Ivanhoe And Rio Tinto Get Set To Start Construction At Oyu Tolgoi

With a long-awaited investment agreement finally signed by the Mongolian government, Ivanhoe Mines(IVN-T, IVN-N)and Rio Tinto (RTP-N, RIO-L) are getting down to the nitty-gritty of building a mine.

The two companies, which are joint ventured on the massive Oyu Tolgoi copper-gold project in the Asian country’s Gobi Desert, say they expect to spend US$758 million next year alone as full-scale construction of the mining complex gets under way.

“Ivanhoe is considering a schedule that could see construction of the initial open-pit mine completed in 2012 and commercial production begin in 2013,” Ivanhoe’s president and chief executive John Macken said in a statement.

Ivanhoe’s plan has long been to begin the project by mining the southern Oyu deposits before turning to the massive Hugo Dummett deposit to the north, which will be mined by underground block-caving methods.

But the companies still need to finalize a few details in connection with the investment agreement signed at the beginning of October –chief among them a government review and approval of the feasibility study. Provided such matters are cleared up imminently, as they are expected to be, construction at the site should get an early start.

Thus far, Ivanhoe says seven of the 10 conditions in the investment agreement have been satisfied.

Ivanhoe laid out some of the specifics for the construction plan, saying that it will resume sinking shaft No. 2 — a shaft needed for hoisting ore from the underground mine at Hugo Dummett — as well as ramping up the construction of the 31-storey head frame for the shaft.

The company will also be installing a 20-megawatt power station, digging the initial earthworks for the open-pit mine at the Southern Oyu deposits, doing more lateral underground development at shaft No. 1 for Hugo Dummett, putting in a 105-km highway link to the Chinese border, and building a regional airport.

Ivanhoe currently has roughly US$1 billion in cash assets to put towards the efforts.

While that may seem a princely sum, it will need more funds next year to meet all of the capital requirements.

It says it will obtain the money in one of two ways: either via Rio Tinto’s exercise of certain warrants (which, if exercised, would yield US$385-393 million) or through more strategic investors. The company says some sovereign wealth funds have already expressed unsolicited interest in the project.

The investment agreement with the Mongolian government calls for Rio Tinto’s stake in Ivanhoe to move up to 19.7% from 9.9% through a US$388-million payment to Ivanhoe.

The final setup will see the government holding a 34% interest in the project with the remaining 66% held by Ivanhoe Mines.