Rio Tinto has warned of further delays and a cost blowout of up to $1.9bn at its giant underground copper project in Mongolia’s Gobi desert.

The Anglo-Australian miner said difficult ground conditions meant that it would have to completely rethink the design and development schedule at Oyu Tolgoi.

As a result, first sustainable production is now expected between May 2022 and June 2023 — a delay of 16 to 30 months compared with original guidance — while the cost of the $5.3bn project will increase by $1.2bn-$1.9bn.

“We have made significant progress on a number of key elements in the construction of the underground project during 2019,” said Stephen McIntosh, head of Rio’s growth and innovation group.

“However, the ground conditions are more challenging than expected and we are having to review our mine plan and consider a number of options.”

Rio said a final estimate cost and schedule would be announced in the second half of next year, “reflecting the preferred mine design approach”. “Significantly more work is required to complete the final assessment,” it said.

The miner also said it was reviewing the carrying value of the project and could announce an impairment charge when it announces half-year results next month.

While it is not unusual for large, complex mining projects to experience delays, the overrun at OT, as the mine is known, will still be painful for Rio, which prides itself on being one of the best operators in the industry.

It could also raise tensions in Mongolia, where the mine dominates political debate and is the country’s biggest source of foreign direct investment.

While Rio operates OT, it does not have a direct shareholding. It is 66 per cent owned by Toronto-listed Turquoise Hill Resources, in which Rio Tinto has a 50.8 per cent controlling stake, and 34 per cent by the Mongolian government.

Although Rio has been producing copper, gold and silver from an open pit at OT since 2013 that was always with a view to exploiting its vast underground riches.

The expansion of OT is Rio’s most important growth project and the one most closely associated with chief executive Jean-Sébastien Jacques, who pulled together the financing package for the project when he ran the company’s copper business.

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The project is aimed at lifting output to 550,000 tonnes of copper per year. When finished it will make OT the world’s third-largest source of copper, an industrial metal tipped to be in ever-greater demand as the world shifts to cleaner forms of energy.

Problems with the underground project first emerged in October when Turquoise Hill Resources announced a nine-month delay to sustainable production, citing issues completing a 1,300 metre production and ventilation shaft and changing ground conditions.

In February, Rio warned investors of “significant changes to the design” of the development schedule of the project that would push back first sustainable production.

Rio is using a mining technique called block-caving to extract the copper ore and send it to the surface. Although technically challenging, it is considered one of the most cost-effective methods of mining ore from deep below the ground.

For this method to work, weak and fractured rock needs to collapse under pressure from blasting and gravity. Mr Jacques has previously said the problem at OT is that the rock collapses too easily.

Published Date:2019-07-16