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Rio ‘Confident’ of Securing China Power Supply for Oyu Tolgoi

Rio Tinto Group, developing a $6.2 billion copper-gold mine in Mongolia, is certain of reaching a power-supply agreement with China for the project scheduled to start production next year.

“The negotiation is going well,” Andrew Harding, chief executive officer of the London-based company’s copper unit, told reporters today in Parkes, Australia. “I’m very confident the negotiation will deliver the outcomes that I need. The power supply line is ready to go.”

Turquoise Hill Resources Ltd., a unit of Rio Tinto, said Aug. 15 it expects talks with the Mongolian and Chinese governments for a power agreement to be expedited and supply to be available during the third quarter. Should talks fail, Oyu Tolgoi, located close to the Chinese border, would need to build its own power plant, delaying the start, it said.

Oyu Tolgoi may produce 60,000 to 70,000 metric tons next year, Harding said, without mentioning when he expects a power supply agreement. The mine, due to start during the first half, will have an average annual output of 425,000 tons of copper and 460,000 ounces of gold. Rio produced 520,000 tons of copper last year, according to its annual report.

Rio this month reported a 22 percent drop in first-half profit and is assessing spending plans on new operations, joining rivals BHP Billiton Ltd. and Xstrata Plc.

“We’ve taken and are taking a full look at the portfolio and being very sensible about the rate of spend at some of the projects,” Harding said, specifying there are no changes planned for Oyu Tolgoi.

Chop, Change

For mines yet to reach production stage, such as Resolution in the U.S. or La Granja in Peru, “you have the ability as the manager of the projects to chop, to change the delivery dates of particular packages of work,” he said.

Rio expects global copper demand to grow 25 percent to 25.5 million tons by 2020, it said on its website. The global copper outlook remained positive, driven by industrialization and producers struggling to bring on new supply, Harding said.

Increased copper production from Oyu Tolgoi will help diversify Rio Tinto’s income stream. Iron ore provided 78 percent of profit last year, followed by copper with 12 percent.

“By 2014, we estimate copper will make up a quarter of Rio’s earnings and iron ore 60 percent, so Oyu Tolgoi certainly helps,” Lyndon Fagan, a Sydney-based resources analyst with JPMorgan Chase & Co., said by phone. “We’re certainly positive on the outlook for copper as supply from existing mines falls as grades decline.”

Rio Tinto also owns copper operations in the U.S., Papua New Guinea, Australia, Peru and South Africa.

Northparkes, located in Parkes, New South Wales state, last year produced 50,000 tons of copper. Rio owns 80 percent of the operation and Sumitomo Corp., the remainder.

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