Rio Tinto offers to write off $2.3bn Oyu Tolgoi loan

Rio Tinto has offered to write off $2.3bn owed by the Mongolian government as the global miner seeks to complete the development of a huge copper project in the Gobi Desert.

The debt cancellation is part of a wider five-point proposal aimed at getting the underground expansion of the Oyu Tolgoi mine back on track and repairing relations with Ulan Bator that have been damaged by years of wrangling.

It includes terminating the project’s controversial financing agreement and covering the additional investment until the start of production, which is now expected in the first half of 2023.

Oyu Tolgoi is one of Rio’s most important assets. When finished it will be one of the biggest copper mines in the world, producing almost 500,000 tonnes a year of the metal used in everything from electric vehicles to household appliances.

The project is running nearly two years late and the budget has blown out to $6.45bn, up from $5.3bn. The reasons for the overruns are fiercely disputed, and are being examined by regulators in the UK and US.

The concession from Rio follows a recent visit to the country by its chief executive Jakob Stausholm, who met Oyun-Erdene Luvsannamsrai, Mongolia’s prime minister and MPs fiercely opposed to the project.

“The above decisions were difficult to make and represent our final offer,” Stausholm said in a letter to Oyun-Erdene that has been seen by the Financial Times. “The investors are transferring significant value to Mongolia, which we believe will be the basis for a long-term, trusting partnership.”

Mongolia has a 34 per cent stake in the project, with the rest owned by Rio subsidiary Turquoise Hill Resources. The mine is the country’s biggest source of foreign direct investment and provides thousands of well-paid jobs.

Ulan Bator has been funding its share of the underground development costs through loans from Rio and will not receive any dividends from the project until its debts are paid back. That could take until 2040 or later.

Writing off $2.3bn will bring forward the date at which Mongolia can start to receive payments from the mine, addressing one of the big sources of tension between Rio and the government, which earlier this year had threatened to halt the project. The loans carry an interest rate of Libor plus 6.5 per cent.

Rio’s offer will need to be ratified by Mongolia’s parliament but it has the backing of Oyun-Erdene, who was recently appointed chair of the ruling Mongolian People’s party, which controls 62 of the 76 seats in parliament.

“Basically, the Mongolian people get 34 percent for free,” Oyun-Erdene told a press conference in Ulan Bator on Monday.

Rio confirmed in a statement that it had made an offer to the government of Mongolia, “which aims to reset the relationship and allow all parties to move forward together”.

If an agreement is reached it will allow Rio to push ahead with the start of a complex underground caving process at Oyu Tolgoi — known as undercutting — in January.

Signed in 2015, the financing agreement — or underground development plan (UDP) — put the expansion project back on track after an earlier dispute between Rio and the government.

The deal, and $4.4bn of project financing, was pulled together by Rio’s former chief executive Jean-Sébastien Jacques and the nation’s then-prime minister Chimediin Saikhanbileg.

However, it was never approved by Mongolia’s parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits from the mine.

A parliamentary resolution was passed in December 2019 ordering the government to improve the terms of the UDP, which Rio has now offered to terminate.

“We think today’s announcement indicates both sides are committed to the project, effectively removing much uncertainty related to Mongolia’s external debt repayment ability, likely bringing forward OT dividend payments to Mongolia,” said Adrienne Lui of Citi in a report.

Rio’s offer comes as the company tries to secure the permits needed to develop a lithium project in Serbia to supply European carmakers as they scale up production of electric vehicles.

The miner has been trying to repair its reputation following the destruction two sacred 46,000-year-old Aboriginal rock shelters in 2020 to make way for a mine expansion.