Thursday, March 27, 2014

Agreement on massive Mongolia mine project eludes Rio Tinto

Rio Tinto faces more delays on its $US6 billion Mongolian copper and gold project after it was revealed that an agreement with the Mongolian government could be at least four months away.

The partners have been unable to agree on a way to expand the Oyu Tolgoi mine for more than a year, and the Rio subsidiary in charge of the negotiations warned that an agreement may not come before a feasibility study was completed and agreed on by both parties.

Billions of dollars worth of funding commitments for the expansion from international banks expire next week, meaning Rio is likely to need extensions from those banks, including the European Bank for Reconstruction and Development.

The Australian government's Export Finance and Insurance Commission has also pledged to help fund the expansion, although its expiry is believed to be longer-dated than the EBRD's.

The Rio subsidiary in charge of Oyu Tolgoi - Turquoise Hill Resources - said on Thursday progress had been made in talks with the Mongolian government and some disagreements had been resolved. The two parties have been at odds over the cost of the expansion, the benefits that should flow to Mongolia, and some environmental factors.

But some issues remain, and may need the feasibility study to be completed midyear before they can be settled. Copper prices have slipped in recent months, but Turquoise Hill chief financial officer Christopher Bateman said he was confident the weaker prices would not damage the company's ability to raise more than $US4 billion.

''Debt capacity for the project really exceeds market capacity … we don't see short-term market gyration in the copper price affecting the finance ability of the underground,'' he said. Earlier this month Rio chief Sam Walsh said he would not rush the agreement just to meet a funding deadline.

Oyu Tolgoi's first year has been dogged by challenges, including equipment failures that prompted a recent seven-week shut down of the concentrator. That shutdown has forced Turquoise to downgrade its production target for 2014 by about 10 per cent.

Meanwhile, another Rio Tinto subsidiary may be forced to buy product from third parties to meet its supply contracts later this year. Uranium miner Energy Resources of Australia halted production at its Ranger mine after a radioactive spill in December.

The company has enough stockpiles to meet its supply contracts until about June, but said it was starting to think about ways to meet its supply contracts if it is still shut down in the second half of the year.

ERA - which is 68 per cent owned by Rio - said installation of new equipment in 2009 had led to December's burst leach tank. The Ranger site cannot restart processing until it has approval from the federal and Northern Territory governments.

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