Mongolian mining

The Government of Mongolia and Rio Tinto have agreed to amend the agreement governing the relationship between the shareholders of the Oyu Tolgoi project. The changes are expected to reduce project costs and increase Mongolia’s future returns.

Prime Minister N. Uchral and Rio Tinto Chief Executive Simon Trott jointly announced the agreement in Ulaanbaatar on September 11. It represents one of the most significant changes to the Oyu Tolgoi arrangements since the original agreements were signed 17 years ago. The Oyu Tolgoi Investment Agreement was signed in 2009, followed by a revised Shareholders’ Agreement in 2011.

According to the government’s estimates, the revised arrangements could reduce Oyu Tolgoi’s total costs by approximately 30 trillion tugriks, or $8.4 billion. At the same time, Mongolia’s projected benefits over the life of the project are expected to increase by approximately 13 trillion tugriks, or $4 billion, the government said. This is not a one-time cash payment to Mongolia, but an estimate of future returns.

The cost reductions are expected to come from measures including lower management service fees, the removal of duplicated costs and a reduction in the interest on shareholder loans extended to Oyu Tolgoi. The Mongolian side said approximately 8 trillion tugriks of the estimated savings relate to management costs, while 22 trillion tugriks are linked to interest expenses.

The timing of Mongolia’s first dividend payments from Oyu Tolgoi remains one of the key issues. Under an earlier agreement reached by the parties on June 30, they agreed to work together to bring forward the start of dividend distributions. At the time, the government said Mongolia could receive dividends in 2026. Under the new agreement reached in September, however, the parties agreed to work toward beginning dividend distributions in 2027.

The amount of the dividends and the detailed terms for their distribution have yet to be finalized. B. Telmuun, chief executive of Erdenes Oyu Tolgoi, said in an interview on September 22 that a joint working group was addressing the issue and that Mongolia had expressed its position that it should receive dividends based on the project’s 2026 financial results. He stressed, however, that the detailed arrangements still needed to be negotiated.

Discussions are also under way on how future Oyu Tolgoi dividends should be used, in coordination with the 2027 state budget. The government has estimated that 3 trillion tugriks in revenue from Oyu Tolgoi dividends will be collected in next year’s budget. It is also considering allocating part of the dividend income to heating plants in the provinces and to heating and energy infrastructure projects in Ulaanbaatar.

However, this revenue would not be sufficient to fully ease pressure on the state budget. The 2027 draft budget projects revenue of 41.3 trillion tugriks and expenditure of 43.6 trillion tugriks, resulting in a projected deficit of 2.306 trillion tugriks.

Oyu Tolgoi’s production outlook remains a key factor in determining the project’s future returns. Rio Tinto says the mine is expected to produce an average of 500,000 tonnes of copper a year between 2028 and 2036. This is a production target calculated on the basis of 100 percent ownership of the project. Actual output, copper prices, project costs and other factors will affect the amount of dividends Mongolia ultimately receives.

Oyu Tolgoi is a joint project in which the Government of Mongolia holds a 34 percent stake and Rio Tinto owns 66 percent. Rio Tinto operates the project and says Oyu Tolgoi has paid Mongolia a total of $6.1 billion in taxes, fees and other payments since 2010.

The new agreement does not mean that the long-running dispute over Oyu Tolgoi’s benefits to Mongolia’s economy has been fully resolved. Instead, the parties have moved forward on several issues, including interest costs, management expenses and the timing of dividend payments, and are entering the next stage of finalizing the detailed terms for future dividend distributions.