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Rio Tinto $4 billion financing deal for Oyu Tolgoi imminent — report

Rio Tinto $4 billion financing deal for Oyu Tolgoi imminent — reportA $4 billion finance package for the expansion of Rio Tinto’s (LON:RIO) Oyu Tolgoi copper and gold mine in Mongolia is likely to be approved this week in Ulan Bator, the capital.

Operator Turquoise Hills (TSE, NYSE:TRQ), which owns 66% of the massive project in the Gobi Desert, has long forecast that the deal will be signed before the end of 2015. But, according to the Australian Financial Review, there is a fresh push to finalize the funding package before Christmas.

The agreement, which is said to involve up to 15 banks, could be signed as early as Wednesday, AFR reports. It would follow years of delays amid disputes between Rio and Mongolia’s government — which owns 34% of Oyu Tolgoi— over how to share costs and profits from the project, the biggest single foreign investment in the land-locked nation.

A $4.2 billion finance package was secured for the expansion in early 2013, but commitments from most of the banks involved expired at the end of last year due to the multiple delays that have affected the project.

In terms of timeline, people familiar with the matter told that development of the mine might have been affected. They expect the parties involved to proceed with the plan more gradually than originally anticipated, with the full ramp-up of the expanded mine taking up to 10 years.

Announcing its 2016 production and financial guidance for the mine last week, Rio Tinto-controlled Turquoise Hill said Oyu Tolgoi is expected to produce 175,000 to 195,000 tonnes of copper and 210,000 to 260,000 ounces of gold in concentrates for 2016 (the mine also produces small quantities of silver).

The reduction in gold compared to 2015 is the result of mining in lower-grade gold areas and processing lower-grade stockpiled ore according to the company, which added that the majority of 2016 gold production is expected in the first half of the year.

Operating cash costs for 2016 are expected to be approximately $800 million, lower than previous guidance. Turquoise Hill said capital expenditures for 2016 on a cash-basis are expected to be approximately $300 million, of which approximately $280 million relates to sustaining capital.

Bullish on copper

The world’s-second biggest miner, which began production from an open pit of Oyu Tolgoi over two years ago, has remained bullish on copper.

Speaking at a Bloomberg News-sponsored forum last month, Rio’s copper and coal chief executive, Jean-Sebastien Jacques, said the red metal is the one commodity the company expects to recover the fastest.

The project finance deal with lenders is one of the last steps remaining before Rio’s board decides whether to forge ahead with an underground expansion of the open pit mine. That project is expected to cost a further $5 billion and would move Oyu Tolgoi, close to the Chinese border, into a new phase.

It would also increase Rio’s exposure to copper, while reducing its reliance on iron ore, where growth in supply and lacklustre demand has sent benchmark prices plummeting this year.

Oyu Tolgoi phase II is a truly giant project – the latest feasibility study including the underground expansion shows recoverable copper of 25 billion pounds, 12 million ounces of gold and 78 million ounces of silver over a mine life of 41 years.

A separate economic assessment to develop Oyu Tolgoi further and include other deposits at the property shows just what a rich find Oyu Tolgoi really was. This scenario provides a 94 year mine life and recoverable copper of 56.5 billion pounds, 27.9 million ounces of gold and 195.2 million ounces of silver, pushing the value of the mine to closer to $200 billion.

After the extension, the Oyu Tolgoi mine, located about 80 kilometers (50 miles) north of the Chinese border, will contribute about a third of Mongolia’s economy when at full tilt, according to Turquoise Hill.

Rio Tinto $4 billion financing deal for Oyu Tolgoi imminent — report