Rio Tinto’s Mongolian Project: New Legal Probe

Rio Tinto’s Mongolian Project: New Legal Probe

Rio Tinto’s Mongolian Project

New Legal Probe

Rio Tinto was involved in the investigation by the law firm  Baker McKenzie in relation to the $US5.3 billion ($7.7 billion) in new Mongolian copper expansion probe, which would make the relationship with minority shareholders in Turquoise Hill Resources more sensitive and fractious.

The investigation by the global firm initially focused on a former employee’s significant claim on the Mongolian project, which was the expansion of Oyu Tolgoi project.

Oyu Tolgoi project, located in the south of Mongolia, is jointly owned by the Government of Mongolia (34 percent) and Turquoise Hill Resources (66 percent).

Although Rio Tinto did not own the stakes in Oyu Tolgoi project, they owned 51 percent of Turquoise Hill, therefore, Rio Tinto became the operator of the expansion project. Since 2010, Rio Tinto had been the manager of the project, which was Rio’s major copper growth project.

Rio Tinto announced the underground project had achieved continuous progress last year in the construction of both above- and below-ground infrastructure.

Rio said: “Overall, the underground lateral development has been proceeding well, with a total of 19 km achieved at the end of January 2019, against our second annual reforecast target of 19.8 km.”

However, in October 2018, Rio Tinto announced that the production of the Oyu Tolgoi underground copper-gold mine could be delayed for nine months due to the detailed geotechnical issues.

“With the structural, mechanical and electrical fit-out of shaft 2, it is now clear that the completion of this technically complex installation and commissioning work will be delayed by several months,” Rio said. “Delayed completion of the shaft, which provides additional hoist capacity to accelerate lateral development, will further delay the date we reach sustainable production beyond the nine-month delay indicated in October 2018.It was revealed that the rock mass was more variable than previously anticipated, and the underground development progress in some of the areas would be slowed due to the difficult conditions.  

In February,  Rio Tinto announced to the public that they should make a significant change to the Oyu Tolgoi expansion project. “This data reveals there are areas of the mine footprint where the strength of the rock mass is more variable than anticipated in the feasibility study,” Rio said. “This will require some potentially significant changes to the design of some future elements of the development and the development schedule,” Rio Said.

The potential changes in the expansion plan could increase the cost and further delays the completion date. Rio Tinto was conducting the estimation of the cost and admitted that the first production was unlikely to occur in the September quarter of 2021 as they guided previously and the company would report back on the revised cost and the schedule of completion later this year. The change of the company’s announcement makes Rio Tinto’s image becomes less reliable.

One working staff of the  Baker McKenzie firm said that they focused on how Rio Tinto recognized the challenges and how they communicated the geology challenges especially rock mass problems. They paid attention to the potential cost and the schedule and relevant stakeholders including Turquoise Hill. The former employee revealed the challenges that Rio Tinto has experienced in the expansion project in Mongolia, not as Rio Tinto presented to the public. The staff from the investigation firm Baker McKenzie described that employee as a “whistleblower”.

Rio Tinto should report the significant change in time, especially the core project changes. Rio Tinto had experienced a series of similar cases before. Rio Tinto’s former executives had been charged with fraud as they tried to hide the investment loss of  $US3.7 billion in Mozambique coal assets in 2011. They failed to disclose the deteriorating nature to the investors and admitted huge value loss until the following year.

Rio Tinto believed that the technology they planned to use was still suitable to the geology at the Oyu Tolgoi project, but the rock strength around “shaft two”, which was the main production shaft, was uncertain. It was unsure whether the technology can sufficiently support the development of infrastructure and the convey-to-surface decline.

Rio Tinto was criticised due to the corporate governance failing last year. They have too much influence over Turquoise Hill Resources. Sailingstone, the second largest shareholder in Turquoise Hill Resources, said that Rio Tinto was exercising more power than the stake they owned and concerned about the conflicts of interest between Rio Tinto, the majority shareholder of Oyu Tolgoi, and the minority shareholders of Turquoise Hill. Rio Tinto’s chief executive Jean-Sebastien Jacques admitted to the public that the ownership structure in the not ideal.

After that, many minority shareholders in Turquoise Hill agreed that it was a frustration these few years that Rio Tinto had too much influence over the project and only providing too little disclosure to the management.

Turquoise Hill shares experienced a sharp drop and traded at the historical lowest price since 2008 last week. It was due to the shareholders voted against the directors in the company’s annual meeting and bring a negative effect to the company.

By Chang Liu

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