Mongolia to be transformed by giant Rio Tinto copper mine

Land of Genghis Khan to become global copper superpower after mega deal to build giant underground Oyu Tolgoi mine


By Commodities editor

On the face of it, Mongolia – a landlocked and wild land – hasn’t changed much since Genghis Khan and his Golden Horde pillaged their way across Asia in the 13th century. The country’s population is still predominantly made up of nomadic herders living in yurts and drinking airag – fermented mare’s milk.
But this is all about to change after an agreement was reached between the government and Rio Tinto last week to develop one of the world’s largest copper and gold mines at Oyu Tolgoi, which literally means Turquoise Hill. The development of the mine is expected to trigger a rush to exploit $1  trillion (£638bn) worth of mineral resources that are thought to exist in the country and drag its mainly agrarian society into the modern age.
Signs of this transformation are already apparent on the streets of the capital Ulan Bator where around 40pc of the country’s 2.8m population now live. Skyscrapers and new office developments across the city are confronting signs of the impending change that the arrival of the mining industry will bring. Oyu Tolgoi is at the forefront of this new era, which according to the Chimediin Saikhanbileg, the prime minister, will “benefit Mongolian citizens for generations to come”.

Developing the major next phase of the mine not only signals a new era of modernity for Mongolia but an important turning point for the global mining industry, which has been focused squarely on retrenchment over the past two years as the so called commodities “super cycle” ran out of momentum. Oyu Tolgoi marks the first new major project to move forward in the current cycle and could see other major miners begin to once again look at developing new capacity, especially in copper.
However, reaching a final deal to develop the underground mine, which contains 80pc of Oyu Tolgoi’s monetary value has been a rocky road for both sides. The Anglo-Australian mining company shut down initial underground operations at Oyu Tolgoi amid a dispute over the terms of the project with the previous government.
This had a devastating affect on Mongolia’s economy, which was already becoming dependent on revenue from the project’s above-ground operations. Starved of hard currency, the government was forced to turn to China to fund its budget.
Moody’s Investors Service warns that Mongolia’s economy is fragile. According to its ‘External Vulnerability Indicator’ – which measures the adequacy of reserves relative to external debt payments in the next 12 months – Mongolia stands at 230pc in 2015; significantly above the 100pc threshold that indicates fragility in the balance of payments.
Mr Saikhanbileg, who is known as a moderniser, wants to turn this around but faces opposition from parties who are concerned that Mongolia will lose its identity and ultimately become entirely dependent on the mining industry. He even conducted his own referendum by sending a text message to all Mongolians that own a mobile phones asking them whether the country should open up to mining investment. About 56pc of people who responded said yes they wanted investment in mining to lift the country out of poverty.

The US-educated prime minister has even talked of his vision of using some of the proceeds from mining to establish a Mongolian sovereign wealth fund that will ensure that the country’s commodities boom isn’t wasted. Mongolian sovereign bonds rallied on news of the Oyu Tolgoi deal with Fitch, which rates the country B+, saying the deal would have “potentially transformative consequences”.
“It is such a big project for Mongolia so there was lots of anxiety and questions,” Jean-S├ębastien Jacques, chief executive of Rio Tinto’s copper and coal division said. Mr Jacques is understood to have personally ironed out the fine details of the deal with Mr Saikhanbileg in the kitchen of his home in London. According to the company, the personal relationship which both men struck up played an important part in moving the deal forward.
“There was a change of government a few years ago and one of the agendas at that time was to change the deal and change the agreement. It took us a long time to explain the deal to them and to change this but we got there in the end,” said Mr Jacques.
The Mongolian government holds a 34pc stake in the Oyu Tolgoi mine with Rio Tinto acting as the project’s operator. Its subsidiary Turquoise Hill Resources owns the remaining 66pc. Rio owns a 51pc stake in Turquoise Hill.
By the time it reaches its full potential by the end of the decade, Oyu Tolgoi will be producing enough copper and gold to account for between 30pc and 40pc of Mongolia’s projected gross domestic product. Production at the smaller above-ground open mine, which started operating in 2013, is expected to reach 195,000 tonnes of copper and up to 700,000 ounces of gold in concentrates in this year.
But the real value in the project is hidden deep underground and Rio Tintowill have to excavate around 200 kilometres of tunnels, which is expected to take around five years to complete, before the mine can achieve its full potential. This phase of the project is expected to cost around $6bn to develop and Rio Tinto will finance around $4bn of this figure through a syndicate of banks.
The majority of the mine’s copper production will ultimately head to China where demand for the metal is expected to rise significantly over the next decade. However, amid a deep downturn in the mining sector when shareholders are demanding that companies cut back on capital expenditure and refrain from making bold bets on new mining projects, Rio Tinto is still shouldering a big risk in Mongolia. According to Mr Jacques, this bet will pay off long term.
“Oyu Tolgoi is a large low-cost ‘tier-1’ asset so it doesn’t matter where you are in the cycle you are going to make money from it for shareholders. To build the mine it will take several years so if you take a medium and long-term view on copper and everyone agrees that in a few years down the road there should be a shortage and therefore one should expect the price of copper to recover significantly. So we’re trying to bring online the underground at a point in time when the market recovers in a significant way,” said Mr Jacques.

Source:http://www.telegraph.co.uk/
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