Design Changes Proposed at Oyu Tolgoi as Rio Looks to Cut Costs

26 March 2013
Significant design changes have been proposed for Rio Tinto's most important growth asset as the company seeks to offset rising costs at the massive Oyu Tolgoi mine in Mongolia.

The $US5.1 billion second phase of the project will no longer involve construction of a power station, and will see less copper concentrate produced, under changes revealed in a technical report released today.

The report was released by Turquoise Hill Resources, the Rio subsidiary that is building the project, and comes amid ongoing tensions with the Mongolian Government over the build cost and the amount of royalties Mongolia will receive. In 2010 the second, underground phase of the mine was forecast to cost $US2.5 billion however, today's report confirmed a prediction made last year that costs would rise to $US5.1 billion.

The axing of the power station means that Oyu Tolgoi will source its power from a ''third party Mongolia based power provider'', which could wither be a Government power station or a private sector one. Had Rio stuck with the original plan with the power plant included, the cost overrun would have been even higher.

The report also said the concentrator has been kept at its initial size for longer than was planned, meaning that at the very least, plans to increase its capacity by 60 per cent will be deferred. The company added that such an expansion was not necessary until 2015, and so could be considered at a later date. Although the changes will no doubt lower the initial costs of construction, operating costs of the mine will likely increase to around US$0.89 per pound of copper.

The company said its differences with the Mongolian Government had still not been resolved, pointing to the descrepincy in royalty expectations that had been included in the Mongolia's 2013 budget that are at odds with the October 2009 agreement; ''In its proposed 2013 budget, the Government of Mongolia has included revenue from the application of a progressive royalty scheme to Oyu Tolgoi. However, the Investment Agreement provides a stabilized royalty rate of 5 per cent over the life of the agreement and specifies that new laws made after its signing will not apply to Oyu Tolgoi. Any change to Oyu Tolgoi’s royalty rate would require the agreement of all parties to the Investment Agreement,''.

Rio still maintains hopes to begin commercial production at Oyu Tolgoi in the first half of this year, assuming it can resolve its differences with the Mongolian Government. A financing package for the second phase of the mine is also hoped to be completed this year and could be worth up to US$4 billion.

Rio shares were $1.21 lower this afternoon at $57.04.