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Oyu Tolgoi on the brink of a cycle

2020  |  January   |  026
  • Rio Tinto’s working group is led by Elias Scafidas
  • If the Government’s defeat, it may follow suit in raising tax disputes

The latest news suggests that Oyu Tolgoi’s shareholder arguments are beginning to be resolved. Among numerous separate issues including the construction of a power plant, tax violations, Dubai Agreement and financing costs, tax disputes and related issues are in the stage of being settled. 

The Government working group to implement Parliament resolution on “protecting the interests of Mongolia in Oyu Tolgoi’s Investment Agreement” has started negotiations with Rio Tinto’s working group. The Government’s main representation is E. Oyu-Erdene, Head of the Cabinet Secretariat, while Rio Tinto’s working group is led by Elias Scafidas, Chief Financial Officer of the Copper & Diamonds Group of Rio Tinto, who also serves as a member of the Board of Directors of Oyu Tolgoi LLC. Negotiations already kicked off. Though it’s unclear when they would reach an agreement, some say it’s before the election. As tax dispute, the most complicated of the issues in question, has been transferred to an international arbitration court, it’s likely the current negotiations will focus on the remaining topics. 

Threats were thrown before by both parties to seek arbitration. This time, they agreed to hold hands on the path to the international arbitration court mutually agreeing that it is the only option to resolve the dispute. While this is less harmful to decision-makers, the consequences will be different for decision bearers.

Rio Tinto first announced its decision to file a complaint to the London Arbitration Court. “We have worked diligently with the government and tax office representatives in Mongolia to find a mutually acceptable settlement and came to the conclusion that arbitration is the best way forward to resolve this issue,” Rio Tinto chief executive copper and diamonds Arnaud Soirat said. After this, Head of the Cabinet Secretariat E. Oyu-Erdene stated “We will not settle tax disputes through negotiations. If we choose this method, there’s the risk that the law will be redundant in the future”. Depending on the Arbitration’s decision, the winning side gets to make the rule. How would the Government measure against Rio Tinto in terms of experience and competency to debate on finance and contractual law? It’s not unlikely that in the case of the Government’s defeat at the arbitration, other mining companies may follow suit in raising tax disputes.  

Perhaps the Government knows that the inclusion of specific clauses on tax regulation to the Dubai Agreement would become a justification for losing at the arbitration. Sources say that Rio Tinto is using this document for the tax dispute as to their defense and has made a series of statements that the agreement was in force. However, the fact that the court decided the process of obtaining the right to sign the Dubai Agreement violated the law and the Parliament passed a resolution to amend the Agreement according to the law could be the Government’s main justifications brought to the arbitration table.   

Tavan Tolgoi’s power station affair has gone back to square one. Previously, Rio Tinto offered to build the power station at a cost of over one billion USD from its pocket. As this means investment costs would go up and the Government’s dividend schedule would delay by ten years, Mongolians have decided to construct the plant ourselves. Through persistent efforts by Minister Ts. Davaasuren, the Southern Region Power Sector Cooperation Agreement was canceled which drove out the consortium of MCS and Marubeni from the project. Shortly after, the Government of Mongolia and Oyu Tolgoi LLC signed the “Power Source Framework Agreement (PSFA)” on December 31, 2018. According to this agreement, Rio Tinto has assumed responsibility to construct a power station under Tavan Tolgoi mine with its fund and commission it by June 30m 2023. However, it appears this agreement could be canceled as well.     

The costs specified in the detailed Feasibility Study of the power station weren’t significantly lower than previously discussed. Therefore, it’s likely the Government wouldn’t support it. “There are four alternatives for supplying power. We will choose the most feasible option. Investors can secure their dividends only if Oyu Tolgoi operates with profit. The Government will take caution on any proposal that would raise costs” says L. Oyun-Erdene, head of the working group, after the Feasibility Study was finalized. Even if the Government rejects its 34 percent share, Rio Tinto would seek to gain discounts and advantages for each penny they spent. Thus, accepting such vast amounts of investment could later become the ministers’ “Achilles heel”. So, it wouldn’t be surprising if the issue of Oyu Tolgoi’s power plant construction comes to a halt yet again. This marks the third time the Tavan Tolgoi power plant project reached its end. In the end, unfortunately, each moment lost cost Mongolian money. The cost of lost opportunities so far has already exceeded the planned investment.   

These events - the deadlock in Tavan Tolgoi’s power plant project, re-opening of the tax disputes and amendment of Oyu Tolgoi’s Investment Agreement – ultimately feels like traveling back in time to 2013. With the difference in only names and dates, history is being repeated. Deja vu?  



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