Rio Tinto approves plans for $5.3 billion expansion of Oyu Tolgoi

May 9, 2016

Rio Tinto is betting on copper and will invest $5.3 billion into a vast underground expansion of the Oyu Tolgoi Mine in Mongolia.

The expansion will include 200 km (125 miles) of tunnels to reach 25 billion lbs of copper and 12 million oz of gold. Production for the expansion is expected to begin in 2020.

Reuters reported that when the expansion is completed it will be the third largest copper mine in the world. And the expansion is not just important to Rio Tinto, but also to Mongolia. Oyu Tolgoi is the biggest foreign investment to date. Early predictions said that at its peak, the mine could account for a third of the country's economy.

The approval is also a victory for incoming chief executive Jean-Sebastien Jacques, who takes charge in early July and has been instrumental in reaching a deal with Mongolia after two-and-a-half years of wrangling over costs and taxes - just as the commodities slowdown battered the country's economy.

"Long-term copper fundamentals remain strong," Jacques, currently deputy chief executive and head of copper, said in a statement announcing the company's decision.

While Rio Tinto will continue to see the bulk of its profit from iron ore - 87 percent of underlying earnings in 2015 - it has said it will no longer fund major expansions as that market reaches saturation. Instead, it is attempting to grow in copper.

Twenty international banks in December agreed to lend $4.4 billion to Rio Tinto for the Oyu Tolgoi expansion but the project still required board approval.

The parties have also agreed to a senior debt cap of $6 billion, with an option for $1.6 billion of supplemental senior debt.

Copper is languishing near its lowest price in seven years due to a supply glut. With fewer discoveries, however, Rio hopes that by the time the underground mine opens, miners will be facing a shortage.

Oyu Tolgoi, which translates to Turquoise Hill, has been a marathon for Rio, from its first involvement with the mine's original owner, Robert Friedland - one of the industry's best known entrepreneurs and toughest negotiators.

Rio took control of the project in 2012, just before commercial production began.

Rio Tinto is operator of the mine, which is 66 percent owned by its Turquoise Hill arm and 34 percent by the Mongolian government.

"Given the current situation, any news regarding progress of Oyu Tolgoi, Mongolia's landmark project, is good news for the economy," said Chuluun Mergen, executive director of the Business Council of Mongolia.

Mongolia's Prime Minister Chimediin Saikhanbileg said the approval was "a clear demonstration" that the country, bruised by the commodities downturn, was "back to business".

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