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New CEO at Rio’s Oyu Tolgoi mine

Hoping to end further production delays at the Oyu Tolgoi copper and gold mine in Mongolia, Rio Tinto (ASX: RIO) has appointed a new CEO to the Oyu Tolgoi company, which is 34% owned by the Mongolian government  and 66% owned by Turquoise Hill Resources (which itself is 51% owned by Rio Tinto).

The new CEO, Craig Kinnell, approved by the company’s board, is a copper marketing executive at Rio Tinto, and will be the man who will be dealing directly with the Mongolian government to get the mine back into production.

Just beginning to ship its first amounts of copper concentrate in July this year, the mine is one of the world’s top five copper mines. In late July, the Mongolian government announced that the financing of the project would have to be further approved by the Mongolian parliament.

Rio Tinto responded to this move by itself announcing that all funding and work on the underground development will be delayed until a formal decision could be reached. With operations on hold, the company laid off 1,700 workers in August.

The Oyu Tolgoi mine site is located in the Gobi desert about 80 km north from the border with China and 550 km south of the capital, Ulaanbaatur. Mongolia, a land-locked country between Russia and China, relies heavily on foreign direct investment, and this project will produce mineral wealth for decades.

However, by the government’s handling of the relations with the company, it stands to scare off further potential investment and development from international companies if the dispute cannot be amicably worked out.

At first, the government said that the parliament would vote on the issue after it returned from summer recess, which Rio Tinto saw as a delaying tactic, which is why it shut down production until it could get some certainty from the government.

The government then suddenly fired the executive director of the company which oversees the Mongolian business interests of the mine, and who was responsible for earlier saying that only the Mongolian parliament could vote on the funding terms.

His replacement, Davaadorj Ganbold, former Mongolian Deputy Prime Minister and current member of parliament, stated, “The project should work for both sides, Mongolia and Rio Tinto. Something should be done to find consensus. It’s a marriage between the two sides and I will try to make it work, to push the project forward.”

Before the layoffs, there were about 13,500 working at the site, yet the timetable for the $5.1 billion underground development will stay on hold until both sides can come to a deal. The news has also blunted foreign direct investment by an estimated 43% this year.

Foolish takeaway

Investing in mining companies can be perilous, with unknown resources and possibly even bigger unknown costs that can cripple business ventures before they even can start. Now add the political element of having to deal with a home country’s government as a business partner, and the miner could have indefinite financial and legal disputes. As investors, you have to study the risks the can affect your potential returns, or you open yourself to protracted losses

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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