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16 September 2020

Oyu Tolgoi furthers funding pit

Metals and Mining
Middle East & Africa, Americas, Asia-Pacific, Europe
Managing Editor
Rio Tinto via its ownership of Turquoise Hill Resources has finally inked an agreement for the additional financing of the long-dated Oyu Tolgoi mining project in Mongolia - albeit with significant construction risk.

The Oyu Tolgoi mine expansion project in Mongolia, one of the world’s largest copper-gold mines, has been dogged by politics, delays and spiralling project costs since the scheme reached financial close on a $4.4 billion multi-sourced project financing in 2015.

But last week, project sponsor Turquoise Hill Resources (TRQ) (66%), which is majority-owned by Rio Tinto, and the Mongolian government (34%), finally signed a memorandum of understanding (MoU) for the financing of the mine’s underground project, following a major redesign of the Hugo Dummett North copper and gold underground mine in the south Gobi desert. 

Under the agreement, Rio Tinto and TRQ have agreed to: pursue re-profiling of principal debt repayments with lenders under the existing project finance arrangements to better align with the revised mine plan, project timing and cash flows; raise up to A$500 million ($363 million) in additional lending under the existing project financing arrangements from selected international financial institutions; and acknowledge that any balance of the funding required for Oyu Tolgoi to achieve completion of the Hugo Dummett North underground mine will need to be met by TRQ offering equity.

The framework has provided a clear funding pathway for the completion of the project, after sponsors mulled over a potential refinancing option. Although THQ will continue to explore other options for additional debt funding for the mining complex. 

According to a Rio Tinto regulatory filing from 11 September, while the global miner will consider that outside funding, “Rio Tinto has advised TRQ that it does not currently support or expect to consent to any additional debt or other sources of funding”.

Either way, upping DFI and international bank backing from the original project debt providers - EDC, EBRD, IFC, US Exim, EFIC, BNP Paribas, ANZ, BNP Paribas, CIBC, Credit Agricole, FMO, HSBC, ING Bank, Intesa Sanpaolo, KfW IPEX, MUFG, National Australia Bank, Natixis, Societe Generale, Standard Chartered and SMBC - is still on the cards for additional lending capacity. 

In fact, the EBRD’s director of natural resources, Eric Rasmussen said last year that the development bank was willing to provide more funding for the project. And the updated financial model - coupled with the fact the scheme has 4.5 years of construction under its belt since financial close - will have added further impetus to any DFIs and commercial banks looking to upsize their debt package stapled to the project.

Furthermore, given all-in pricing on the 2015 deal was 600bp over Libor, there is clearly room for a margin cut and tenor extension on at least some of the debt. 

Oyu Tolgoi is a hard sell – but remove much of the political risk and the scheme becomes eminently bankable, particularly given the original extent of DFI and ECA support. And initial signs suggest there is appetite, at the very least at the EBRD, for upping that backing

A chequered past

Rio Tinto’s new estimate for capex on the project is now $6.5 billion to $7.2 billion, and dependent on the mine redesign for Panel 0 announced in July this year, first sustainable production has been pushed back to between May 2022 and June 2023, a delay of 21 to 30 months on the original feasibility study estimate (and an increase of 25-34% from the original A$5.3 billion development capital).

The scheme has also been at the centre of an anti-corruption investigation that has resulted in the arrest of two former prime ministers and a former finance minister. And a parliamentary working group, established last year to examine the original Oyu Tolgoi project agreements, has recommended that the 2015 Dubai Agreement – the basis for the extension project – should be scrapped.

The core of the political row dogging the project is the share of project benefits Mongolia is getting out of the deal. Although Rio Tinto claims to have spent “$8.3 billion in-country in the form of salaries, payments to Mongolian suppliers, taxes, and other payments to the government” between 2010 and 2018, Mongolia will not earn a dividend from the mine until 2041 when the dividend flow is predicted to have repaid the state’s share of the project costs.

And a report in 2018 by Dutch NGO the Centre for Research on Multinational Corporations (SOMO) claimed that tax arrangements in the Oyu Tolgoi investment agreement resulted in a $230 million tax revenue loss for Mongolia. The report, which was arguably flawed, nevertheless added fuel to an already heated dispute between the project sponsor and the Mongolian tax authorities over withholding tax payments.

A power push for future projects

Despite all the problems at the project, Rio Tinto continues to anticipate Panel 0's definitive estimate of the cost and schedule in H2 2020. Meanwhile, the global miner in June 2020 announced an agreement with the government of Mongolia on the preferred domestic power solution for Oyu Tolgoi, paving the way for the government to fund and construct a state-owned power plant at Tavan Tolgoi.

Parties will negotiate a power purchase agreement and, by March 2021, extend existing power import arrangements beyond 2023. Project vehicle Oyu Tolgoi retains the right to implement its own coal-fired or renewable energy power plant if the government abandons the development of the state-owned power plant.

Even before the news about the redesign of the Hugo Dummett North underground mine, it emerged in March this year that TRQ was forecasting financial hardship beyond Q2 2021.

TRQ’s released estimate that month had considered the expansion of the Oyu Tolgoi underground mine and a proposed 300MW coal-fired power plant at Tavan Tolgoi. In February 2020, Rio Tinto had also submitted its feasibility study for the coal-fired plant to the government. It put the cost at $924 million, which could be included in the mine expansion project's existing budget. The plant had been the primary option being considered to ensure domestic power supply for the mine. 

A 2018 investment agreement obliges the project company to obtain its power domestically. The mine's existing power supply comes from a Chinese power grid via overhead power lines. 

The project company in November 2019 finished the second shaft’s construction, with a parliamentary review over 18-months concluded a month later (December 2019) with all project agreements reinstated. Darkhan Mongol Nogoon Negdel NGO brought the claim about the government’s alleged mishandling of the Oyu Tolgoi Underground Mine Development and Financing Plan (UDP) to the Administrative Court.

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