Commodities & Metals

Mongolian Mine Offers New Headaches for Turquoise Hill and Rio Tinto

Open pit mine
Source: Thinkstock
Vancouver, British Columbia-based Turquoise Hill Resources Ltd. (NYSE: TRQ) announced Monday morning that the company has received an audit report from the tax authority of Mongolia claiming the company owes unpaid taxes and penalties as a result of benefits that have been disallowed and were associated with the initial development of the Oyu Tolgoi copper and gold mine. Rio Tinto PLC (NYSE: RIO) owns a 50.8% stake in Turquoise Hill.

Turquoise Hill owns leases adjacent to the Oyu Tolgoi copper and gold property, as well as leases on a nearby coal mine through its SouthGobi Resources subsidiary. Turquoise Hill, formerly known as Ivanhoe Mines, essentially discovered the resource after acquiring the exploration rights from BHP Billiton PLC (NYSE: BHP) in 2000. Rio Tinto bought a stake in Ivanhoe in 2006.

The company’s Oyu Tolgoi project has been delayed by ongoing negotiations among itself, Rio Tinto and the Mongolian government. Turquoise Hill was forced to renegotiate financing arrangements earlier this year as talks with the government dragged on.

Oyu Tolgoi produced 76,700 metric tons of copper in 2013 and 157,000 ounces of gold. Copper production was expected to double in 2014 and gold production might have risen by between four and five times to as much as 750,000 ounces. The lagging negotiations have forced Turquoise Hill to cut its copper forecast to a range of 135,000 to 160,000 tons and its gold production estimate to a range of 600,000 to 700,000 ounces. The resource is estimated to have a life of at least 40 years, with 10-year average annual production of 332,000 metric tons of copper, 495,000 ounces of gold and 2.3 million ounces of silver.

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Turquoise Hill’s CEO said, “We strongly disagree with the claims in the audit report and are currently reviewing all options to resolve this matter. It is important that we protect our right of tax stabilization provided by the Investment Agreement.” Rio Tinto and Turquoise Hill are currently reviewing the tax claim and any element of the claim that amounts to a breach of the Investment Agreement will trigger a resolution process that could include international arbitration.

The company said it does not know what impact the tax claims will have on shareholders, but the completion of an underground feasibility study is “likely to be delayed” if the tax claims are not settled by June 30.

Turquoise Hill’s shares traded down about 3.6% in the noon hour on Monday, at $3.71 in a 52-week range of $2.93 to $4.73.

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