Ulaanbaatar /MONTSAME/. The working group in charge of implementing the parliamentary resolution No.92 dated November 21, 2019, titled ‘Ensuring the interests of Mongolia in the exploitation of the Oyu Tolgoi gold-copper mine’ held a press conference on August 9. During the press conference, the Head of the working group, Mr. Nyambaatar Khishigee, stated that the recently completed independent review into Oyu Tolgoi’s underground development challenges, specifically the USD 1.4 billion in cost overruns and 22 month schedule delays, concluded that the issues were triggered by Rio Tinto’s mismanagement and not the geotechnical conditions that Rio Tinto claimed.

To look more into the details of the situation, we met with member of the Board of Directors of Oyu Tolgoi LLC, Ms. Bayasgalan Enkhbaatar.

“The independent review on the cost overruns and schedule delays of Oyu Tolgoi underground development was submitted to the Government of Mongolia on August 9. The 157-page report rejected Rio Tinto’s claim of the abovementioned issues being caused by geotechnical conditions and concluded that it was triggered by the company’s mismanagement. The findings of the independent experts have been studied by the relevant authorities and will play an important role in the negotiations with Rio Tinto” she said.

“Discussions were held on the report and recommendations were given to us by the independent experts during a meeting of Oyu Tolgoi’s Board on August 25. At the third quarter board meeting which is scheduled to be held early this month, we will discuss ways to implement the recommendations we received from the experts in the future, how Rio Tinto should be held accountable for management errors, how to prevent such issues from recurring, and whether the current management should remain unchanged. One of the recommendations we received from the expert team was to have a detailed cost audit on the cost overruns of the underground expansion. In this regard, we may set up a special committee again, if necessary, and appoint independent financial experts to further audit the estimated costs of the underground mine development.”

“Bold Baatar, Copper Chief Executive of Rio Tinto, did not attend the August 25 Board meeting, unfortunately. It is rather disappointing that Rio Tinto did not make available its key representative to attend this important meeting and give the Board the opportunity to openly discuss the findings of the independent review and ask questions from the Rio Tinto’s executive team in charge of the management and development of Oyu Tolgoi. We are still waiting for Rio Tinto’s offical response on the independent review report. I believe that the official response will play a key role in the government’s negotations with Rio Tinto. For example, if they admit that they have made a management mistake, we can talk openly about further steps to be taken and changes to the contract.”

“To put it simply, the cost overrun of USD 1.5 billion should not be taken lightly, especially considering the initial budget of USD 5.3 billion included around USD 500 million of contingencies. Therefore, the issue of being held accountable for the mismanagement and consequences thereof, such as cost overrun, must be raised. That way, we can find a way forward” she added.

What exactly do you think Rio Tinto should be responsible for?

-Any organization that charges for services must ensure adequate performance of their services. But if the work they have done is not as you agreed, they continue to charge additional costs, and most importantly, if they are misleading you and being dishonest about their performance shortcomings, then you cannot continue to work with them on that basis. You will need to raise the issue of accountability before moving forward.  I believe our government has the same view.

Rio Tinto invoices large sums of money as management fees annually. If you get that amount of money and do not do your job well enough, we need to reconsider the amount.

The government expressed its willingness to start the underground undercut process in September. Rio Tinto has confirmed it was technically feasible to initiate the undercut. However, as we all know, the work has not yet begun.

In addition, the net present value of the project is declining as construction of the underground mine is delayed. The 22-month delay has already devalued the project. The more time passes, the lower the value of the project. Ultimately, a quick start to underground mining is mutually beneficial.

Oyu Tolgoi’s reserve report and feasibility study are separate issues and must go through proper administrative due processes in order to ensure the appointed expert team is able to conduct their thorough review, to get responses to their questions and to raise issues and recommendations. Only at the completion of such procedural requirements, those reports should be received by the appropriate agencies. However, Rio Tinto continues to push the Mongolian government at the top to approve those reports, without allowing our mining and technical experts to do their work, which is an issue. As you know, the same problem arose in the Dubai Agreement and there is a clause forcing the government to accept the 2015 feasibility study.

What recommendations did the independent experts give?

-According to our independent external experts, it is certain that the cost was exceeded due to management errors. However, it was recommended that financial analysts be hired to dig deeper into cost overruns.

A letter from Rio Tinto to the Prime Minister of Mongolia stated that Mongolia’s share of 34 percent could be renegotiated. What is your position on this?

-It is better not to make a hasty decision on the offers of Rio Tinto. Each of these offers needs to be carefully reviewed and followed by a decision made in the best interests of Mongolia. We can also make offers. In my opinion, Rio Tinto has not responded to the report of independent experts. Therefore, I think it is inappropriate to make offers prior to openly discussing and resolving the issue of mismanagement and ways to mitigate such risks going forward.

How will the current negotiation affect the start of underground development?

-It will not affect it at all. It is not necessary to conclude negotations between the government and Rio Tinto, prior to the start of the underground mine. There is no reason for the development of the underground mine has to freeze because of the negotiation. Further delaying the schedule itself is economically unprofitable for all the stakeholders. The decision on when to start underground mining is in Rio Tinto's full control after all.