Preliminary talks have been held with some of the lenders behind an existing $US4.4 billion finance package for the mine expansion, which Rio estimated would cost $US5.3 billion to build when it made a final investment decision in 2016.
Severe blowouts in cost and schedule have since struck the Mongolian project, which ranks as Rio's most important growth asset, and the miner said on Tuesday it was now expected to cost between $US6.5 billion and $US7.2 billion.
First production was expected in the early weeks of 2021, but is now expected to be delayed by between 16 and 30 months, and Rio may record an impairment against the carrying value of Oyu Tolgoi in its August financial results.
The delays have been caused by project management shortcomings and a major rethink of the mine plan forced by weaker-than-expected geology at Oyu Tolgoi.
Australian taxpayers are among the lenders to the project, after the federal government's Export Finance Insurance Corporation agreed to lend $US150 million ($213 million) on the ground that Australian mining services companies would win work on the project.
Local commercial banks such as ANZ and NAB were also part of the lending consortium, which included more than 20 financial institutions from around the world.
The $US4.4 billion finance package was struck in 2015 and came with a proviso that total debt to the project could not exceed $US6 billion.
Rio and its partners in the mine (Canada's Turquoise Hill Resources and the Mongolian Government) will likely need to exceed the $US6 billion cap if the final cost of the project is at the upper end of the new cost range disclosed by Rio on Tuesday.
The 2015 finance package contained clauses that would allow the $US6 billion debt cap to be breached for "expansion facilities", and Rio may try to classify some of the extra cost under those terms.
Rio and its partners are expected to point to those "expansion" clauses if and when they seeks extra debt to pay for a power station to provide energy to Oyu Tolgoi.
Rio's original $US5.3 billion budget for Oyu Tolgoi did not include the cost of a power station, and it is understood Tuesday's increased cost estimates also do not include the cost of a power station, which is expected to be in the realm of $US1 billion.
Rio and its partners in the mine are expected to own, and therefore have to fund, at least 51 per cent and possibly 100 per cent of the power station, after the Mongolian government vowed in 2018 that Rio could no longer import power for the mine from neighbouring China.
While the existing lenders are the most likely source of the extra $US1.6 billion of debt allowed under the $US6 billion cap, Rio and its partners in the mine are allowed to, and have considered sourcing that debt from elsewhere.
EFIC told The Australian Financial Review this month that there had so far been no change to its loan to Oyu Tolgoi, while ANZ declined to comment on Tuesday.
Rio was expected to provide a ''definitive estimate'' of the updated project cost and schedule by late 2019, but on Tuesday the company said it would not be able to provide such an estimate until late 2020.
The extra time required speaks to the scale of the rethink being considered by Rio, which is exploring multiple design options in a bid to ensure sufficient stability in the underground chambers.
''All options under consideration present a pathway to sustainable first production, and have different cost and schedule implications,'' said Rio in a statement on Tuesday.
''Significantly more work is required to complete the final assessment."
Some of the scenarios being considered by Rio and its partners would see less copper and gold extracted over the 40 year life of the underground mine than previously expected.
Turquoise Hill told the Toronto Stock Exchange that the mine design rethink could result in a reduced estimate of the amount of copper and gold retrievable from the mine.
''Current information indicates that Oyu Tolgoi mineral reserves will not be materially impacted by the Hugo North mine design options being considered. However, ongoing reviews will be considered as the work progresses,'' said Turquoise Hill.
While Rio is operator of Oyu Tolgoi, it does not directly own a stake in the mine.
Rio's exposure to the project comes through its 50.79 per cent stake in Turquoise Hill, and Turquoise Hill in turn owns 66 per cent of the Mongolian company that owns the mine; Oyu Tolgoi LLC.
The remaining 34 per cent of Oyu Tolgoi LLC is owned by the Mongolian Government.
Many minority shareholders in Turquoise Hill fear the cost blowouts on the project will force it to conduct an equity raising, which could provide Rio with a low cost way to increase its ownership in the company and by extension, the Mongolian mine.
Turquoise Hill has made clear in recent months that it should have sufficiency liquidity to avoid an equity raising for several years at least.
Source:www.afr.com
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