While copper concentrate shipments to China began earlier this month from Rio Tinto plc (ADR) (NYSE:RIO)‘s huge Oyu Tolgoi project in Mongolia, as the miner and the region’s government tried to hammer out an acceptable compromise over the profits the latter will be able to siphon off, the hurdles to full production remain high and won’t be resolved anytime soon.
Rio Tinto plc (ADR) (NYSE:RIO) said yesterday that despite having reached a provisional agreement on securing financing for the project with Mongolia, which currently owns about 34% of Oyu Tolgoi, underground expansion plans are being put on hold indefinitely, because the country’s parliament is in summer recess and it won’t be a simple rubber-stamp approval upon their return.
Moreover, there are still a number of other sticking points that have to be worked through, such as cost overruns and employment and pay issues for mine workers, as well as corporate governance concerns, taxation, and the repatriation of earnings. The government has termed these items as “22 points of dispute,” and they’ve been a source of contention for some time, with Turquoise Hill Resources Ltd (NYSE:TRQ), which owns the other two-thirds of the Oyu Tolgoi and in which Rio Tinto acquired a near-51% ownership stake.
Since these issues aren’t likely to be resolved quickly, considering how long the dispute has been simmering, Rio Tinto plc (ADR) (NYSE:RIO) resolved to shelve the planned $5 billion expansion until they do reach a settlement and a new timetable is set.
Oyu Tolgoi is one of the five largest copper projects in the world, expected to produce between 75,000 and 85,000 tonnes of copper concentrates this year. It’s anticipated that the project, should it ever get moving fully, is expected to boost the country’s economy by 35% by 2020.
Yet Rio Tinto and Turquoise Hill Resources Ltd (NYSE:TRQ) aren’t alone in their plight, as governments around the globe have greedily tried to amend their contracts with miners and extract more profits from projects as commodity prices soared.
Shares of Turquoise Hill Resources Ltd (NYSE:TRQ) tumbled 12% yesterday, after Rio Tinto announced the expansion work suspension, and analysts see delays now extending to 2018 or beyond. With the Mongolian government trying to artificially sweeten its take, the future profit potential for the mining subsidiary looks bleak.
The article Turquoise Hill Tainted by Oyu Tolgoi originally appeared on Fool.com is written by Rich Duprey.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Vale.
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