The cost of expanding Rio Tinto’s Mongolian copper project could be cut by almost USD 1 billion under a surprise Mongolian government plan that could increase the host nation’s long-term influence over Rio and the project.

The Mongolian government has told the Rio subsidiaries building the USD 6.8 billion Oyu Tolgoi copper expansion that it plans to build a state-owned coal-fired power station that would provide a long-awaited domestic power source for the mine.

The latest curveball from the Mongolian government comes barely a month before parliamentary elections in the developing nation, and a week before Mongolian courts hear charges against the government officials who signed the 2015 agreement that underpins the Oyu Tolgoi expansion.

The existing mine at Oyu Tolgoi is powered by coal-fired electricity that is imported from neighbouring China, but Mongolia has demanded that Rio find a domestic power source before June 30, 2023.

Rio flagged in February that a USD 924 million coal-fired power station was the most likely domestic solution, although it indicated it would not be finished before June 2024.

The Mongolian government disagreed with Rio’s USD 924 million power station proposal, and has since told Rio and its subsidiaries that it plans to build a state-owned power station at the Tavan Tolgoi coalfields. The surprise move has both short-term and long-term ramifications for Rio and the Rio subsidiary that owns 66 per cent of Oyu Tolgoi, Turquoise Hill Resources.

A government-funded power station would reduce Rio and Turquoise Hill’s near-term spend on the project; a prospect that would appeal to minority investors in Turquoise Hill given the company needs to raise “at least USD 4 billion” in further funds to cover cost and schedule blowouts on the Oyu Tolgoi expansion.

But a government-controlled power station would give the government a long-term source of leverage over the mine project, which could be important given the fractious nature of Mongolia’s relationship with Rio. The government is also understood to believe it can build such a power station cheaper than the USD 924 million price tag suggested by Rio and its subsidiaries.

Turquoise Hill said it was broadly supportive of the government-owned proposal, subject to further agreement over the commercial terms for the supply of power and construction timelines. Rio and its subsidiaries would likely need a guarantee they can continue importing power from China until the Mongolian government power station was built, suggesting the June 2023 deadline for Rio to find a domestic power source could be extended.

The cost blowout range was tightened to between USD 1.3 billion and USD 1.8 billion, with USD 1.5 billion being the company’s best guess at this stage. If Turquoise Hill is correct on those estimates, the construction cost would amount to USD 6.8 billion excluding the cost of the power station, and first sustainable production would occur about the middle of 2023.

In 2012, Rio was expecting to have the Oyu Tolgoi underground expansion complete and in production by 2015. (Financial Review)