EURASIA BLOG: Optimism grows at Mongolia’s Oyu Tolgoi as launch set for mid-2016

By bne IntelliNews September 18, 2015

Terrence Edwards in Khanbogd Soum, Mongolia -

 

Workers at the Oyu Tolgoi copper-gold mine in Mongolia's Gobi desert are abuzz in anticipation of the launch of a $6bn expansion project that will unlock 80% of the wealth stored underground. The start of construction is still some way off, but optimism is high after the resolution of two years of squabbles between investors and the Mongolian government.

The launch of the second phase of development at Oyu Tolgoi, expected mid-2016, will bring in badly needed investment to Mongolia, where the economy is sinking alongside foreign investment. Oyu Tolgoi is seen by many as a litmus test as to whether Mongolia can again be an investor-friendly destination, and construction could spark a second investment boom.

Global miner Rio Tinto shares 66% ownership of the mine with minority investors through the Toronto-listed Turquoise Hill Resources, while the Mongolian government owns the remaining 34%.

The mood among staff was grim two years ago, when workers were being made redundant and equipment mothballed because of the suspended works. Visiting the mine today, however, most of the talk centres around the grand plans to build enormous structures and the more than 3,000 additional workers that will be needed to complete them.

In contrast to six years ago, when construction headed across and up, most work will take place 1,300 metres below ground. Andrew Hooppell, a senior engineer, says the mine will be one of the biggest operations in the world for blasting and drilling. "It'll be a significant footprint even though none of it will be seen," said Hooppell, during a tour of the mine.

Rio is planning to build over 200 kilometres of lateral tunnels at a deposit with higher copper grades over the then next five to seven years, says Craig Kinnell, Rio's chief development officer for copper and coal. The project will extend the mine's lifetime past 2100, he claims, and make it the world's third largest for copper and gold.

The mine is a key piece in Rio's strategy to shift dependence away from iron ore. The low costs of production in Mongolia make it the "bedrock" that Kinnell says can withstand market downturns. The global mining giant’s commitment to copper can be seen in its investment portfolio: the red metal used to produce electrical wiring among other things takes up 30% of its investment portfolio for global exploration, and it has two more projects in the western hemisphere that it wants to take online. "We're bullish on the long-term fundamentals of copper," says Kinnell.

State goals

The project is also a key component in Prime Minister Chimed Saikhanbileg's plan to restore Mongolia's flagging economy, which some analysts think will slump into contraction this year.

Spending will start after Rio finally signs a project financing package worth up to $4.2bn, which Kinnell says is expected to happen in November. Financing will come from a mix of private banks and development institutions, such as the European Bank for Reconstruction and Development (EBRD).

Although Mongolia has plenty of reason to encourage activity at Oyu Tolgoi, it still has its detractors, including resource nationalists. And many worry that lawmakers pandering to those detractors could try to interfere again when the economy eventually starts recovering. But with a new agreement in place reaffirming an investment agreement originally signed in 2009, Kinnell is undeterred by the possibility of a repeat of the events of 2012 and 2013 that resulted in the suspension of the project. “We've got a sustainable agreement that's consistent with the [investment agreement],” says Kinnell. “We are confident moving forward that we will be working profitably with our partners for the next 80-plus years.”

Going forward, Rio will implement a third and fourth phase throughout the mine's lifetime. But a more immediate issue will be securing a local power source to replace the energy currently imported from China. The investment agreement it signed in 2009 also stipulates it consider a smelting facility.

Although the foreign mining giant is not likely to spearhead either of those initiatives, Rio's country director Sukhbaatar Munkhsukh says Oyu Tolgoi could be central to either plan as a "key customer". "If the government takes a feasibility study and is able to find funding, we'll be keen to supply," says Munkhsukh. "But we won't be looking into investing."

 

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