Rio Approves $5.3 Billion Oyu Tolgoi Copper Mine Expansion

  • Output from underground site in Mongolia will begin in 2020
  • Long-term outlook is strong for copper, Rio deputy CEO says

Rio Tinto Group and its partners approved a $5.3 billion expansion to more than double output at the Oyu Tolgoi copper and gold mine in Mongolia as producers race to meet a forecast global deficit by the end of the decade.

Work on the project will begin from the middle of this year and first production from the underground mine is expected in 2020, London-based Rio, the world’s-second biggest mining company, said Friday in a statement. When the underground is fully ramped up in 2027, Oyu Tolgoi is expected to produce more than 500,000 metric tons of copper a year.

Shares of Turquoise Hill Resources Ltd., which owns 66 percent of the deposit, jumped 8.7 percent to C$3.74 at 11:46 a.m. in Toronto, after earlier climbing as much as 13 percent, the biggest intraday increase since February. Rio Tinto controls Turquoise Hill through a 51 percent equity stake, according to data compiled by Bloomberg.

As the big miners look to a rebound in commodities, Rio and rival BHP Billiton Ltd. have identified copper as a key focus for growth, flagging the metal as a priority by examining potential deals and allocating project spending. On Friday, OZ Minerals Ltd. unveiled a revised A$975 million ($718 million) plan to begin output from Australia’s biggest undeveloped copper deposit by 2019.

“Long-term copper fundamentals remain strong,” Jean-Sebastien Jacques, Rio’s deputy chief executive officer, said in the statement. “Production from the Oyu Tolgoi underground will commence at a time when copper markets are expected to face a structural deficit.” Jacques will become CEO in July, replacing Sam Walsh.

Oyu Tolgoi, about 80 kilometers (50 miles) north of the Chinese border, will rank as the third-largest in the world at full production, according to Wood Mackenzie Ltd. The site is forecast to produce 175,000 tons to 195,000 tons of copper in concentrate in 2016.

A rising number of middle-class consumers in emerging markets will boost copper demand as they add appliances containing the metal, Gavin Wendt, Sydney-based founding director at MineLife Pty, said by phone before the announcement. China will need an extra 15 million tons by 2025 just for wiring in its expanded power grid, Rio said last year.

A shortfall of the metal should emerge later this decade, according to Rio’s Jacques, while Freeport-McMoRan Inc., the largest publicly traded copper producer, sees the market in deficit as soon as next year. Jacques, who won promotion after negotiating the financing of the Oyu Tolgoi upgrade with a group of 20 lenders, sees the metal as central to Rio’s growth. “We will see a new metals age, with copper at the center,” he told a Bloomberg event in London in October.

BHP is studying a $2.2 billion option to expand its Spence operation in Chile to extend its life by about 50 years, while the Melbourne-based producer and Rio are progressing the approvals process for their Resolution joint copper venture in Arizona. BHP CEO Andrew Mackenzie sees “significant upside” in copper as demand outpaces declining supply.

Grasberg Venture

Rio’s expansion in Mongolia, together with growth at operations including the Grasberg joint venture in Indonesia, will double the producer’s total annual copper output to about 1.1 million tons over the next decade, according to Deutsche Bank AG. Rio, the world’s seventh-largest copper producer in 2015, got 11 percent of earnings from the metal last year, compared with almost 60 percent from iron ore.

Progress on Oyu Tolgoi’s underground extension, where about 80 percent of the deposit’s mineral wealth is located, stalled in mid-2013 amid disagreements over taxes and cost overruns that were resolved last May. A $4.4 billion financing package with lenders including the Export-Import Bank of the United States, BNP Paribas SA and Standard Chartered Plc was finalized in December. The project’s cost compares with an estimate in December of between $5 billion and $6 billion.

The parties have agreed a senior debt cap of $6 billion, providing the option for $1.6 billion of supplemental senior debt.

Mongolia’s state-owned Erdenes Oyu Tolgoi LLC holds the share of the mine not owned by Turquoise Hill.

(A previous version of this story corrected a misspelling in the first deck headline.)

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