Rio Tinto poised for write-off on delayed Mongolian copper mine

RIO TINTO looks set to take a $US2.5 billion writedown on its huge but troubled copper project in Mongolia.
Construction of the $US5 billion Oyu Tolgoi mine has become ensnared in a tax dispute with the government.
The mine has the potential to transform an economy that is on a par with Angola or Swaziland in national income per head. The International Monetary Fund says that it will be responsible for a third of the country’s GDP growth by the time it is operational.
However, the delays contributed to a $US2.5 billion reduction in the project’s value, according to a report by Turqoise Hill, the Rio-controlled company that owns most of the project.
Rio (RIO) had flagged at its half-year results in August that it may have to write down the value of the project if the delays continued.
Its value has shrunk from $US9.9 billion to $US7.4 billion during the past year, with $US1.1 billion of the fall in value due to the delays and slower production ramp-up. First production from the underground element of the project, which holds about 80 per cent of the value, was supposed to arrive in 2017 but is not now expected until 2019, with one analyst who visited the site this week saying that 2020 is a more likely start date.
Daniel Greenspan, a Macquarie analyst who visited the site, wrote to clients: “We got the distinct impression that even if the green light was given tomorrow, it could take at least ten months before workers and contractors are mobilised and construction recommences. Therefore, the 2019 production start date targeted in the new (technical report) is likely one year off at least.”
Construction of the underground mine, and its 200km of tunnels, was postponed last summer after the Mongolian government announced that it was reviewing a feasibility study, which meant that Rio was unable to hit a September 30 deadline attached to a $US3.6 billion finance package.
Rio cut 300 jobs in May and appointed a new chief executive for the project, Andrew Woodley, in September.
The project would be one of the world’s largest copper mines at full capacity, helping Rio Tinto to break its dependence on Australian iron ore for the vast majority of its profit. Macquarie is forecasting that the project will suck in about 40 per cent of Rio’s growth investment from next year.
The negotiations and impending writedown come at a fraught time for Rio. The company was informally approached in July by Glencore about a potential merger and is three weeks into a six-month period, enforced by the Takeover Panel, during which Glencore cannot return.
Sam Walsh, Rio’s chief executive, said: “It’s a 50-year project ... I need to make sure with these sorts of projects that you don’t put lead in the saddle that you have to carry for 50 years.”
The Times



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