Markets: Rio Tinto's Mongolian problem

Morgan Stanley says the underground development of the miner's Mongolian copper project may take time.

Morgan Stanley says the delay on the underground development by Rio Tinto at its Oyu Tolgoi copper mine in Mongolia “might take some time”. The financing secured for the project will need to be approved by the Mongolian parliament. The legislature is in summer recess.

The delay in underground development at Oyu Tolgoi is unlikely to impact Rio’s planned phase one shipments, which are from the open pit section of the mine, Morgan Stanley analyst Brendan Fitzpatrick says.

“We see limited downside risks to volumes in 2013 and 2014,” Fitzpatrick says.

The Mongolian mine is designed to process between 33-37 million tonnes of copper ore between 2015 and 2020, at an average copper grade of 0.9 per cent, according to Morgan Stanley. The ore contribution from the underground mine is set to rise from about 2 per cent of total copper mined at the site in 2015 to about 50 per cent by 2020, he says.

Fitzpatrick values Oyu Tolgoi at $US103 billion on a net present value basis. He values the overall equity from Oyu Tolgoi at $US1.9 billion, or $1.46 a share in Australian dollars.  

“In a scenario where ore processed from the underground mine is delayed by two years, and assuming no replacement ore from the open pit mine, the equity net present value impact would be a negative $US280 million, or 22 (Australian) cents a share, off the overall valuation,” says Fitzpatrick.

At 1138 AEST Rio shares were had fallen 1 cent, to $57.10. The stock has dropped 14 per cent this year, while the S&P/ASX200 Index which is up 8.1 per cent during the same period.

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