For nearly two decades, the relationship between Mongolia and Rio Tinto has defined the country's investment story. The 2009 Oyu Tolgoi Investment Agreement unlocked one of the world's largest copper-gold deposits and attracted billions of dollars in foreign capital, but it also became one of Mongolia's most politically contentious contracts.

Today, as underground production approaches full ramp-up and copper markets remain structurally attractive, Mongolia has returned to the negotiating table with significantly greater leverage. Unlike previous rounds of discussions that focused primarily on keeping the project moving, the latest negotiations have centered on redistributing long-term economic benefits rather than preserving investment certainty.

Recent negotiations culminated in a new financial agreement between Rio Tinto and the Mongolian government that reduces management fees, lowers shareholder loan interest rates and commits both parties to continue discussions over the unresolved Entrée Resources joint venture licenses. While the agreement removes several long-standing points of friction, the most strategically important issue, the fiscal treatment of the Entrée license areas remains unresolved and will likely determine how much value Mongolia ultimately captures from future underground production.

A New Political Environment

The current negotiations differ fundamentally from those that produced the original Investment Agreement in 2009.

The underground mine is now operational, Oyu Tolgoi is expected to become one of the world's largest copper producers over the coming decade, and higher copper prices have significantly increased the project's long-term economic value. At the same time, Mongolia has become increasingly focused on ensuring strategic mineral assets generate larger domestic economic returns.

Parliamentary Resolution No. 120 formalized this objective by directing the government to renegotiate several aspects of the Oyu Tolgoi framework while providing regular progress reports to Parliament. Rather than reopening the entire Investment Agreement, the government's strategy has been to renegotiate financial terms that directly influence Mongolia's eventual returns from its 34% ownership stake.

Management Fees Become an Early Victory

One of the government's primary objectives was reducing Rio Tinto's management fees.

Mongolian negotiators initially sought a 50% reduction, arguing that management-related charges had steadily increased through various supplementary agreements and materially reduced the project's profitability.

Following months of negotiations, Rio Tinto agreed to halve its management fees. Government officials estimate the change could improve Mongolia's economic share by approximately US$1.5 billion over the life of the project through lower operating costs and the elimination of duplicate charges.

While the reduction appears modest in percentage terms, it is significant because management fees directly reduce distributable profits. Since Mongolia does not expect dividends until well into the project's mature operating phase, lowering operating costs today increases future cash flows available to shareholders.

Lower Financing Costs Improve Long-Term Economics

The second major breakthrough involved shareholder loan financing.

Mongolia's 34% ownership stake has largely been financed through shareholder loans, with interest historically calculated at approximately LIBOR plus 6.5%. Successive project delays, cost overruns and compound interest significantly postponed the timeline for Mongolia to receive dividends.

The revised agreement reduces the shareholder loan interest rate by roughly 2.5-2.6 percentage points to approximately 7.9% while shortening future review periods from seven years to three years. Rio Tinto described the lower rate as reflecting the project's reduced risk profile as underground production advances.

Although Mongolia originally sought substantially lower financing costs, the negotiated reduction still represents one of the most meaningful financial concessions obtained since the project began and improves the long-term economics of the government's equity position.

The Entrée Licenses Remain the Key Outstanding Issue

Despite progress on financial terms, negotiations over the Entrée Resources joint venture remain unresolved.

The dispute centers on the Shivee Tolgoi and Javkhlant mining licenses, which are held through the Entrée/Oyu Tolgoi joint venture and contain strategically important underground mineral resources required for future mine development.

The core disagreement is not geological but fiscal.

Rio Tinto argues these license areas should continue operating under the stabilization provisions contained within the original 2009 Investment Agreement. Under that framework, production would remain subject to the project's stabilized 5% royalty regime.

Mongolian policymakers, however, have explored replacing the state's equity option within these licenses with a higher mineral royalty structure under current legislation. Such an approach would subject future production to a materially higher progressive royalty regime while increasing direct fiscal revenues to the government.

The outcome carries implications well beyond the Entrée licenses themselves. It will establish an important precedent for how Mongolia balances investment stability against evolving expectations for resource nationalism and fiscal participation.

Recognizing the significance of the issue, Parliament has postponed broader discussions regarding copper royalty reforms until negotiations over the Entrée licenses are completed.

The Tax Dispute Has Not Been Resolved

Another issue that continues to complicate relations is Oyu Tolgoi's tax dispute with Mongolian authorities.

Earlier this year, Oyu Tolgoi transferred approximately MNT 1.6 trillion (around US$440 million) to the Mongolian State Treasury following tax assessments covering previous fiscal years. The payment attracted significant public attention and was widely presented as evidence of progress in government negotiations.

However, the legal position remains unchanged.

Rio Tinto and Oyu Tolgoi continue to dispute the assessment and maintain international arbitration proceedings. The payment was made to comply with domestic legal requirements while preserving the company's legal rights during the dispute resolution process.

Consequently, although the transfer provided a political victory for the government, it does not represent final settlement of the underlying tax case. A definitive resolution will depend on ongoing legal proceedings.

A More Assertive Negotiating Strategy

The latest negotiations illustrate a broader shift in Mongolia's approach toward strategic mining assets.

Rather than questioning foreign investment itself, policymakers have increasingly focused on improving the distribution of economic benefits through lower financing costs, reduced operating expenses and potentially higher fiscal participation.

For Rio Tinto, preserving investment stability while maintaining constructive relations with Mongolia has become increasingly important as Oyu Tolgoi approaches peak underground production. The company has therefore shown greater willingness to make financial concessions than in previous negotiation rounds.

Nevertheless, analysts caution that political risks remain elevated. Public pressure for greater national benefits continues to increase, particularly as copper prices strengthen and Oyu Tolgoi moves closer to producing around 500,000 tonnes of copper annually. Recent protests temporarily disrupting concentrate exports demonstrate that mining remains politically sensitive despite the latest agreement.

CMM Insight

The latest agreement represents the most meaningful recalibration of the Oyu Tolgoi partnership since the comprehensive reset reached in 2022. Reductions in management fees and shareholder loan interest rates should improve Mongolia's long-term economic returns while allowing Rio Tinto to preserve operational certainty during the underground mine's critical production ramp-up.

However, the negotiations are not over.

The unresolved treatment of the Entrée Resources licenses remains the most consequential issue still on the table. Beyond determining the fiscal framework for two strategically important mining licenses, the outcome will signal how Mongolia intends to balance contractual stability with growing domestic expectations for a larger share of mineral wealth.

For investors, the recent agreement reduces some near-term political uncertainty but does not eliminate it. As Oyu Tolgoi enters its next phase of production growth, the project's long-term investment case will increasingly depend not only on copper prices and operational execution, but also on whether Mongolia and Rio Tinto can establish a durable fiscal framework that satisfies both shareholder returns and national economic priorities.