Rio Tinto appears set to approve the long-awaited $US4 billion ($5.25bn) expansion of the Oyu Tolgoi copper and gold mine in Mongolia as early as next week, in a move analysts say could add $US4.7bn of value to the company and pave the way for further expansion.
The miner, whose copper boss Jean-Sebastien Jacques will take over as chief executive from Sam Walsh in July, holds its annual general meeting in Brisbane next Thursday ahead of what is likely to be the board’s final meeting for the first half.
And with Rio this month saying it was on track for a June-quarter decision on the expansion, which was stalled for 18 months because of disagreements between Rio and Mongolia, an investment decision looks increasingly likely.
In December, Rio said the disagreement had been settled, paving the way for project financing deals and the coming approval of the expansion, which is designed to unlock the up to 80 per cent of the value of the project that cannot be accessed by the open pit mine.
“We expect the Oyu Tolgoi project to be approved by Rio Tinto, Turquoise Hill (the Canadian listed Rio subsidiary that operates the project) and the Mongolian government during the second quarter,” Deutsche Bank analysts said yesterday in a note to clients. “We value Rio’s 34 per cent share of the underground phase 1 at $US4.7bn, or $3.50 per share, with the project delivering an internal rate of return of 25 per cent at our long-term copper price of $US3 a pound.”
The latest cost estimate for the underground expansion issued by Rio was $US4.9bn in October 2014.
Deutsche Bank says this could have been whittled down to about $US4bn because of reductions in construction costs that the downturn has brought.
In its March quarter report, released last week, Rio said the board was expected to make an investment decision on the Oyu Tolgoi underground this quarter, which is a good indication management thinks the project is set to go ahead.
At full production, Oyu Tolgoi is expected to produce about 700,000 tonnes of copper and 500,000 ounces of gold a year at a cost of US70c a pound (net of gold credits).
Deutsche Bank said there was the potential to expand the mine through further development of other deposits.
It said a second phase could mine another 2.5 billion tonnes of resource at a cost of $US4bn, including boosting the size of the mill by 50 per cent to be able to process 210,000 tonnes of ore per day. That could another $US1.1bn of value to Rio, the bank said.