High costs to shrink Rio mine
Design changes for the massive mine were introduced on Tuesday in a bid to offset soaring construction costs in the second phase, which Rio and its subsidiaries now expect to cost $US5.1 billion ($4.9 billion).
Analysts had previously expected the second phase to cost about $US4 billion, but the higher sum was confirmed in a Rio Tinto report on Tuesday, despite the design changes saving close to $US1.7 billion of construction costs.
The report was released by the Rio subsidiary building the project - Turquoise Hill Resources - and comes amid ongoing tensions with the Mongolian government over the cost of building, and the amount of royalties it will deliver to the developing nation.
Under the design changes, a $US500 million expansion of the concentrator at Oyu Tolgoi will be deferred indefinitely, meaning the mine will produce 100,000 tonnes rather than 160,0000 tonnes a day of copper concentrate.
While the company said it may choose to expand to 160,000 in the future, it was no longer committed to that expansion.
Construction of a $US1.2 billion power station for Oyu Tolgoi has also been scrapped, meaning the mine will have to obtain power from a "third-party Mongolia-based power provider".
While the changes have reduced the construction costs, they have raised the mine's the expected operating costs to US89¢ a pound of copper.
Bank of America analyst Oscar Cabrera, who previously estimated the mine's operating costs at US65¢ a pound, said the design changes would make the project "less robust than expected".
The company said its differences with the Mongolian government had still not been resolved, pointing to royalty expectations factored into Mongolia's 2013 budget that were worth more than Rio expected to pay under its 2009 investment agreement.
Rio still hopes to begin commercial production at Oyu Tolgoi at the end of June, assuming it can resolve its differences with the Mongolian government.
Phase one is almost complete, and Rio hopes to secure a financing package worth up to $US4 billion for the second phase of the mine
Frequently Asked Questions about this Article…
Rio Tinto and its subsidiary Turquoise Hill Resources announced design changes for the Oyu Tolgoi project that defer a planned concentrator expansion and scrap a planned on-site power station. The changes were introduced to offset rising construction costs for the mine’s second phase.
The report confirms the second phase of Oyu Tolgoi is now expected to cost about US$5.1 billion, up from analyst expectations of roughly US$4 billion despite design changes that saved close to US$1.7 billion in construction costs.
Because the US$500 million concentrator expansion has been deferred indefinitely, the mine will produce about 100,000 tonnes of copper concentrate a day instead of the previously envisaged 160,000 tonnes a day. Rio Tinto said it may expand to 160,000 in the future but is not committed.
Construction of the planned US$1.2 billion on-site power station has been scrapped. As a result, Oyu Tolgoi will need to obtain power from a third-party Mongolia-based power provider.
The design changes reduced construction outlays but raised the mine’s expected operating costs to about US$0.89 (89¢) per pound of copper.
Bank of America analyst Oscar Cabrera, who had previously estimated operating costs at about US$0.65 (65¢) per pound, said the design changes make the project “less robust than expected.”
Yes. Rio says differences with the Mongolian government remain unresolved, particularly around construction cost and royalty expectations. Those royalty assumptions appear higher in Mongolia’s 2013 budget than Rio expected under its 2009 investment agreement.
Rio Tinto still hopes to begin commercial production at Oyu Tolgoi at the end of June, but that depends on resolving differences with the Mongolian government. Phase one is almost complete, and Rio hopes to secure a financing package worth up to US$4 billion for phase two.
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