Wednesday, April 16, 2014

Banks overlook delays to boost Rio Tinto expansion in Gobi

Banks supporting Rio Tinto's $US6 billion expansion of the Oyu Tolgoi mine in Mongolia look set to forgive ongoing delays to the project, with at least two major banks agreeing to extend their funding commitments.

Australia's export Export Finance and Insurance Corporation and the European Bank for Reconstruction and Development have both agreed to extend their funding commitments towards the end of the year, with Rio now hoping to resolve issues with the Mongolian government before September 30.

Funding commitments for the second stage of Oyu Tolgoi from about 15 international banks expired on March 31, and Rio said on Tuesday that it had asked its funders to extend their commitment to September 30.

The EBRD confirmed on Tuesday that it had granted an extension until September 30, while EFIC is understood to have gone further and given Rio until December 31 on the proviso that the nature of the expansion does not significantly change between now and then.

Mongolia wants Rio to reduce the cost of building the second stage, and much of the negotiations over the next few months will be around ways to reduce the cost of the underground expansion.

The commitments from EFIC and the EBRD are understood to be in the hundreds of millions.

Deutsche analyst Paul Young said the market was patient with regard to Oyu Tolgoi, which is Mongolia's first major development and is located in the harsh expanse of the South Gobi Desert.

''Ultimately the underground was only expected to produce material amounts of ore by about 2018 or thereabouts so it's a good five to seven-year ramp-up on that operation,'' he said.

The continuing support from lenders is a boost to Rio's executive team, who fronted London shareholders on Tuesday night at the miner's annual meeting.

Rio boss Sam Walsh told the meeting that his first year in charge had been devoted to rediscovering ''the old Rio'', a reference to improving investment decisions and the strategy of the company.

''On reflection, I have termed our journey as taking Rio 'back to the future','' he told shareholders.

Rio chairman Jan du Plessis reiterated that 2014 would be a year of paying down debt and strengthening the balance sheet in a bid to ensure net debt was lower by the end of the year.

Despite BHP Billiton reportedly being poised to launch a spin-out of its non-core assets, most analysts believe Rio will have a less dramatic 2014 before launching big increases in shareholder returns and corporate transactions in 2015.

Rio's dominant iron ore division is still on track to export 295 million tonnes in the year to December 31, despite a March quarter that was affected by cyclones and bad weather in the Pilbara.

Rio produced 66.4 million tonnes of iron ore from its global operations, falling just short of the 70.5 million tonnes that Deutsche Bank had forecast. But Mr Young said the most important thing was that full-year guidance for iron ore had been maintained.

Equipment failures at Oyu Tolgoi helped drag copper production lower to 156,500 tonnes, while the ramp-up of Rio's bauxite mines at Weipa helped deliver the company's highest producing quarter ever.

High rainfall in Queensland also saw Rio's production of hard coking coal slide by 20 per cent compared with the December quarter. But production of thermal coal - which Rio largely mines in NSW - was 6 per cent higher across the group.

Rio shares closed 9¢ higher at $63.35.

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