Rio Tinto (ASX:RIO)’s top growth project could be cancelled

The giant miner’s $8.7 billion copper-gold mine expansion project is under threat from the Mongolian government.

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Rio Tinto Limited (ASX: RIO)’s most important growth project is under threat, with the government of Mongolia this week threatening to pull the deal.

For years Rio Tinto, through its subsidiary Turquoise Hill Resources Ltd (NYSE: TRQ), has been trying to expand the Oyu Tolgoi copper and gold mine.

But on Tuesday Australian time Turquoise Hill announced to the market that the Mongolian government was “dissatisfied” about the estimated economic benefits of the $8.7 billion expansion.

The numbers were released mid-December but this was the first the market heard about the Mongolian government’s response.

“The government of Mongolia has indicated that if the Oyu Tolgoi project is not economically beneficial to the country, it would be necessary to review and evaluate whether it can proceed,” Turquoise Hill stated on the NYSE and TSE.

The situation is serious enough that Ulaanbaatar has expressed intent to tear up the Oyu Tolgoi Underground Mine Development and Financing Plan (UDP) that it signed with Rio in 2015.

“The government of Mongolia has stressed the importance of achieving a comprehensive solution that addresses both financial issues between the shareholders of Oyu Tolgoi as well as economic and social issues of importance to Mongolia, such as water usage, tax payments, and social issues related to employees, in order to implement the Oyu Tolgoi project successfully.”

The Oyu Tolgoi project is rather important to Rio Tinto

Turquoise Hill announced it would be “engaging immediately” with the Mongolian government to sell the economic benefits and save the UDP.

This is the latest crisis in a long-troubled project.

The Oyu Tolgoi expansion was first budgeted to cost $6.8 billion but Rio Tinto was forced to update that number to $8.7 billion in October.

Notwithstanding the headaches, the mining giant is keen to keep the project going as it wants to grow and diversify from its main iron ore business.

The Mongolian government’s adverse reaction to the economics estimate is the first big challenge for Rio Tinto’s new chief executive Jakob Stausholm.

He was appointed to the job after the company’s last crisis — last year’s blowing up of the historically significant Juukan Gorge in Western Australia.

Rio Tinto, in testimony to parliamentary committees and in an internal investigation, defended the destruction, citing that it fully complied with the law. 

The company initially penalised 3 executives a total of $7.2 million of bonuses without apportioning blame on any individual. 

But after a campaign from its biggest shareholders, the 3 executives exited Rio Tinto. Although the ‘punishment’ possibly ended up better than an exoneration, with the trio walking away with massive golden handshakes.

After that messy saga, Stausholm promised to rebuild trust with indigenous owners of lands the company mines. Now he unexpectedly faces a test of that promise in north Asia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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