Rio Tinto polishes image of giant Oyu Tolgoi mine in Mongolia

Rio Tinto seeks to ease Mongolian doubts over huge mine with a number of social projects

PUBLISHED : Sunday, 23 September, 2012, 12:00am
UPDATED : Sunday, 23 September, 2012, 3:15am

Inside the brand new information centre at Oyu Tolgoi mine, the resident guide shuffles between hi-tech displays of flashing lights, models and videos as he explains to a group of students the staggering size of Mongolia's biggest infrastructure project.

"The ore body at Oyu Tolgoi contains 24.7 million tonnes of copper and 1087 tonnes of gold. It can be mined for 69 years," Munkhbayar Ganbat announces, showing off a scale model of the 39 kilometre long underground mineral reserve, which has been a source of controversy for nearly a decade. It's balanced over a schematic of Manhattan, as a way to indicate the sheer size of the deposit.

"The general public has high expectations from this project. But they have insufficient information, which is why we created this centre," Munkhbayar later told the Sunday Morning Post.

The information centre is part of a campaign by Rio Tinto to win over the hearts and minds of the Mongolian people, who want the country to receive a greater share of its natural wealth. The project is 66 per cent owned by Rio Tinto and Turquoise Hill Resources, with the remaining 34 per cent in the hands of the Mongolian government. The terms, established in a 2009 investment agreement, will exist for 30 years, after which time Mongolia has the right to negotiate for a 50 per cent stake.

But three years after the deal was inked, many here are feeling buyers' remorse and calling for the contract to be rewritten. Twice in the past year, backbench members of parliament have issued a letter to Prime Minister Sukhbaatar Batbold ordering a renegotiation of the terms so Mongolia can grab its half as soon as the investors recoup their US$6 billion start-up investment.

Rio Tinto has held its ground, saying that the time for negotiation has passed. But its defensive position comes with a dose of soft power, too. In addition to the information centre, the Anglo-Australian firm is spending more than US$2 million on environmental and social projects.

These have included the renovation of the hospital near the mine site, a vaccination programme for the local population and a new dental clinic. Rio Tinto also donated US$150,000 to rebuild the local Buddhist monastery, which Stalin's thugs had destroyed in 1937.

For many locals, the most popular initiative is a US$125 million vocational training programme for more than 3,300 Mongolian workers. Rio Tinto is also helping to fund the American University in Mongolia, scheduled to open in 2014.

Rio Tinto's efforts, and its reputation as a world class block-cave miner, have made the company a welcome part of Mongolia's corporate fabric, in sharp contrast to Canada's Ivanhoe Mines, the early licence-holder of the project. For many here, Ivanhoe became a symbol of alleged foreign greed following media and political attacks against the project.

"Public opinion was really tough on Ivanhoe Mines, but Rio Tinto is more respected because Mongolians recognise the underground expertise of this global mining corporation," said Origo Partners analyst Dale Choi. "Mongolians see this company as an indispensible partner."

But the company remains dogged by an investment deal many here see as unfair. Oyu Tolgoi's CEO Cameron McRae often finds himself trying to spell out the benefits for Mongolia.

"For each one hundred dollars of pre-tax cash flow, the government takes from US$55 to US$71," said McRae at a recent investors' conference. "Having a 34 per cent share does not mean the government takes 34 per cent of the cash flows. The government will take up to 71 per cent, using discounted cash flows and taking into account VAT, dividends and royalties," he added.

McRae also took a shot across Mongolia's bow when he noted that the investors expected their host country to honour signed contracts.

"When international investors decide to deploy their scarce capital, cutting-edge technology and management expertise, they look for responsible partners. Companies like Rio Tinto prefer to invest in countries where the host government takes the long view, just as we do," he said.

For Rio Tinto, the long view is decades away. For the Mongolians, the need to develop their country is immediate. Somehow, both must continue this awkward dance in order to keep Oyu Tolgoi on pace for its initial commercial production next year.