Rio Tinto outlines Oyu Tolgoi’s path forward

Rio has said Oyu Tolgoi’s underground expansion is its most important growth project. (Image courtesy of Erdenes Oyu Tolgoi LLC.)

Rio Tinto (ASX, LON, NYSE:RIO) outlined on Friday how it plans to start production from the underground section of the vast Oyu Tolgoi copper-gold mine in Mongolia by October 2022. 

The company said mining at the new section of the mine, set to become the world’s fourth-largest copper operation by 2030, would be done by sections — Panel 0, Panel 1 and Panel 2.

Production will start at Panel 0, Rio said, adding than Panels 1 and 2 will boost output to the proposed 95,000 tonnes of ore per day. The last two phases, however, are subject to further studies with initial recommendations expected by mid-2021.

The update follows Rio’s announcement on Wednesday, when it said the “definitive estimate” budget for the expansion would be $6.75 billion ($9 billion). This meant the project cost went up by $1.45 billion.

Update specifies “mining by sections” plan that should make of Oyu Tolgoi the world’s No.4 copper operation by 2030

The company, which on Thursday named finance head Jakob Stausholm as its next chief executive, also said this week that sustainable first production would be achieved in October 2022. This is almost 22 months later than originally expected, when the project was launched in 2015.

The news came more than two years after the company first said the project was not moving according to plan because of weaker than expected geology and project management issues.

The announcement failed to provide straightforward information on its dealings with the Mongolian government. It also lacked clarity around the ongoing legal spat with its subsidiary Turquoise Hill (TSX, NYSE: TRQ), which launched in November arbitration proceedings against the mining giant to get clarity on the terms of its financing.

Rio is at odds with Turquoise Hill on how to cover a $3 billion funding gap. It wants to use a mixture of debt, equity and reprofiling of loans, while the Canadian miner favours a package that does not include a sale of new shares. 

Minority investors in Turquoise Hill, including US hedge fund Pentwater Capital, oppose Rio’s attempts to force the Vancouver-based miner to conduct an equity raise.

They claim there are “much cheaper and more advantageous financing options” available to the company, such as streaming and bond financing. 

They also worry about Rio growing its stake in Turquoise Hill through such an equity raising. Investors based this argument on the expectation that Rio would underwrite any shortfall created by minority Turquoise Hill shareholders who do not participate in the raising.

Mongolia’s reaction

Erdenes Oyu Tolgoi LLC, the Mongolian state-owned company that owns a third of the mine, reacted to the new timeline and budget by saying that Rio had not delivered on its 2015 promises.

“While we continue to review, at a preliminary level, due to the significant increases in development and sustaining capital as well as operating costs which are further exacerbated by the schedule delays, it appears that the economics of the project expected to be delivered to direct equity holders have diminished substantially,” Erdenes said in a statement.

Erdenes’ interest in Oyu Tolgoi is technically held through a 34% in a Mongolian company called Oyu Tolgoi LLC. The remaining stake belongs to Canada’s Turquoise Hill Resources (TSX, NYSE: TRQ), which is 50.79% owned by Rio.

”This is of great concern to us and further indicates that the management team of Oyu Tolgoi LLC delivered negative financial value to its shareholders over the last 5 years,” Erdenes said.

Mongolia requested in November an independent review of the cost blowout and delays at the project, with results expected in early 2021.

A tax dispute between the state and the various foreign investors in Oyu Tolgoi, including Rio Tinto, is currently waiting for a United Nations arbitration decision.

The government has complained about overruns in the past. A group of legislators recommended last year a review of the 2009 deal that launched construction of the mine. It also advised revoking a 2015 agreement allowing for the now ongoing underground expansion. 

The parliament ended up approving a resolution in December 2019, which reconfirmed the validity of all the Oyu Tolgoi mine-related agreements. The decision brought an 18-month-long review to a close.

Rio has repeatedly said the underground expansion is its most important growth project. Once completed, Oyu Tolgoi will churn out 480,000 tonnes of copper a year from 2028 to 2036.

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