Rio Unit Readies $2.4 Billion Rights Offer for Mine

Turquoise Hill Resources Ltd., the Rio Tinto Group unit that produces copper in Mongolia, may go ahead with a $2.4 billion share offer after it failed to arrange funding to expand its Oyu Tolgoi mine.

Turquoise Hill, which owns 66 percent of Oyu Tolgoi, was unable to obtain long-term project financing because of uncertainty about when it will resolve disagreements with its other shareholder, Mongolia’s government, the Vancouver-based company said yesterday in a statement.

Turquoise Hill “remains committed to obtaining project finance to fund the development of the Oyu Tolgoi project and is engaging with the government of Mongolia to achieve this,” according to the statement.

Oyu Tolgoi, located 80 kilometers (50 miles) north of the Chinese border, is forecast to account for about a third of Mongolia’s economy when in full operation. Rio, which has a 51 percent stake in Turquoise Hill, in July delayed work on the underground expansion, which is expected to cost about $5.1 billion, until discussions with the government on funding and other issues are resolved.

Oyu Tolgoi’s shareholders are discussing four outstanding issues, Turquoise Hill Chief Executive Officer Kay Priestly said on a conference call. These relate to the sharing of the mine’s wealth, clarifying its construction costs, concerns over long-term access to water, and the timing and approval of the feasibility study for its expansion, which should be completed in the first half of 2014, she said.

Discussions Continue

“Rio Tinto confirms that it is in continuing discussions with the government of Mongolia in relation to a number of issues concerned with the development and operation of Oyu Tolgoi,” London-based Rio said in an e-mailed statement. “Good progress is being made but there is still more to be done.”

The suspension led to the layoff of about 1,700 workers at the mine, Rio said in a statement in August.

Turquoise Hill shares fell 7.8 percent to C$4.27 in Toronto yesterday. They’ve dropped 44 percent this year. Rio was little changed in Sydney trading today at A$65.01.

While Rio, the world’s second-biggest mining company by market value, and the government of Mongolia have cleared up some of their disagreements, the two sides have yet to resolve “broad” issues related to cost overruns and the project’s long-term financing, Davaadorj Ganbold, one of three Mongolian nationals on the board of Oyu Tolgoi LLC, said in an Oct. 27 interview in the capital Ulaanbaatar.

Credit Facility

Turquoise Hill said yesterday it and Rio agreed to extend the maturity date on an interim credit facility to no later than Jan. 15 to provide time to complete the rights offer. The rights offer may raise as much as $2.4 billion, it said in a separate filing.

Commercial output at Oyu Tolgoi started in July, although Chinese customs delayed deliveries to customers for more than three months before releasing the first batch of concentrate from a bonded warehouse in China last month.

Production of copper in concentrates at the mine is proceeding, with output expected to be between 72,000 and 77,000 metric tons this year, according to the statement. The mine’s concentrator is operating at full nameplate capacity of 100,000 tons of ore per day. Concentrates are semi-processed ore that’s shipped to smelters.

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