Mongolia banking on extra $300m in Rio royalties standoff

Mongolia expects to squeeze at least an extra $303 million out of Rio Tinto this year, as part of the royalties stand-off that is threatening to stall development of the massive Oyu Tolgoi mine.

Mongolia expects to squeeze at least an extra $303 million out of Rio Tinto this year, as part of the royalties stand-off that is threatening to stall development of the massive Oyu Tolgoi mine.

A World Bank analysis of the Mongolian government's budget for this year found the nation was expecting a revenue boost of 445 billion tugriks to come from a renegotiation of the Oyu Tolgoi investment agreement struck with Rio and its subsidiaries in 2009.

Rio, which has rejected any attempt to renegotiate the agreement, made reference to Mongolia's latest push for more royalties on Tuesday, when it announced a cost blowout and significant redesign of the copper and gold project.

"In its proposed 2013 budget, the government of Mongolia has included revenue from the application of a progressive royalty scheme to Oyu Tolgoi. However, the investment agreement provides a stabilised royalty rate of 5 per cent over the life of the agreement," Rio subsidiary Turquoise Hill Resources said.

The stand-off is not the first time Mongolia has sought to rewrite the agreement, but as the budget papers show, it looms as potentially the most determined effort yet.

Oyu Tolgoi is due to sell its first copper concentrate in June, but the stand-off may delay this, and could also push back a financing package for the $US5.1 billion ($4.87 billion) second stage of the mine, which ranks as Rio's most important growth project.

Turquoise Hill chief executive Kay Priestly said the concern for the government had been the sharp rise in construction costs for the second phase, which was set to cost almost $US7 billion until this week's design changes scrapped plans to expand the concentrator and build a power station.

Those changes might have eased the soaring cost of construction, but they have also ensured Oyu Tolgoi will be a smaller, less profitable mine once it is operating.

The cost of power would rise four-fold under the new plan to purchase it externally rather than from an on-site power station, and overall operating costs were expected be to 37 per cent higher.

Ms Priestley said the government, which holds a 34 per cent stake in the mine, was also concerned about the mine's operating budget, project financing and governance.

Under the 2009 agreement, Mongolia does not have to provide its 34 per cent share of construction costs up front, but will not get dividends until that amount has been recovered. It will pay its share of construction costs by forgoing early dividend flows.