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Virus may add $US1b to Rio’s Mongolian blowout www.afr.com
Rio Tinto’s Mongolian copper project could face a further $US1 billion ($1.28 billion) of cost blowouts on the back of the coronavirus delays, as brinksmanship with the Mongolian government extends to the supply of power to the project.
The cost and schedule for an underground expansion of the Oyu Tolgoi copper mine has already blown out by $US1.45 billion and 22 months, and the Rio subsidiary in charge of the mine hinted on Thursday that the pandemic was likely to add to those blowouts.
Turquoise Hill Resources, which is 50.79 per cent owned by Rio, said the accuracy range on the existing $US6.75 billion cost estimate had been expanded and the ultimate cost could be up to 15 per cent higher.
Previously, the accuracy range had suggested a maximum of 10 per cent above $US6.75 billion.
The project would cost $US7.76 billion if the 15 per cent range was fully utilised.
While the accuracy range also implies there is potential for the cost to be lower than $US6.75 billion, Turquoise Hill was clear that the risk was to the upside given delays to multiple aspects of the project.
Most importantly, a crucial mining move called the “undercut”, which triggers the controlled collapse of rock within the mining zone, appears increasingly unlikely to go ahead on schedule.
Rio executive Arnaud Soirat wrote a letter to the Mongolian government on Christmas Eve, when he was still Rio’s copper boss, saying the undercut decision would occur in May so long as the government gave Rio clarity on a number of geological and financial issues.
Rio and Turquoise Hill now talk about the undercut decision occurring in “mid 2021” and Turquoise Hill noted on Thursday that the Mongolian government had not yet clarified the matters sought by Rio before going ahead with the undercut.
“The exact timing of the undercut is under increasing pressure principally due to our understanding of the rapidly evolving recent COVID-19 impacts,” said Turquoise Hill on Thursday.
“It is critical to ensure that, once commenced, the undercut and drawpoint construction continues unimpeded.
“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 achieving first sustainable production.”
While the undercut effectively triggers the start of the mining process, Turquoise Hill said delays were also hitting the digging of shafts that are crucial to ensuring extraction can continue from the first mining zone into the second and third zones.
Asked last week whether a delay to the undercut would see Oyu Tolgoi put on care and maintenance at the expense of jobs, Rio chief executive Jakob Stausholm said he had not given up hope of proceeding in the next few months.
“The situation right now in Mongolia with COVID is difficult,” he said on the sidelines of Rio’s annual shareholder meeting in Perth on May 6.
“Our discussions in Mongolia is affected both on COVID and on the fact there is a presidential election a month from now, but I am optimistic that things will come together and we at the right time can take an undercut decision.”
The $US1.45 billion cost blowouts announced last year had a huge impact on Turquoise Hill, as it meant the company did not have enough money to complete the project.
Turquoise Hill’s plan to raise extra cash through debt and financial instruments strained relations with Rio, which wanted Turquoise Hill to conduct a multi-billion dollar equity raising.
The two companies only patched up their differences and agreed on a funding plan in April, but that agreement will be undermined if a further round of cost and schedule blowouts is announced on the back of the pandemic and frayed relations with the Mongolian government.
Turquoise Hill’s funding challenge has been helped by a surge in copper prices to record highs this year, meaning it is making more money than expected from the small open pit mine that already exists at Oyu Tolgoi.
But the tailwinds from commodity prices have been offset by geotechnical problems in the pit, which forced Turquoise Hill to downgrade copper and gold production guidance on Thursday.
The supply of power to Oyu Tolgoi is becoming an increasingly important topic given the Mongolian government’s demand for the mine to eventually be fed by a local generator.
Oyu Tolgoi currently sources its power from across the international border in China and Rio wanted permission to extend its contracts by March 1 to ensure stable power supply until the Mongolian government completes construction of a coal-fired power station about 150 kilometres away at the Tavan Tolgoi coalfields.
Permission to extend the Chinese power contract was not granted by the Mongolian government, which now wants the Oyu Tolgoi partners to sign up to a contract for future power supply from Tavan Tolgoi before it allows an extension of the Chinese power deal.
The power play is just one of a myriad of unresolved issues between Rio, Turquoise Hill and the Mongolian government, all of which are coming to a head prior to presidential elections in the developing nation next month.
by Peter Ker
Published Date:2021-05-13
