Rio’s Mongolia mine hits another hurdle

Mar 26 • Business, Mining, News • 825 Views • No Comments on Rio’s Mongolia mine hits another hurdle

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Significant design changes have been proposed for Rio Tinto’s most important growth asset as the company seeks to offset rising costs at the massive Oyu Tolgoi mine in Mongolia.

The $US5.1 billion second phase of the project will no longer involve construction of a power station, and will see less copper concentrate produced, under changes revealed in a technical report released today.

The report was released by the Rio subsidiary that is building the project – Turquoise Hill Resources – and comes amid ongoing tensions with the Mongolian Government over the cost of building the project, and the amount of royalties Mongolia will receive.

The second phase – which will take the mine underground – was forecast in 2010 to cost $US2.5 billion, but today’s report confirmed a prediction made last year that costs would rise to $US5.1 billion.

It appears construction costs were set to rise even higher had the original mine plan – which included a new power station and expansions to the concentrator – been retained.

The axing of those parts of the project means Oyu Tolgoi will source its power from a ”third party Mongolia based power provider”. It was unclear whether that would be a Government power station or a private sector one.

Today’s report also said the concentrator has been kept at its initial size for longer than was planned, meaning that plans to increase its capacity by 60 per cent will be deferred at the very least.

The company said such an expansion was not needed until 2015, and so could be considered at a later time.

While the changes will help lower the initial costs of construction, they have increased the likely operating costs of the mine, which will now rise to US89 cents per pound of copper.

The company said its differences with the Mongolian Government had still not been resolved, and pointed to royalty expectations that had been included in the Mongolia’s 2013 budget that were at odds with the agreement that was struck between the company and the Government in October 2009.

”In its proposed 2013 budget, the Government of Mongolia has included revenue from the application of a progressive royalty scheme to Oyu Tolgoi. However, the Investment Agreement provides a stabilized royalty rate of 5 per cent over the life of the agreement and specifies that new laws made after its signing will not apply to Oyu Tolgoi. Any change to Oyu Tolgoi’s royalty rate would require the agreement of all parties to the Investment Agreement,” said the statement.

Rio still hopes to begin commercial production from the first phase of Oyu Tolgoi at the end of June, assuming it can resolve its differences with the Mongolian Government.

A financing package worth up to $US4 billion for the second phase of the mine is also hoped to be completed this year.

Rio shares were $1.21 lower this afternoon at $57.04.


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