[SMM Analysis] the Mongolian Parliament intends to amend the Oyu Taogai Copper Mine Agreement, which has some hidden dangers to the supply side of copper raw materials.

SMM7 22 July news:

On July 22, 2019, the Mongolian parliament said it would vote in August on whether to amend the Oyu Tolgoi copper and gold expansion agreement, which could lead to an early dividend for Rio Tinto.

Oyu Tolgoi copper and gold deposit is located in Khan Baogde County, South Gobi Province, Mongolia. It is one of the largest gold and copper deposits in the world. Oyu Tolgoi mine is close to the border of our country and is one of the important sources of mine supply in the north of China. Australia's Rio Tinto's turquoise resources company owns 66 per cent of the mine and the rest is owned by Mongolia. In 2009, Mongolia signed an agreement with Canadian mining giant Ivanhoe and Rio Tinto, which states that Mongolia owns 34 per cent of the Oyu Tolgoi joint venture and 66 per cent of Ivanhoe. The Mongolian government can increase its stake to 50 per cent in 30 years. Rio Tinto develops the Oyu Tolgoi project, continuously subscribes to increase its stake in Ivanhoe, and eventually becomes the controlling shareholder of Ivanhoe, in order to get rid of the contradiction between Rio Tinto and the Mongolian government. Ivanhoe transferred its stake in the Oyu Tolgoi project to turquoise Resources, which is controlled by Rio Tinto, which has been in talks with Mongolia over the Oyu Tolgoi project for years, and the two sides have been at odds over tax and development cost increases.

Mongolian lawmakers will vote in August on whether to revise the 2015 investment agreement with mining giant Rio Tinto on the giant Oyu Tolgoi copper and gold mine in the Gobi Desert. After the signing of the giant copper mine capacity expansion agreement, the Mongolian government has repeatedly called for adjustments to the mine's expansion plan on the grounds that mining development is not conducive to Mongolia's mining boom and that it is unable to reasonably share the benefits of development. The agreement covers Oyu Tolgoi's costly and delayed underground expansion.

On the cost side, due to the poor progress of the underground expansion project, production is expected to be delayed to May 2022 to June 2023, and the cost is expected to significantly exceed the budget by $5.3 billion, to about $6.5 billion-$7.2 billion, an increase of nearly 35 per cent. On the tax front, Rio Tinto has been facing legal difficulties in Mongolia, where it provided Oyu Tolgoi with a $155 million tax bill last year, its second tax dispute since 2014. The double pressure of tax and cost has frequently hindered Rio Tinto's Mongolian copper project.

Since it was put into production in 2013, the overall output of Oyu Tolgoi has increased at first and then decreased, and the overall growth rate has decreased year by year. Copper production reached 159.1kt in 2018. Oyu Tolgoi gold deposit is an important supply source of mines in northern China. The obstruction of underground copper mine expansion process is expected to have a great impact on the future copper mine supply in China, especially to increase the pressure on the raw material supply side of the northern copper smelter.