In the middle of the Gobi Desert in Mongolia, Rio Tinto’s flagship
$5.2-billion (U.S.) copper-gold mine stands nearly completed except for one
thing: The mine is waiting for the power to be switched on.

The Oyu Tolgoi mine, which holds the world’s largest undeveloped copper
deposit, has been caught in the middle of a complex negotiation between China
and Mongolia. The two sides are trying to reach a deal under which the mine,
which is close to the Chinese border, would buy electricity from the Chinese
grid.

A spokesperson for Rio Tinto Group said: “Active discussions are continuing
on the commercial agreement. You have to remember this is a complex deal but we
are maintaining our focus and working hard towards reaching an agreement.”

But for now, the copper concentrator at Oyu Tolgoi sits idle after a
multibillion-dollar, three-year construction effort. The power lines from China
to the mine have been built and tested, according to Rio Tinto, but the two
sides have not been able to reach an agreement over the commercial terms of the
power supply contract despite several years of negotiations.

The mine construction currently stands at 97-per-cent completion, and
further steps in the construction, such as fine-tuning the copper concentrator,
will require larger and larger amounts of power.

“In the absence of a power supply agreement they can’t turn the plant on and
start producing metal,” says Andrew Driscoll of CLSA. However he still believes
the power supply will come through without being a major disruption to
commissioning plans.

If the delay persists, the mine stands to miss out on roughly $8.4-million
per day in delayed revenues from copper and gold production, according to rough
estimates based on the mine’s first-year production forecast. The mine is
co-owned by Rio Tinto, Turquoise Hill Resources (formerly known as Ivanhoe
Mines) and the government of Mongolia, and run by Rio.

The plight of Oyu Tolgoi highlights the uneasy relations between Mongolia
and China, which is virtually Mongolia’s only customer for commodities exports.
Earlier this year, ties between the two countries soured when Chalco, a Chinese
state-owned metals company, attempted to purchase a large coal mine in the Gobi
desert and was met with fierce political opposition. Chalco eventually dropped
its bid.

The Oyu Tolgoi mine has also been coming under pressure from Mongolian
lawmakers who want to raise the country’s stake in the mine. Earlier this
month, 24 members of parliament submitted a petition to the prime minister
seeking to renegotiate the investment agreement that governs the mine.

Even though it has not yet begun production, the Oyu Tolgoi mine already
accounts for about 30 per cent of Mongolia’s $10-billion economy and is the
biggest foreign investment ever in the mineral-rich country.