level. One example is to have detailed cost audit on the cost overruns of the underground expansion. We will work with relevant stakeholders to improve transparency and operational efficiency at the Oyu Tolgoi project. This will benefit all stakeholders.
Can you quantify what damages the Government suffered from the cost overruns and schedule delays?
-We received a definitive estimate of the underground expansion from Rio Tinto in December 2020. Due to the cost overruns and schedule delays, benefits of the Oyu Tolgoi project to the Government are significantly reduced. The definitive estimate suggests that we will never get dividends from our 34 percent equity interest until 2051 and in fact the significant debt (USD 22 billion) on 34 percent equity interest will remain outstanding. Further, Oyu Tolgoi LLC would barely pay corporate income taxes in Mongolia – to be specific only in 4 years until 2051. Oyu Tolgoi LLC does not pay corporate income taxes in Mongolia and would not pay it until 2038 based on the definitive estimate. Further, net present value of the Oyu Tolgoi project is negatively affected by the cost overruns and schedule delays. We are currently working with advisers to have estimates and more understanding on the impacts and overall value loss. Some preliminary analysis suggests that the loss on the Government may be in the region of USD 2 billion. But more work needs to be done in this respect and we will continue to work with Oyu Tolgoi LLC, the investors and our advisers to understand more about the actual impacts.