Rio trims Oyu Tolgoi in bid to cut costs
Changes for the massive mine were introduced on Tuesday in a bid to offset soaring construction costs on the second phase of the project, which Rio and its subsidiaries expect to cost $US5.1 billion ($4.9 billion).
Analysts had expected the second phase to cost about $US4 billion, but the higher amount was confirmed in a Rio Tinto report on Tuesday, despite the design changes saving close to $US1.7 billion in construction costs.
The report was released by the Rio subsidiary that is building the project - Turquoise Hill Resources - and comes amid tensions with the Mongolian government over the cost of building the project, and the royalties it will deliver.
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 a day of copper concentrate rather than 160,000 tonnes a day.
While the company said it may choose to expand to 160,000 at some stage, it was no longer committed to that expansion.
"At a time when all capital commitments are subject to increasing scrutiny, the company has recognised that committing to focus on operations at 100 ktpd ... provides the best return to stakeholders with installed assets, is the most prudent use of scarce capital resources and preserves all options for future expansion and development," the company said.
Construction of a $US1.2 billion power station for Oyu Tolgoi has also been scrapped, meaning the mine will need to source power from a "third party Mongolia-based power provider".
While those changes have cut the construction costs, they have lifted the forecast operating costs of the mine to US89¢ a pound of copper.
Bank of America analyst Oscar Cabrera had forecast operating costs of US65¢ a pound and said the changes would make the project "less robust than expected".
The company said its differences with the Mongolian government had not been resolved. Mongolia has budgeted for a "progressive" royalty rather than the stabilised 5 per cent royalty rate Rio said was agreed for the life of the contract.
Rio still hopes to begin commercial production from the first phase of Oyu Tolgoi at the end of June.
Frequently Asked Questions about this Article…
Rio Tinto (via its Turquoise Hill Resources subsidiary) announced significant design changes to Oyu Tolgoi to curb rising construction costs. Key moves include deferring a US$500 million concentrator expansion (cutting planned capacity from 160,000 to 100,000 tonnes per day of copper concentrate) and scrapping a US$1.2 billion on-site power station in favour of sourcing power from a third‑party Mongolian provider. The changes trim construction spending but raise operating costs.
Under the new plan the mine will produce about 100,000 tonnes per day of copper concentrate instead of the previously planned 160,000 tpd. Rio Tinto says it may expand to 160,000 tpd in the future, but it is no longer committed to that expansion now.
The second phase of Oyu Tolgoi is now expected to cost about US$5.1 billion, higher than many analysts had anticipated (around US$4 billion). The design changes do save close to US$1.7 billion in construction costs, but overall phase‑two costs remain elevated versus earlier forecasts.
The design changes have increased forecast operating costs to about US$0.89 per pound of copper. By comparison, a Bank of America analyst had forecast operating costs around US$0.65 per pound, and said the changes make the project “less robust than expected.”
The on-site US$1.2 billion power station was scrapped to reduce capital commitments. As a result, Oyu Tolgoi will source electricity from a third‑party Mongolia‑based power provider. That reduces upfront capital needs but contributes to higher forecast operating costs.
Turquoise Hill Resources is the Rio Tinto subsidiary building the Oyu Tolgoi project. Turquoise Hill released the report describing the design changes and cost outlook for the project.
Yes. Rio Tinto says differences with the Mongolian government remain unresolved. Mongolia has budgeted for a “progressive” royalty structure, while Rio maintains there was an agreement for a stabilised 5% royalty for the life of the contract. That dispute could affect project economics and cash flow for stakeholders.
Investors should monitor updates on final construction costs for phase two, any decisions about future concentrator expansion, confirmation of the third‑party power arrangement, progress in royalty negotiations with Mongolia, and whether Rio meets its target to begin commercial production from the first phase at the end of June. These items will drive project economics and investor sentiment.
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