Ivanhoe staggers as Ouy Tolgoi costs balloon to $13 billion

Ivanhoe Mines gave up 6.3% on Friday, bringing its losses for the year to 28% as worries about its Oyu Tolgoi project – one of the richest copper and gold mines in the world – continue to mount.

By close of trade on the NYSE, Ivanhoe (NYSE:IVN) had given up 6.3% at $12.79, up from the day's low of $12.60, a loss of 7.5%. Ivanhoe stock is down from a peak above $28/share reached in February last year.

Investors were reacting to news of rising development costs for the Mongolian copper-gold-silver mine. A 513-page 'Development and Operations Plan Technical Report' released by Ivanhoe but not widely publicized forecasts not only higher mining and processing costs at Oyu Tolgoi but development delays and most worryingly, lower projected ore grades at what Reuters calls "one of the industry's most anticipated greenfield projects."

Ivanhoe has already spent over $5 billion on the 66%-owned project in Mongolia and the mega-mine, scheduled for production in Q3, is sucking up all of Ivanhoe's cash. Overall costs have now ballooned to $13.2 billion, up from $9.5 billion before.  Reuters reports it's not just Ivanhoe and partner on the project Rio Tinto that are dealing with rising costs:

"Shareholders are desperately concerned about capex inflation. Capex inflation without a concomitant increase in the underlying price of the commodity is not good and at the moment we are seeing commodity prices flat to down," analyst Des Kilalea at RBC Capital in London said.

At the peak of construction Oyu Tolgoi had 14,200 builders on site easily overshadowing the largest construction project in the US, the new World Trade Center with only 2,300. The life of the mine is set at 60 years.

In order raise funds for the 73%-built project, the company last week sold a controlling stake in its coal subsidiary in the Central Asian country to a Chinese consortium. Ivanhoe has also put up for sale its stake in Ivanhoe Australia where it has a number of copper-gold projects in various stages of development. The company also owns half of a private gold project in Kazakhstan.

World number three miner Rio Tinto took 51% control of Ivanhoe in January after Ivanhoe scrapped a controversial “poison pill” shareholder provision clearing the way for Rio, which already owned 49% of the Vancouver-based company, to do a complete takeover.

At the time Rio paid $20/share for the additional 2%.

In October Ivanhoe and Rio dodged a bullet when the Mongolian government said it was rethinking the 2009 deal that gave Ivanhoe Mines a 66% stake in Oyu Tolgoi and that it wanted half of the $6 billion project.

Ivanhoe shares plunged on the news, but the firm took a tough stance and after some desperate negotiations Mongolia backed off.

Oyu Tolgoi, which Ivanhoe has been advancing for the last 8 years, is one of the biggest mining projects in the world and will help turn Mongolia into the world’s fastest-growing economy with staggering GDP growth of 35%.

The mine is set to produce more than 1.2 billion pounds of copper, 650,000 ounces of gold and 3 million ounces of silver each year.