6th May 2016 10:49
LONDON (Alliance News) - Rio Tinto PLC Friday said it has agreed with its partners to start developing the huge potential of the underground mine at the Oyu Tolgoi copper and gold mine which will lead to production ramping up over several years starting from 2020.
The FTSE 100-listed multi-commodity miner has agreed the next stage of development work for the mine with its partners, Turqoise Hill Resources and the government of Mongolia, where the mine is located.
The mine is located in the South Gobi region of the country and is one of the largest undeveloped high-grade copper deposits in the world.
Although the USD5.30 billion development will start in the middle of 2016, the underground mine will not start producing until 2020 and will take around seven years to reach optimal production levels. In the meantime, Oyu Tolgoi continues to produce significant amounts of copper from the open pit operation.
The underground area that will be developed has an average copper grade of 1.66%, which is three times higher than that existing open pit, demonstrating the attractiveness of moving underground.
Rio Tinto did not state how much the underground mine will be able to produce when it starts in 2020, but said production from Oyu Tolgoi is expected to be 560,000 tonnes of copper per year between 2025 and 2030, when the project will be operating within the first quartile of the copper cost curve, it said.
The mine is expected to reach optimal production levels by 2027, Rio Tinto said.
To put that into perspective, the current operation at Oyu Tolgoi is focused around the open pit and is only currently producing around 175,000 to 200,000 tonnes of copper per year and Rio Tinto's total production of copper from all operations in 2015 was 504,000 tonnes.
The production levels envisaged at the underground operation are huge, as Rio Tinto's share of copper production in 2016 from all of its operations across the world is expected to rise to a range of 575,000 to 625,000 tonnes.
Also, the open pit operation at Oyu Tolgoi has only delivered 440,000 tonnes of copper in total since it started producing in 2013.
"Today's investment takes it to another level and will transform Oyu Tolgoi into one of the most significant copper mines globally, unlocking 80% of its value," said Jean-Sebastien Jacques, the deputy chief executive of Rio Tinto.
The underground development is aiming to exploit the Hugo Dummett North deposit, including the extension to the north of that deposit, which contains probable ore reserves of 499.0 million tonnes of ore.
Although production will take years to ramp-up and initial production is a way off, Rio Tinto is confident the mine will come into play as copper markets begin to improve. The company said the long term fundamentals of copper remain strong, adding Oyu Tolgoi will enter the frame as markets are expected to face a "structural deficit."
Copper accounts for around 8% of Rio Tinto's overall Ebitda and copper prices have remained under pressure. The effect of those lower prices can be demonstrated by the 27% fall in earnings before interest, tax, depreciation and amortisation from the copper unit in 2015 - however that was also partly driven by reduced production as well.
Importantly, the open pit at Oyu Tolgoi performed well on an operational front in 2015, increasing production by 36% and reporting higher grades and throughput levels.
Copper is the main commodity being targeted, but the operation will also have gold as a by-product. The average gold grade in the underground area is 0.35 grammes per tonne of ore.
As an operation is already up and running at Oyu Tolgoi, the material extracted from the underground area can processed using the existing concentrator on site and the project will continue to benefit from the existing infrastructure.
"In line with Rio Tinto's other tier one assets, Oyu Tolgoi offers opportunities for further expansions, leveraging existing infrastructure and supply chains and will provide attractive returns for all shareholders and Mongolia more broadly for decades to come. This is a long-term partnership, built to create mutual benefit," said Jacques.
Rio Tinto said the expansion is an "attractive investment" for all shareholders and said the internal rate of return of the underground project is "more than" 20%.
Further down the line, Rio Tinto believes there is further potential upside that could mean production from Oyu Tolgoi could be sustained for "many decades" to come.
The current operation at Oyu Tolgoi employs around 3,000 members of staff, of which around 95% are from Mongolia. With the government on side as a partner, the Mongolian Prime Minister Chimediin Saikhanbileg said the development would unlock value for all involved and create even more jobs, stating it was a "proud day for Mongolia" that shows the country is "back to business".
Looking further at the cost of the underground expansion, the USD5.30 billion figure revealed Friday can be compared to the cost of developing the initial open pit of USD6.40 billion, which is the total sum invested in Oyu Tolgoi by the partners to date.
Initial development of the underground operation will be USD500.0 million, which will be split by the partners.
The government owns 34% of the mine whilst Turquoise Hill owns the remaining 66%. Rio Tinto holds its interest in the operation through its 51% stake in Turquoise Hill.
The partners have already signed funding deals for the development, signing a USD4.40 billion project financing agreement back in December with numerous financial institutions and export credit agencies which represent the governments of the US, Canada and Australia. Around 15 commercial banks have also supported the financing deal.
Rio Tinto said the partners have agreed to a senior debt cap of USD6.00 billion, adding there is an option to expand the senior debt by a further USD1.60 billion.
"Oyu Tolgoi raised limited recourse project finance to refinance existing shareholder funding and support development of the underground. The initial project finance tranche of USD4.40 billion was secured in December 2015 and is expected to be drawn during the second quarter of 2016," said Rio Tinto.
"The Oyu Tolgoi underground development will be funded by project finance debt and cash flows from Oyu Tolgoi's open-pit operations plus cash held by Turquoise Hill Resources," the company added.
Once the debt is drawn down, the project finance will be recognised on Rio Tinto's balance sheet as cash and debt.
Rio Tinto, like its peers, have been trying to reduce debt to adjust the balance sheet to suit current commodity markets with lower prices, with Rio Tinto recently paying off around USD1.50 billion of debt earlier than necessary in order to strengthen its financial position.
Rio Tinto shares were trading down 1.4% to 2,086.0 pence per share on Friday morning.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.
Related Shares:
Rio Tinto