Mongolia Says Rio Mine Audit Seeks Answers on $2 Billion Cost Overrun

April 18, 2013 Leave a comment

Mongolia Says Rio Mine Audit Seeks Answers on $2 Billion Overrun

Mongolia said it’s undertaking an audit of Rio Tinto Group (RIO)’s Oyu Tolgoi operation as it seeks to understand the reasons for an alleged $2 billion cost overrun at the mine where output is due to start in June.

“We are checking procurement documents and expenditures,” Finance Minister Chultem Ulaan told reporters yesterday in the capital Ulaanbaatar. “No one understands why the project has gone $2 billion over budget, so we are checking this.”

The $6.6 billion Oyu Tolgoi mine will be the largest contributor to Mongolia’s economy and is estimated to account for one-third of the nation’s gross domestic product by 2020. The government’s audit team is studying what equipment was bought for the mine and its cost, said Ulaan. The operators of Oyu Tolgoi have brought in a foreign auditor, he said.Oyu Tolgoi is 66 percent owned by London-based Rio Tinto, the world’s second-largest mining company, with the remainder controlled by the land-locked nation. They’ve been in dispute over alleged cost overruns and management control with three emergency shareholder meetings held this year.

Mongolian President Tsakhia Elbegdorg said in February the country should have more control over the project, prompting Rio to threaten delays to the start of production. Talks on legislation governing Rio’s investment at the mine are continuing.

“The agreement is fine, there are just some parts that need to be streamlined so it will be more efficient,” minister Ulaan said. “We don’t intend to increase the tax on Oyu Tolgoi, we are just saying that they should pay what every other mining company pays.”

Tax Demand

Ulaan repeated a claim that Rio Tinto owes taxes to the government for 2012.

“We believe that Oyu Tolgoi needs to pay taxes for 2012,” he said. “We have that position. All the companies should follow the law.”

Cameron McRae, chief executive officer of Oyu Tolgoi LLC, a unit of Rio Tinto, said yesterday at a conference in London that “constructive progress” is being made in talks with the government.

“The focus is both on reviewing progress to date and ensuring that production and future expansions are delivered together – and that critical agreements and finance are supported,” he said.

The company is well advanced in funding talks for an expansion of Oyu Tolgoi, he added.

‘Most Attractive’

“Bank funding in the form of project finance is the most attractive finance option because it is cheaper and better tailored to the project than any other option currently available,” McRae said. “The process is now well advanced.”

A London-based spokesman for Rio declined to make any further comment.

The underground component of the planned mine expansion includes 250 kilometers (155 miles) of tunnels and may cost $5.1 billion, according to a report last month by Rio Tinto unit Turquoise Hill Resources Ltd. (TRQ)

The boards of International Finance Corp., the World Bank’s funding arm, and the European Bank for Reconstruction and Development granted approval in February for the lenders to join a $4 billion project-finance deal for the Oyu Tolgoi mine.

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Michael Kohn in Singapore at mkohn5@bloomberg.net

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