At the close of 2015, the leading global mining group Rio Tinto and a group of partnering investors celebrated Christmas with a beefy stocking stuffer: A $4.4 billion tranche agreement towards new development of the copper-gold Oyu Tolgoi mine in the South Gobi region of Mongolia. Currently, an open-pit mine, the construction of Oyu Tolgoi began in 2013 and required less than two years to be completed. To date, the site has produced more than 1.5 million tons of copper concentrate.
More than 80 percent of the Oyu Tolgoi mine’s value is tucked in the ground below the open-pit mine that currently exists. Reaching the resources underground requires a different strategy than the one used for the open pit mine, and thus additional funding. About $6.4 billion has already been poured into the development of the open-pit mine, and Oyu Tolgoi is aiming to raise another $6 billion to develop the underground mine, $4.4 billion of Rio Tinto has been instrumental in financing.
The funding arrives from a collective of resources including export credit agencies and international financial institutions scattered between 15 commercial banks, Canada, Australia, and the United States. The next step is for Rio Tinto and Oyu Tolgoi shareholders to determine if they will and can move forward with the development—which will depend on capital, permit obtainment and overall feasibility—followed by a green light approval from various boards. The parties have also agreed to create a debt ceiling of up to $6 billion, which will enable the flexibility for an additional $1.6 billion of supplemental spending in the future.
It’s not a quick or simple road and it has the potential to change the flow of copper all over the world.
“This kind of mining development partnership model sets the industry benchmark for future schemes and underscores Rio Tinto’s commitment to responsible and prudent growth,” said Rio Tinto Copper and Coal chief executive Jean-Sébastien Jacques in a statement. “Long-term copper fundamentals remain strong and Oyu Tolgoi as a tier one asset will be a globally important source of supply as the market moves back into structural deficit over the next few years.”
On the horizon, one forecast for the mine is that the majority of the copper production will be shipped to China where demand is expected to rise significantly over the next decade, according to an article in The Telegraph. However, some shareholders view the pitch to expand as too risky due to a downswing in the mining sector as a whole.
Still several years away, many support the notion that the price of copper will recover and the demand will upturn—which will help keep other copper mining companies bustling, such as the industry in Chile—especially with the increase of renewable energy sources and the production of wind turbines, which require copper.
Expanding Oyu Tolgoi would certainly increase Rio Tinto’s exposure to copper while decreasing its employment of iron ore. According to Mining.com, one feasibility study showed that the amount of recoverable copper in the mine is expected to equal 25 billion pounds over the course of 41 years. Another economic assessment revealed that the recoverable copper would reach 56.5 billion pounds over a 94-year mine life—which would up the value of the mine closer to $200 billion including gold and silver.
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