ESG

Mongolia threatens to void Oyu Tolgoi investment agreement

Mongolia’s government is looking to void Oyu Tolgoi’s 2009 investment agreement if the company’s tax claims aren’t dismissed in international arbitration.

 The concentrator at the Rio Tinto-operated Oyu Tolgoi mine in Mongolia

The concentrator at the Rio Tinto-operated Oyu Tolgoi mine in Mongolia

The government owns 34% of the giant copper-gold mine, and Turquoise Hill Resources (TRQ) - which is in turn owned 50.8% by Rio Tinto - holds the remainder.

The threat was outlined in an update yesterday from TRQ regarding an ongoing tax dispute.

TRQ said the government had filed its statement of defence and a counterclaim, in relation to an international tax arbitration brought by Oyu Tolgoi in February 2020. 

"The company understands that the principal thrust of the GoM defence and counterclaim is to seek the rejection of OT's tax claims in their entirety," Turquoise Hill said.

"As part of the counterclaim, the GoM makes assertions surrounding previously-reported allegations of historical improper payments made to GOM officials and seeks unquantified damages.

"Also, in the event OT's tax claims are not dismissed in their entirety, GoM is seeking in the counterclaim an alternative declaration that the 2009 Investment Agreement is void."

The company denied the allegations.

It said neither TRQ nor Rio were parties to the arbitration but it understood the government had requested they be added.

It intended to oppose the request that to be added, "as and when" the application was formally served on TRQ.

"If nevertheless the company is added to the proceedings, Turquoise Hill will vigorously defend itself against the counterclaim," it said.

Bone of contention

The 2009 investment agreement has long been a bone of contention.

A working group was formed by the government in 2019 to engage with Rio and TRQ, following a push to improve its implementation. 

The threat of voiding the agreement is the latest development in a fractious relationship between mine owners, with the government indicating in January it was unhappy with the updated plan for the over-budget underground expansion at the mine.

TRQ had also opposed a rights issue as part of a new financing plan but reached agreement with Rio in April, a month after the Toronto-based company's CEO quit following a push by Rio. 

Rio says Oyu Tolgoi's expansion is expected to take peak production to an average annual 480,000 tonnes of copper per year and become the fourth largest copper mine in the world by 2030.

The mine produced 146,600t of copper in 2020.

Oyu Tolgoi was impacted by COVID-19 in the March quarter, with two positive cases halting underground construction for a fortnight.

The miner was also working to address the force majeure situation regarding shipments to Chinese customers which were suspended due to COVID-19 border controls.

TRQ shares (TSX: TRQ) lost 0.5% to C$21.95 yesterday but remain near the top of a one-year range, valuing it at $4.4 billion (US$3.6 billion).

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