ULAANBAATAR -- The Mongolian government is seeking further concessions from Australian mining company Rio Tinto after it proposed new terms for financing the $6.75 billion underground expansion of the vast Oyu Tolgoi copper mine.
"Mongolia wants Rio to clear Mongolia's debt," said Prime Minister Oyun-Erdene Luvsannamsrai on Monday, ahead of a meeting with company officials later in the week, insisting the company should shoulder responsibility for delays and cost increases with the project.
"The Mongolian government didn't make mistakes," he said. "As project investment costs mounted, so have the debts of Mongolian shareholders sharply increased."
The expanding bill for the Oyu Tolgoi project, which has undermined expectations of financial returns from the mine for the government, have roiled both Rio and Mongolia over the past year, helping bring down both the company's last chief executive and Luvsannamsrai's predecessor.
The sides have been working since February on a new deal to finance Oyu Tolgoi's underground expansion.
In August, Rio offered to waive interest due on the loan it extended to finance the government's one-third capital share of the project and to prepay $350 million in dividends to the government over the next three years to ease the economic strain of the COVID pandemic.
Under the current arrangement, the interest rate on the government's loan is fixed at Libor plus 6.5%, or around 6.86% currently.
The government currently owes $1.4 billion in principal and $900 million in interest on the loan, according to figures published on Tuesday by Turquoise Hill Resources, the Toronto-listed vehicle through which Rio controls Oyu Tolgoi.
According to Minister of Justice Nyambaatar Khishgee and other government officials, Rio's latest offer includes raising its forgiveness on the amounts due on the government's loan to $1.7 billion and increasing the dividend prepayment to $350 million a year for three years as well as waiving part of the fees it is due as manager of the project and as guarantor of loans provided for the mine's expansion by banks and export credit agencies.
Negotiators initially met last week to discuss the new offer. After the session, Bold Baatar, who runs Rio's copper operations, confirmed the outlines of the proposal
Under the existing financing arrangement, Mongolia would receive dividends only after it pays off the interest and principal on the loan from Rio.
Until late 2020, the authorities had expected to start collecting dividends in 2032, but a two-year delay in construction and $1.5 billion increase in the project's budget raised the prospect that the government might not receive dividends during the mine's lifetime.
Total capital spending on the mine's underground expansion reached $5.1 billion as of Sept. 30, according to Turquoise Hill.
In its announcement, the unit warned that further work might have to be slowed unless Mongolia and Rio Tinto can agree on financing terms by the end of this month, with sustained production unlikely to start until 2023 in any case. Production was originally scheduled to commence last year.
Turquoise Hill estimates that costs for the underground project have risen another $140 million due to COVID-related delays since the budget was put at $6.75 billion last December.
In August, a special board committee of the joint venture that owns the mine concluded that project management problems were key to the delays and cost overruns with the underground expansion.
Oyu Tolgoi's existing open-pit section produced 41,935 tons of copper in the July-September quarter, up 16% from a year earlier. It also generated 130,799 ounces of gold during the period, three and a half times as much as a year before.
Boosted by a jump in copper prices, Turquoise Hill generated a profit of $473.9 million on revenue of $1.47 billion over the first nine months of 2021.