RE:August Corporate Presentation Also worth considering when thinking about time pressures and the possible advancement of development of Lift 2 and/or Heruga, plus potential mill capacity expansion are the terms of the 2009 Investment Agreement concerning ownership of OTLLC.
That agreement, which stabilized taxes and duties to be paid by OTLLC, has an initial term of thirty years, ie. until 2039, at which time Rio Tinto and Mongolia may negotiate an extension for another 20 years, provided (and this may be significant), that Mongolia shall have the option of acquiring a further 16% of the shares of OTLLC at that time. It is not crystal clear reading the Investment Agreement and the Shareholders Agreement how Mongolia will negotiate and pay for (or not!) the additional 16% equity in the project. Rio Tinto even if reduced to 50% ownership will maintain a casting vote and control of management of OT for the 16 year extension period by the terms of the existing agreements.
Having seen the turmoil and negotiations surrounding the build-out financing of OT to date, and the significant disputes between Rio Tinto and Mongolia concerning additional financings which were compounding debts from Mongolia and would have deferred and reduced free cash flow from OTLLC dividends until forgiven in 2022, you can imagine the renegotiations in 2039 may be challenging. In fact, it is possible, perhaps even probable, that Rio Tinto may make any significant additional capex investment in OT - such as developing Heruga, advancing Lift 2, substantially expanding the mill throughput capacity, contingent upon further clarification of the terms of future ownership, the terms of compensation for any additional equity ownership purchase or acquisition by Mongolia, plus further optional extension periods beyond the additional 50 year period of tax stability.
The point isn't that there is uncertainty beyond 2039, it is that Rio Tinto has a substantial incentive to maximize the profitability of OT for the next 15 years. There were at least two negotiating slowdowns and halted development periods due to governance disputes with Mongolia, plus the technical and construction delays in development of Lift 1, that have already eaten up half of the 30 year period of potential 66% ownership by Rio Tinto.
Seems to me they will have a significant incentive to advance development of Lift 2 to commence in 2036 or 2037, but not without first negotiating with Mongolia the terms of ownership, tax stability, and extension of tax stability that will operate for the period 2039 to 2059, and beyond that as well. In particular if, and the probabilities seem good, it is the case that Lift 2 extends north along strike a significant further distance (perhaps contiguous another 700m to the intersections ETG interpreted as a potential continuation of the same mineral deposit) then Rio Tinto will be in an interesting position to go and present the option of further capital investment to the Mongolians to increase output and revenue earlier, but only if there are reasonable protections in place to maintain a fair financial arrangement that accommodates extended periods of amortization and depreciation of further investment.
Point being, fifteen years is not that long a period when contemplating multi-billion dollar developments, the clock really is ticking on Rio Tinto's longer term plans and the optionality of expansion of OT revenue.
The pre-TRQ demeanour towards ETG which appeared to be "you can pound sand", and fruitless attempts over the 15 years from 2009 to present to clarify ETG's position, including a halting of any significant drilling on the JV ground, has taken on a new life. A consolidation of ETG into the OTLLC framework seems to be a "next-step" before serious negotiation with Mongolia concerning potential expansion of OT output capacity, which would then enable accelerated development of Lift 2 (perhaps a much larger Lift 2 if it is significantly larger as confirmed by drilling) and Heruga.
The optionality issue impacts the value of ETG to OTLLC, which impacts valuation. However, if Rio Tinto has contemplated additional investment to expand the production guidance out of OT, the "deliverable" to Mongolia of 34% of ETG may be an outstanding unfinished transaction in the initial structuring of ownership and taxation that needs to be addressed sooner rather than later, and surely before they approach Mongolia to discuss the terms upon which they are going to extend the project into the future.
To me ... tick tick tick.
cg