Turquoise Hill report shakes up Mongolia stand-off
The Oyu Tolgoi mine has been a political hot potato in Mongolia from virtually the day it was discovered in 2001. Commercial production is expected in a couple of months, but the government and Rio Tinto Ltd. continue to feud over contract terms. Turquoise Hill Resources Ltd., which owns 66% of the project and is controlled by Rio Tinto, is caught up in the muck.
In the midst of all this, Vancouver-based Turquoise Hill released an eye-opening technical report this week that outlined a much smaller mine plan at Oyu Tolgoi than anyone expected. The report keeps the mining rate for the phase two expansion at 100,000 tonnes of ore per day, with no immediate plans to increase capacity to the expected rate of 160,000 tonnes.
The project is also facing significant cost pressures. The capital cost for the phase two expansion was maintained at US$5.1-billion, but given that a power plant is excluded and the mill capacity is kept flat, BMO Capital Markets analyst Tony Robson wrote that it really hides an increase of 30% to 50%.
To him, the question is whether the Oyu Tolgoi expansion to 160,000 tonnes is really on hold, or if this is just Rio Tinto’s way of playing politics and sending a message to the government of Mongolia.
“Rationally, a deposit of this size will not stay at a [100,000 tonne per day] mining rate, but the new technical report is based on a fixed capacity,” Mr. Robson wrote in a note. “It is almost as if Rio Tinto were telling the Mongolian Government that if they insist on no capex overruns [a principal point of argument over expenditure to date] then the next phase will be downsized.”
In the meantime, he noted that Turquoise Hill “remains a very high-risk situation.” He cut his target price on the stock to $10 a share, down from $13.75, as he assumed that the expansion to 160,000 tonnes a day is pushed back three years and costs an extra US$1.5-billion.
“It is likely, however, that the differences between Rio and the Government of Mongolia can be patched up post-presidential elections [no guarantee], sending the share price higher,” he wrote.
In the midst of all this, Vancouver-based Turquoise Hill released an eye-opening technical report this week that outlined a much smaller mine plan at Oyu Tolgoi than anyone expected. The report keeps the mining rate for the phase two expansion at 100,000 tonnes of ore per day, with no immediate plans to increase capacity to the expected rate of 160,000 tonnes.
The project is also facing significant cost pressures. The capital cost for the phase two expansion was maintained at US$5.1-billion, but given that a power plant is excluded and the mill capacity is kept flat, BMO Capital Markets analyst Tony Robson wrote that it really hides an increase of 30% to 50%.
To him, the question is whether the Oyu Tolgoi expansion to 160,000 tonnes is really on hold, or if this is just Rio Tinto’s way of playing politics and sending a message to the government of Mongolia.
“Rationally, a deposit of this size will not stay at a [100,000 tonne per day] mining rate, but the new technical report is based on a fixed capacity,” Mr. Robson wrote in a note. “It is almost as if Rio Tinto were telling the Mongolian Government that if they insist on no capex overruns [a principal point of argument over expenditure to date] then the next phase will be downsized.”
In the meantime, he noted that Turquoise Hill “remains a very high-risk situation.” He cut his target price on the stock to $10 a share, down from $13.75, as he assumed that the expansion to 160,000 tonnes a day is pushed back three years and costs an extra US$1.5-billion.
“It is likely, however, that the differences between Rio and the Government of Mongolia can be patched up post-presidential elections [no guarantee], sending the share price higher,” he wrote.
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