Rio Tinto Considering Doing Nothing on Oyu Tolgoi

As explained before, Rio Tinto has some very simple leverage against the unreasonable requests of the Mongolian government to get a larger share of the profit.

They can just do nothing. That in turn will lead to zero profits, and zero revenue for the Mongolian government from the mine, much different from what they expect in their budget plans.

In the short term, this loses some money for Rio Tinto. But in the long term, they have a strong interest to show all developing country governments world wide that they are not going to be pushed around, and that attempts at getting greedy over what was agreed on will backfire.

Actually, it is the same for Mongolia. In the short term, it may look like a good idea to try to get some extra coin from this big investor. But in the mid term and long term, it will obviously delay development if investors need to reasonably conclude that the Mongolian government is unworthy of trust.

Therefore, it was very interesting to read at Bloomberg that Rio Tinto is considering doing exactly that. They are thinking about a “temporary halt of construction work”. Thanks to this Tweet by BDSec for the link.

In a contest on which party can hold its breath for the longer time, Rio Tinto will always win.

And the way to resolve the issue is for Rio Tinto to give the Mongolian government some more money, as long as it is clear that this is just an advance on future expected earnings.

 

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

3 thoughts on “Rio Tinto Considering Doing Nothing on Oyu Tolgoi

  1. “unreasonable requests of the Mongolian government”?

    I would be reluctant to apply terms like “unreasonable” to any kind of situation like this and would be reluctant to do so for both sides of this particular negotiation. That is a judgement and value call on your part, but there is no obvious standard to judge reasonableness by, esp. when the prosperity and development of a country hinge on these decisions.

    I also think that your analysis of the short-term and long-term gains and losses for both sides is missing an important piece: that is managing expectations in Mongolia and their political implications. As I argued on the FT’s ‘beyond brics’ recently (http://blogs.ft.com/beyond-brics/2013/02/05/guest-post-mongolia-doesnt-have-resource-nationalism-for-now/) there is a very real risk that Rio Tinto’s reaction, including the frequent reference to an non-existent (at least as a political movement with any coherent ideology) to ‘resource nationalism’, will breed just that, i.e. a unified movement that leads to the Mongolian government digging in its heels, not acting like a shareholder, but more like a sole owner of OT, at least in their own mind.

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  2. My standard for calling the position of the Mongolian government “unreasonable” is the simple fact that they don’t seem to be willing to keep the promises they made in the Investment Agreement.

    Where I come from (law), that is not something viewed favorably. Pacta sunt servanda.

    Of course one may also ask what the point of “renegotiating” the Agreement is, if the result of that can’t be expected to be followed through with by the Mongolians.

    I have read your article (though I did not have time to blog about it at the time). It may well be that the political climate in Mongolia becomes even worse than it has in the last couple of months. That would be unfortunate, since any multi-trillion dollar renewable energy project in the Gobi desert would need to steer clear of the country and use only the Chinese side. Already under present conditions I don’t think that Mongolia is a safe country for foreign investment right now.

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