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Rio Delays $5.1 Billion Mine Expansion Pending Mongolia Approval

Oyu Tolgoi's average annual production over 20 years from the open pit and planned underground mine is estimated at 430,000 metric tons and 425,000 ounces of gold, Rio said this month. Photographer: Tomohiro Ohsumi/Bloomberg
Oyu Tolgoi's average annual production over 20 years from the open pit and planned underground mine is estimated at 430,000 metric tons and 425,000 ounces of gold, Rio said this month. Photographer: Tomohiro Ohsumi/Bloomberg

July 30 (Bloomberg) -- Rio Tinto Group, the world’s second-biggest mining company, said it’s delaying work on a $5.1 billion underground expansion of its Oyu Tolgoi copper mine, pending financing approval by Mongolia’s parliament.

“In view of the current uncertainty, including continued discussions with the government on a range of other issues, all funding and work on the underground development will be delayed until these matters are concluded and a new timetable has been agreed,” London-based Rio said yesterday in a statement.

Rio earlier this month made its first commercial copper shipment from the mine, which has so far cost $6.6 billion to build, after two postponements as Mongolia sought to ensure that revenue from the project passed through domestic banks. Earlier tensions included Mongolia seeking a bigger stake in the project and new mining royalty rates, which the company rebuffed. The two have also clashed over cost over-runs, tax payments and a lack of local participation in management.

Yesterday’s announcement means the start of the underground mine is likely delayed two years to 2018, “pushing back cash flows and profits from the operation,” BMO Capital Markets analyst Tony Robson said in a note to clients. “The underground was, and is, vital to provide a real return on equity.”

The mining company’s stock gained 0.7 percent to 2,939.5 pence in London yesterday. The shares have fallen 16 percent this year. BMO sees “no further real progress” on talks with the government this year and predicts that the share price to be “range-bound for some time.”

Summer Recess

Rio controls Oyu Tolgoi through its 51 percent stake in Turquoise Hill Resources Ltd., which in turn owns owns 66 percent of the operation, located 80 kilometers (50 miles) north of the Chinese border. The government owns 34 percent of the copper and gold mine, which is forecast to account for a third of Mongolia’s economy.

“Rio Tinto has been notified by the government of Mongolia that the terms of the project financing provisionally secured for the underground development of Oyu Tolgoi will need to be approved by the Mongolian parliament,” Rio said, according to the statement. “The Mongolian parliament is currently in summer recess and the parliamentary approval process may take some time to work through.”

Rio is considering expanding Oyu Tolgoi, which would include building an underground mine and enlarging its concentrator, and could involve constructing a power station. The work may cost $5.1 billion, Turquoise Hill said in a March report.

Positive Development

Asking lawmakers to approve future funding should actually prove to be a positive development for the project, said Oscar Mendoza, managing partner at Mongolia Asset Management, an investment advisory group based in Ulaanbaatar.

“When the entire parliament is involved, then usually a project that is beneficial for all of Mongolia will likely get support,” he said. “It will be difficult to publicly oppose it.”

Oyu Tolgoi’s average annual production over 20 years from the open pit and planned underground mine is estimated at 430,000 metric tons and 425,000 ounces of gold, Rio said this month.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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