Vancouver —
The plan to get the massive Mongolian metals deposit onstream forecasts average output of over 1 billion lbs. copper and 330,000 oz. gold annually for at least 35 years. Initial production is forecast to begin mid-2008.
The independent IDP, led by engineering firms AMEC Americas and Ausenco, outlines an Oyu Tolgoi development schedule over 15 years with a greater than 40-year mine life. The first step is a feasibility study on the Southern Oyu deposits, which will host the initial, open-pit operations. A prefeasibility and scoping study on infrastructure requirements (power, etc.) for underground mining of the Hugo Dummett North and South deposits will follow.
The IDP charts a two-phase approach towards development. The first phase, or “base case,” predicts a 70,000-tonne-per-day circuit producing a gold-rich copper concentrate from open-pit ore mined at the Southwest Oyu deposit. Over the first three years of mining, ore would be principally sourced from the gold-rich portions of the Southern open-pit operations, while large-scale underground block caving development on the Hugo North deposit proceeds.
Production from Hugo North would begin around year four, and is expected to be the primary source of mill feed by year five. As the underground ore is softer, a boosted throughput rate of 85,000 tonnes per day is anticipated by year six, with some modifications to the downstream section of the single semi-autogenous grinding (SAG) concentrator circuit. At this stage, open-pit mining would cease, with only the first two stages of a modelled 9-stage, open-pit plan completed. The base case envisages Hugo North providing the ore-stream beyond year 40.
A phase two, or “expanded case,” envisages a more aggressive development plan. Initial operations would progress as outlined in the base case, however in year three, decisions would be made on block cave development of Hugo South, and stripping of stages three and four of the open-pit mine. The ramped-up scenario would include a doubling of the concentrator capacity through the addition of a second SAG milling circuit, giving the combined open-pit, underground operation at least a 140,000-tonne-per-day production rate by year seven. With mining of Hugo South starting in year 12, underground ore output would hit 140,000 tonnes per day.
Under the expanded case schedule, the IDP shows Oyu Tolgoi could produce about 35 billion lbs. copper and 11 million oz. gold over a projected 35-year initial mine life, based on current resources. Optimistic about its deposit’s resource expansion potential, Ivanhoe believes mill throughput in the twin circuits could be boosted to the 170,000-tonne-per-day level with a modest infusion of additional capital.
Project economics
Initial capital requirements for the open-pit mine and milling complex are estimated at US$1.15 billion, with an additional US$232 million earmarked for development of the underground Hugo North mine. The expenditure would carry the project through its first 6-month phase into full production of 70,000 tonnes per day by early 2009.
Ivanhoe believes that additional capital to boost production to the expanded-case (phase-two) level of 140,000 tonnes per day between 2009 to 2014, could be financed from cash flow.
IDP financial modelling indicates a net present value (NPV) of US$3.4 billion before tax for Oyu Tolgoi, US$2.7 billion after tax, using an 8% discount rate and assuming the expanded production scenario. The project shows an after-tax internal rate of return (IRR) of 19.75% and a 6.5-year payback period. Base metal prices of US$1 per lb. copper and US$400 per oz. gold were used in the study.
With its strong sensitivity to copper price, a 10% increase in the metal’s value to US$1.10 per lb. boosts the project’s after-tax IRR to 22.1% and the after-tax NPV to US$3.4 billion using the same 8% discount rate.
None of the NPV calculations in the IDP include consideration of the deep, high-grade mineralization recently discovered adjacent to, and north of, Ivanhoe’s Hugo Dummett deposit, on its Shivee Tolgoi joint venture with
Ivanhoe Mines recently initiated its underground work program on the Hugo North deposit, engaging the Redpath Group to construct the 6.7-metre-diameter shaft no. 1 and a headframe and hoisting plant. The shaft is scheduled to be completed by the third quarter of 2007, to be followed by underground drifting and drill programs. A second 10-metre diameter production and service shaft is currently under design.
Kinder, gentler company
Throughout Ivanhoe’s IDP is an emphasis on the project’s “significant and long-lasting benefits for Mongolia,” and the company’s ambition to be “a model of environmentally sound mineral development.” Ivanhoe is keenly aware that its proposal will be scrutinized at a higher level than most others’ due to the sheer scale of the project and its potential to contribute to Mongolia’s economy.
The company is awaiting a stability agreement, essential to the project and anticipated by early 2006, from the Mongolian government. The country’s political environment is still fraught with a vocal minority of “old guard” critics and detractors who oppose foreign mining companies reaping the “riches of the people.”
Studies commissioned by Ivanhoe predict significant benefits to the Mongolian economy from Oyu Tolgoi production. Over the initial 35-year mine life direct contributions to the Mongolian government through corporate taxation, sales royalties, employee taxes and social security contributions, and other charges are estimated at US$4.5 billion.
The Stokes Report anticipates contributions to the Mongolian economy, between 2002 and 2043, under the expanded case development scenario as follows:
– average increase of 34.3% in real gross domestic product;
– increase in nationwide employment levels by over 10%;
– an 11.5% boost in nationwide real per capita disposable income; and
– Mongolians are projected to hold 90% of jobs at Oyu Tolgoi by year five of operations, increasing to 98% by year seven.
Oyu Tolgoi contains measured and indicated resources of 1.15 billion tonnes grading 1.3% copper and 0.47 gram gold per tonne (1.54% copper equivalent grade), using a 0.6% copper equivalent cutoff. The measured and indicated resource is almost 33 billion lbs. copper and over 17 million oz. gold. The deposit also hosts an additional 1.16 billion tonnes of inferred resource grading 1% copper and 0.23 gram gold, equating to a further 26 billion lbs. copper and 8.4 million oz. gold.
Ivanhoe posts a market capitalization of about $3.1 billion with its 314 million shares outstanding. The company has recently traded in the $9.80-per-share level, near the higher end of its $6.82-$11.27 trading range for the last 52 weeks.
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