Rio Tinto confirms Mongolian expansion

KHANBOGD-SOUTH GOBI DESERT, MONGOLIA - OCTOBER 11: Trucks move tons of ore at the open pit mining area as a rainstorm approaches at the Oyu Tolgoi mine October 11, 2012 in the south Gobi desert, Khanbogd region, Mongolia. The Oyu Tolgoi (Mongolian for Turquoise Hill) copper and gold mine is a combined open pit and underground mining project. The site, discovered in 2001, is located approximately 550 km south of the Mongolian capital, Ulan-Batar in the South Gobi Desert. Turquoise Hill Resources (Formerly Ivanhoe Mines) and Rio Tinto signed a long-term comprehensive investment agreement with the Government of Mongolia in 2009 with the deal awarding Turquoise Hill Resources, whose majority shareholder is Rio Tinto, with a controlling 66 percent interest and The Mongolian Government with a 34 percent interest in the project. Rio Tinto provided a comprehensive financing package and assumed direct management of the project under an agreement with Ivanhoe Mines. Initial production from open pit mining is currently underway and commercial production is planned to start in first half of 2013. An 85million USD investment was earmarked for education and training projects, with Mongolians expected to constitute 90 percent of the work force when production begins in 2013. When Oyu Tolgoi starts fully operating Mongolia will be set to become one of the world's top copper and gold producers with production estimates of 450,000 tons of copper and 330,000 ounces of gold annually. Mongolia is currently the world's fastest growing economy with its GDP increasing by more than 17 percent last year and an estimated $1.3 trillion in untapped mineral resources. Oyu Tolgoi is Mongolia's largest foreign investment project and the country's biggest economic undertaking to date, which is projected to add one-third of future value to the country's GDP by 2020. (Photo by Paula Bronstein/Getty Images)©Getty

Trucks move ore at the Oyu Tolgoi mine in the south Gobi desert region of Mongolia.

Rio Tinto is moving ahead with a $5.3bn expansion of its Oyu Tolgoi copper mine in Mongolia, placing a bigger bet on long-term demand for the industrial metal but increasing its exposure to a country where it struggled for years to win approval for the project.

The board of the Anglo-Australian miner signed off on a plan to more than double output at Oyu Tolgoi to 500,000 tonnes annually over the next decade, making it one of the world’s largest copper mines.


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Rio controls the mine through its majority ownership of Canada-listed Turquoise Hill, which owns 66 per cent of the project with the remainder held by Mongolia’s government.

While copper prices are close to multiyear lows, miners including Rio expect a healthier outlook for the metal over the medium term, with falling output from existing mines.

One common piece of conventional wisdom in the industry is that a project the size of Escondida — the world’s largest copper mine, with more than 1m tonnes of annual production, where Rio is a minority shareholder — is needed each year just to keep pace with the natural decline from older mines.

Rio, one of the world’s largest miners of iron ore, has been expected to increase its focus on copper. The group recently said it would replace Sam Walsh, chief executive for the past three years, with Jean-Sébastien Jacques, who headed its copper operations over the same period.

Rio first invested in Mongolia more than a decade ago in the first, open-pit phase of Oyu Tolgoi, which went into production in 2013. But the miner battled with Mongolian authorities for several years over the terms for an underground expansion, which Rio said would bring more of the overall profits from the project.

Mr Jacques, who headed the last years of talks with Mongolia over the mine and will take over as Rio’s chief executive in July, said the Oyu Tolgoi expansion would mean “unlocking 80 per cent of its value”.

“Long-term copper fundamentals remain strong and production from the Oyu Tolgoi underground will commence at a time when copper markets are expected to face a structural deficit,” he said.

Myles Allsop, analyst at UBS, said Oyu Tolgoi was “still a high risk project” for Rio because of potential further disputes with Mongolia.

“We see a number of potential areas of contention medium term, including the use of cash, power supply, smelter construction, as well as taxes,” Mr Allsop said in a research note that also highlighted risks from the project’s reliance on a single customer — China — and the technical challenges of the underground development.

The expansion is one of the largest projects sanctioned by a global miner since commodities went into a sharp downturn. Across the industry, companies have been ratcheting back their capital spending. Rio’s annual investment budget for this year is $4bn, compared with more than $17bn in 2012.

But miners that do have funds to commit to projects are expected to benefit from cheaper production and labour costs than during the sector’s boom years, when skilled staff were scarce and machinery was in short supply.

Rio agreed $4.4bn of project financing for the development in December, with an option for a further $1.6bn of debt. The first phase of Oyu Tolgoi has already cost almost $7bn.

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