Turquoise Hill secures power for Oyu Tolgoi

Turquoise Hill Resources (TRQ-T, TRQ-N) rose more than 11% after announcing it has finalized the much anticipated power purchase agreement (PPA) for its Oyu Tolgoi copper-gold mine in Mongolia’s South Gobi desert.

In a press release before market open on November 5, Turquoise Hill said it signed a PPA with Inner Mongolia Power Corp. to supply power to its 66%-held mine to finish commissioning so it could start production. The Mongolian government holds the remaining 34%.

“The physical infrastructure to transmit power is already in place, and the agreement means the last issue critical to the mine start has been overcome,” writes BMO Capital Markets analyst Tony Robson in a note.

The company concluded testing the 87-km, 220-kilovolt transmission line that goes from the power grid in China’s Inner Mongolia to the China-Mongolia border in the third quarter.

The PPA now allows the Vancouver-based firm to shortly start the 7-week commissioning of the process plant. First copper-gold concentrate should follow within one month, with commercial production slated to begin three to five months thereafter, nearing the end of the company’s target to reach commercial production in the first half of next year.

“BMO notes, however, that with delays to obtaining this agreement, the schedule for commercial production in H1/13 could be tight,” says Robson.

Bank of America Merrill Lynch analysts Oscar Cabrera and David Foster write that they “originally expected a PPA to be concluded in 3Q12 after Mongolia’s parliamentary elections.” But they add, the PAA remains a positive development,  despite the slight delay. According to the Investment Agreement the company and its major shareholder, Rio Tinto (RIO-N, RIO-L), signed in 2009 with the government, Turquoise Hill can source power inside or outside of Mongolia, including China, for the mine’s first four years of commercial production, after which all power must come from within the country.

The agreement also notes Turquoise Hill can build or sub-contract construction for a coal-fired power plant in Mongolia’s South Gobi region for the project, which is currently being reviewed.

With the PAA concluded, BoA analysts point out the next catalysts for the company includes the underground feasibility study now expected in the first half of 2013, and the US$3 billion to US$4-billion project financing with Rio Tinto, where final documentation should close early next year, with funding to follow in the first half of 2013.  

Underground production is anticipated to kick off in 2016, with full production slated for 2018.  

During its first ten years, Oyu Tolgoi should generate 1.2 billion lbs. copper, 650,000 oz. gold and 3 million oz. silver a year. The mine should operate for at least 50 years.

“OT is a world-class copper-gold mine and the third largest copper mineral resource and one of the lowest C1 LOM (life of mine) cash costs, due to its large precious metal by-product credits,” conclude BoA analysts.

Turquoise Hill was up 90¢ to $8.97 in late trading.