Expansion of the US$6.75 billion Oyu Tolgoi copper-gold mine will begin in 2022

Rio Tinto announced on Wednesday that underground mining of the Oyu Tolgoi copper- gold mine in Mongolia is scheduled to begin in October 2022, adding that the project will cost US$6.75 billion.

When it was approved in 2015, Rio Tinto predicted that this expansion would cost US$5.3 billion and achieve its first sustainable production in early 2021.

However, last year, the company pointed out the stability risks associated with the initial project design, which resulted in additional costs of up to $1.9 billion. The expected production will then be transferred between October 2022 and July 2023.

Although the investment and timetable for mine expansion disclosed on Wednesday were better than most analysts' estimates, the world's second-largest mining company failed to provide direct information on dealing with the Mongolian government.

Source: https://www.riotinto.com/

The announcement also lacks clarification on the ongoing legal disputes of its subsidiary Turquoise Hill. In November last year, the company initiated an arbitration procedure against the mining giant to clarify its financing terms.

Rio Tinto and Turquoise Mountain disagree on how to make up for the US$3 billion funding gap. It hopes to mix debt, equity and loan restructuring, while the Canadian mining company prefers not to include a package of new shares.

Minority shareholders of Turquoise Mountain, including U.S. hedge fund Pentwater Capital, opposed Rio Tinto’s attempt to force the Vancouver-based mining company to raise equity.

They claim that the company has "cheaper and more favorable financing options", such as streaming media financing and bond financing.

They are also worried that Rio Tinto will increase its stake in Turquoise Mountain through such a capital increase. Investors are based on the expectation that Rio Tinto will bear any funding gap caused by the minority shareholders of Turquoise Mountain who are not involved in the fundraising.

Analysts said that these remaining issues mean that the funding and economic conditions surrounding the expansion project are still unclear.

Berenberg consultants wrote in a report to investors: “It is encouraging that capital expenditures and project timetables are on the right track, although there is no reason for the government’s postponement of approval, and financing reviews seem to provide limited information. New insights."

Tyler Broda of the Royal Bank of Canada (RBC) stated that Rio Tinto advocates that “all shareholders should contribute proportionally and share the proceeds fairly”, which shows that the company believes that it is “responsible for 100% of the economic benefits of the project, but only bears 33 % Of shares."

Broda also emphasized that the Mongolian government has not yet approved Rio Tinto's latest expansion feasibility study report released in July, which is another area of ​​uncertainty.

The analyst said that these unresolved issues will eventually be resolved, and Oyu Tolgoi will account for 21% of Rio Tinto’s 2028 earnings.

Independent review

According to the request of the Mongolian government in November, Rio Tinto will also face the results of an independent review of cost blowouts and overruns.

Mongolia has complained about overspending in the past. Most of Oyu Tolgoi’s copper mines are located deep underground. When Rio Tinto finally launched the delayed project, the profits from surface mining should have been used to pay for the cost of mining more copper mines underground.

Over time, it is clear that the cost of underground mines alone will far exceed the initial budget.

While building one of the world’s three largest copper mines operating at full capacity, investors’ enthusiasm continues to increase, and it is currently expected to be completed by 2025 at the earliest.

The Mongolian government's insistence on holding equity in the mine is also the main obstacle to be overcome by the mine.

Last year, some lawmakers suggested a review of the transaction that started the construction of the mine in 2009. It is also recommended to withdraw a 2015 agreement that allows for underground expansion currently underway.

Parliament finally approved a resolution in December 2019, which reaffirmed the validity of all agreements related to the Oyu Tolgoi mine. This decision ended an 18-month review.

Mongolia has also been considering a possible option to exchange its 34% stake in the project for royalties or production sharing agreements. According to the current agreement, the government will not receive any dividends until the loan for part of the construction costs it bears is repaid.

Rio Tinto has repeatedly stated that underground expansion is its most important growth project. Once completed, Oyu Tolgoi will be among the four largest copper mines, producing 480,000 tons of copper per year from 2028 to 2036.