Resolution Of Tax Dispute In Mongolia Boosts Rio Tinto’s Plans For Expansion Of Copper Mine

A tax dispute that could potentially have delayed the development of Rio Tinto‘s (NYSE:RIO) Oyu Tolgoi copper mine in Mongolia, has been resolved. ^[1] This is good news for the company as the project is an integral part of its plans to ramp up its copper production.

The Oyu Tolgoi mine is operated by Turquoise Hill Resources Limited, a Rio Tinto subsidiary, in which the company holds a 50.8% stake. ^[2] Turqoise Hill holds a 66% interest in the mine, with the Mongolian government holding the remaining 34%. ^[1] This ownership arrangement indirectly gives Rio Tinto a 33.5% stake in the Oyu Tolgoi mine.  The Phase II expansion of the mine had been held up due to a series of disputes between the Mongolian government and Turquoise Hill. The latest of these disputes pertained to an audit conducted by Mongolian authorities, claiming unpaid taxes by Turquoise Hill. ^[3] However, a settlement reached between the two sides has pegged the unpaid tax liability at $30 million, significantly lower than the $130 million in unpaid taxes claimed by the authorities in June. ((Mongolia says resolves Rio Tinto copper mine tax dispute, Reuters)) Now, all disputes have been settled and post the approval of a  new feasibility study being conducted by Turquoise Hill, construction activities should resume at the mine.

See our complete analysis for Rio Tinto here

The Oyu Tolgoi Mine

The Oyu Tolgoi mine began operating in July 2013, with Phase I open-pit operations producing 76,700 tons of copper concentrate in that year. ((Rio Tinto’s Oyu Tolgoi Mine in Mongolia Hits Another Snag, Wall Street Journal)) The construction of the Phase II underground expansion is now expected to begin in Q1 2015. ^[1] Upon reaching full production in 2021, the mine is expected to produce 450,000 tons of copper and 330,000 ounces of gold annually. ^[4] Rio’s share would stand at approximately a third of this level of output, around 150,000 tons of copper and 110,000 ounces of gold annually. The company’s attributable share of copper production stood at approximately 631,000 tons in 2013. ^[5]

The Oyu Tolgoi mine fits in well with Rio’s overall strategy. Iron ore is the company’s main offering, which accounts for over half of its revenues. ^[6] However, prices of the commodity have fallen drastically over the course of last year or so due to weak demand and an oversupply situation, as major producers have ramped up production despite weak demand. ^[7] Iron ore prices stood at $92.61 per dry metric ton (dmt) at the end of August 2014, around 32% lower than at the corresponding point of time a year ago. ^[8] In such an environment, the company has drastically reduced its capital expenditure spending from $13 billion in 2013, to an expected $9 billion and $8 billion in 2014 and 2015 respectively. ^[9] As a part of its disciplined approach to capital allocation, the company is focusing on a smaller project pipeline, which includes projects that would generate the maximum returns for the company. The Oyu Tolgoi mine is an integral part of this smaller project pipeline. The copper and gold mine provides benefits of diversification away from iron ore to Rio Tinto, by increasing the company’s exposure to copper. Copper prices have recovered after a decline earlier on in the year over fears of unwinding of copper financing deals in China. ^[10] ((China Fears Trigger Dramatic Drop In Copper, Financial Times)) With iron ore prices expected to remain low in the medium term, developing the Oyu Tolgoi mine will reap benefits for the company.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Mongolia says resolves Rio Tinto copper mine tax dispute, Reuters [↩] [↩] [↩]
2. Rio Tinto’s Q2 Earnings Media Release, SEC [↩]
3. Rio Tinto’s Oyu Tolgoi Mine in Mongolia Hits Another Snag, Wall Street Journal [↩]
4. Rio Tinto to Cut 1,700 Jobs at Oyu Tolgoi Mine, Wall Street Journal [↩]
5. Rio Tinto’s 2013 Annual Results Media Release, Rio Tinto Website [↩]
6. Rio Tinto’s 2013 20-F, SEC [↩]
7. BHP, Rio Gamble with Stacked Iron ore Deck, Mineweb [↩]
8. Iron Ore Prices, Y Charts [↩]
9. Half Year Results 2014, Rio Tinto Media Release [↩]
10. LME Copper Prices, LME [↩]