Turquoise Hill expects Oyu Tolgoi blowout to top $1.8bn

Oyu Tolgoi. Image from Turquoise Hill.

Canada’s Turquoise Hill Resources (TSX, NYSE: TRQ) said this week that an ongoing expansion of the giant Oyu Tolgoi copper-gold-silver mine in Mongolia is expected to cost as much as an additional $1.8 billion.

The Rio Tinto-controlled company and mine operator had expected the underground expansion to cost $5.3 billion when it was approved in 2015. Last year, however, Turquoise Hill flagged stability risks associated with the original project design, adding that amendments to it could increase costs by as much as an additional $1.9 billion.

Underground expansion had been pegged at $5.3 billion when it was approved in 2015

The Vancouver-based miner also warned at the time of further delays of up to two and a half years, noting it wouldn’t know the exact scale of schedule and costs blowouts until mid-2020.

Oyu Tolgoi’s operator now says the expansion will need an estimated $1.5 billion, in a range of $1.3 billion to $1.8 billion. This may change due to any additional scheduling delays or increases in capital costs arising from the impacts of the covid-19 pandemic, it said.

In terms of project completion, Turquoise anticipates it would take two extra years than originally planned for the project to begin production, with a 21 to 29 months range.

“It is still a range. It is still fairly broad, but it is narrower (than the 2019 estimates), and importantly, it stayed within the range we have given,” chief executive officer Ulf Quellmann said.

Block caving

Turquoise Hill’s boss noted the company had selected block caving for the mine design, as it considers it a “more resilient mine plan that provides the best opportunity for success.”

Quellmann also said that the decision was based on an extensive trade-off analysis taking into account the reserve recovery, geotechnical, constructability, operability, schedule, as well as cost and value risks.

Turquoise Hill has $1.8 billion, which Quellmann says is sufficient to fund operations, underground and power development into the third quarter of 2021.

Definitive extra costs and a new schedule for the expansion project will be published in the second half of the year

He also said that a definitive estimate will be published in the second half of the year.

Turquoise Hill is currently in discussions with Oyu Tolgoi’s 50.8%-owner, Rio Tinto (ASX, LON, NYSE: RIO), regarding a proposal for an interim $4 billion funding over and above the liquidity currently available.

The massive deposit was discovered in Mongolia’s south Gobi Desert in 2001. Rio Tinto gained control of it in 2012, with the government of Mongolia retaining one-third ownership of the asset.

The ongoing expansion is expected to lift production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, targeted for 2025. This would make it the biggest new copper mine to come on stream in several years.

Oyu Tolgoi produced 35,203 tonnes of copper and 26,154 ounces of gold in the first three months of this year, which puts it on track to achieve 2020 production guidance. 

One of Rio Tinto’s top investors, US hedge fund Pentwater Capital, said in April it would push for a management shakeup at the operation, due to what it calls “a massive devaluation” of the asset.

Oyu Tolgoi’s expansion cost blowout to hit up to $1.8 billion
The copper-gold mine is located in the South Gobi region of Mongolia, about 550 km south of the capital Ulaanbaatar.