- Oyu Tolgoi underground expansion could now cost $6.75bn, up from a previous $5.3bn estimate
- Mining expected to begin in 2022, although funding and permitting issues remain
Rio Tinto (RIO) has put a new price tag on the project that will largely define it over the coming years, the Oyu Tolgoi underground copper mine. While its iron ore division has been the source of huge profits of late, as well as a scandal that compelled chief executive Jean-Sebastien Jacques to resign after a sacred Aboriginal site was destroyed, the company has already committed over $10bn (£7.4bn) into the Mongolian copper project.
RBC Capital Markets forecasts the mine will make up 7 per cent Rio’s attributable cash profits in 2028, when it ramps up to 480,000 tonnes (t) of copper a year.
The red metal’s importance will also grow due to the energy transition, which is set to place huge demand on the commodity in grid electrification and renewable power. Once complete, the Oyu Tolgoi underground operation will also be the fourth-largest copper mine in the world, according to Rio.
Building the mine section of the mine will now cost $6.75bn, compared with the previous $5.3bn estimate. Oyu Tolgoi's current output is from its open pit operation, but in order to keep producing copper Rio has to move underground.
This will be through a block cave system, where large areas underground are blasted so ore can be removed. While this is an established way to mine copper, Rio announced last year it would have to alter the mine plan because of “difficult ground conditions”.
RBC analyst Tyler Broda flagged funding and Mongolian sign-off as hold-ups to this new plan working perfectly, but said he expected “a resolution to the outstanding issues [would] eventually be achieved and Oyu Tolgoi will become a key contributor to Rio’s Ebitda”.
The miner operates Oyu Tolgoi through its 51 per cent holding in Turquoise Hill Resources (Can:TRQ), which owns 66 per cent of the copper project. In a further twist, Turquoise Hill has opened arbitration proceedings with Rio over the funding of the underground mine.
Minority shareholder in Turquoise Hill, Pentwater Capital Management, also recently accused Rio of acting against it and other holdings of Turquoise Hill shares by pushing for an equity raise to fund the Oyu Tolgoi overrun. Turquoise Hill said in September it would need to raise between $1.7bn and $3.6bn, against its current market capitalisation of $2.4bn.
In the update, Rio said the Mongolian government had not yet signed off on the new feasibility study for the mine.
The miner is riding high on the iron ore price right now, and copper’s price strength should also boost 2020 earnings. There are still questions over this project and its iron ore division following Juukan Gorge, however. Hold at 5,604p.
Last IC View: Hold, 4,992p, 11 Sep 2020
