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Rio hit by new tensions, new geology problems in Mongolia www.afr.com
Rio Tinto's threat to abort the start of underground mining at the $US6.5 billion ($8.4 billion) Oyu Tolgoi project unless concessions are granted by the Mongolian government is neither appropriate nor necessary, according to the Rio subsidiary in charge of the project.
Turquoise Hill Resources' objection to Rio's brinkmanship over the underground expansion of Mongolia's Oyu Tolgoi mine came as new geological problems were revealed at the existing open pit that will hamper copper and gold production in the next two years.
Turquoise Hill is 50.79 per cent owned by Rio, but said it did not agree with its majority shareholder's demand for the Mongolian government to approve a number of geological, financial, engineering and power supply issues before a major mining decision is made in June.
The June decision focuses on the commencement of an "undercut" in the underground mine, which will trigger the controlled collapse of sections of rock under the caving technique adopted by Rio at the mine.
Rio has no ownership stake in the mine, but is the biggest shareholder in Turquoise Hill and has been appointed as the operator of the mine and the arranger of finance.
Turquoise Hill owns 66 per cent of the Mongolian company that owns the mine (Oyu Tolgoi LLC) with the remaining 34 per cent owned by the Mongolian government.
Turquoise Hill made clear on Tuesday morning that neither it nor the Mongolian government believed the outstanding issues identified by Rio warranted a delay to the start of underground mining.
The comments create the extraordinary situation where shareholders owning 100 per cent of the mine are being told by the contractor hired to run the mine that it cannot proceed unless certain terms are met.
The underground expansion of Oyu Tolgoi is already running 22 months late and $US1.45 billion over budget, and any further cost and schedule blowouts are a problem for Turquoise Hill and the Mongolian government, which are both struggling to fund their share of development costs and sorely need the funds injection that will come from the start of underground mining.
Adverse impact
''The criteria supporting the undercut decision, including the non-technical criteria publicly announced by Rio Tinto, have not been agreed to by the shareholders of Oyu Tolgoi LLC,'' said Turquoise Hill in a filing to the Toronto Stock Exchange on Tuesday morning Australian time.
''Turquoise Hill does not agree that all of these additional non-technical criteria are either appropriate or necessary and is engaging with Rio Tinto and Erdenes (the Mongolian government) to address the areas of disagreement, with the objective, which Turquoise Hill believes it shares with Erdenes, of preserving the timeline for project completion.
''If agreement is not reached on the undercut criteria in a timely manner, or if the undercut criteria proposed by Rio Tinto are included and not met, there is a risk that the undercut will not occur as planned.
''Any significant delay to the undercut would have a materially adverse impact on schedule as well as the timing and quantum of underground capital expenditure and would materially adversely impact the timing of expected cash flows from the Oyu Tolgoi underground project, thereby increasing the amount of Turquoise Hill’s incremental funding requirement.''
Tuesday's comments are the second time Turquoise Hill has publicly aligned itself with the Mongolian government rather than its biggest shareholder in the space of seven weeks.
An unlikely alliance was formed between Turquoise Hill and the Mongolian government last month when they voted to establish an independent review of Rio's management of the mine, and the subsequent cost and schedule blowouts.
Relations between Rio and Mongolia have long been fractious, but they appear to have plumbed new depths in recent months, with Mongolia threatening to unilaterally tear-up the 2015 legal agreement that underpins the underground expansion of Oyu Tolgoi unless Rio agreed to better terms for the host government.
Cost blowouts
Rio's threat to delay the start of mining was not the only piece of bad news for Turquoise Hill on Tuesday; the existing open pit mine at Oyu Tolgoi looks set to generate less revenue in the next two years than was previously expected.
Rio altered the sequence of mining in the existing Oyu Tolgoi open pit in late 2019 in a bid to bring forward extraction of higher-grade ore, as part of efforts to mitigate the cashflow problems created by the cost and schedule blowouts on the underground project.
Those sequencing changes saw Rio bring forward the mining of a deeper section of ore called ''Phase 4B'', which contained high gold grades which would bring in solid revenues amid high gold prices.
But Rio, which is the manager and operator of the open pit, informed Turquoise Hill in recent weeks that problems had been encountered at ''4B'' which would hamper output in coming years.
''We have been advised by the manager that recent geotechnical concerns in Phase 4B have required changes to the mine design impacting both 2021 and 2022, resulting in a reduction in metal delivery expectations,'' said Turquoise Hill on Tuesday.
Reduced metal production means Turquoise Hill will likely generate less cashflow in the next two years; a crucial blow for a company which is trying to defer an injection of new funding for as long as possible.
The fact the reduced metal production has been announced by Rio, a shareholder that wants Turquoise Hill to conduct a multi-billion-dollar equity raising, risks fuelling fears about Rio's motives among angry minority shareholders in Turquoise Hill.
Turquoise Hill said it would publish a production target for 2022 in April after further studies were conducted.
As recently as November, Turquoise Hill expected the existing open pit at Oyu Tolgoi to produce between 170,000 and 200,000 tonnes of copper in 2021, with gold production forecast to be between 500,000 and 550,000 ounces.
Turquoise Hill downgraded those targets on Tuesday, saying copper production would be between 160,000 and 180,000 tonnes while gold production would be higher between 500,000 and 550,000 ounces.
The company said it would process some of the "development material" that had been extracted from the underground project alongside open pit material to achieve that goal.
Sustainable first production from the underground mine is expected to be achieved in October 2022.
While that is close to 22 months later than was envisaged when the project was revived in 2015, it is seven years later than was envisaged by Rio when it was drawing up plans for the mine in 2012.
Located in Mongolia's remote South Gobi Desert, the mine could be one of the world's top five copper producers by the end of this decade if all goes to plan, and shapes as Rio's most important growth project.
by: Peter Ker covers resource companies, based in Melbourne.
Published Date:2021-01-19
