Oyu Tolgoi’s feasibility study gets delayed

Turquoise Hill Resources (TRQ-T, TRQ-N) updated the market on its 66%-held Oyu Tolgoi copper-gold project in Mongolia’s South Gobi desert with a mix of potentially good and bad news.

It noted the mine’s first-phase development was virtually completed by the end of 2012, with final costs anticipated to come in at US$6.2 billion, 3% over its initial budget. The company, which is majority-owned by Rio Tinto (RIO-L), said US$6 billion had been invested in the first phase by the end of 2012. 

The project, comprising several copper-gold-silver-molybdenum deposits, will be mined as an open-pit and underground operation, with first phase mining targeting near-surface pits, where ore will be processed in a 100,000-tonne-per-day copper concentrator plant. Once the open pit production ramps up, the company will add ounces from a proposed underground mine and expand the mill capacity to 160,000 daily tonnes. 

As previously reported, processing of near-surface ore started in early January, with the first copper-gold concentrate produced on Jan. 31.

“We are making good progress on our timetable leading to the start of commercial production,” the Vancouver-based firm said that day.

On Feb. 14, it added first commercial production from the open pit should start by the end of June 2013, depending on whether it could resolve the concerns the Mongolian government has with the “implementation of the Investment Agreement, the companion shareholders’ agreement and project finance.”

The Mongolian government acquired 34% of the primary copper-gold property after entering an Investment Agreement with Turquoise Hill and Rio Tinto in late 2009. But several officials have been pushing for sometime to have that contract renegotiated so the government could increase its stake to 50%.  

Turquoise Hill says discussions with the government and other stakeholders are ongoing to ensure no changes are made to the current investment and shareholders’ agreements.

Once surface activities ramp up, the companies intend to develop an 85,000-tonne-per-day underground block-cave mine at the Hugo North deposit, where the ongoing feasibility study has been delayed to early 2014.

“This follows earlier postponements from Q4/12, to H1/13, H2/13 and now into next year,” writes BMO Capital Markets analyst Tony Robson, adding he’s unsure if the setbacks have any thing to do with the country’s ongoing political risk or technical or geological study issues.

The U.K.-based analyst also suggests that Turquoise Hill and Rio Tinto are waiting for the government to reaffirm the current investment agreement before another US$7-$8 billion is invested into Oyu Tolgoi.

Despite the feasibility delay, Turquoise Hill hasn’t made any changes to its underground production guidance, slated to begin in 2016, with full production from both underground and open pit to follow by 2018.

But Robson remains cautious, saying “although work on the shaft is ongoing, a delay to the feasibility study puts that timeline at risk.”

Oyu Tolgoi is located 550 km south of the capital of Ulaanbaatar and some 80 km north of the China-Mongolia border.

The large-scale project has the potential to produce an average of 1.2 billion lb. copper, 650,000 oz. gold and 3 million oz. silver a year in its initial 10 years. Oyu Tolgoi has an estimated mine life of 50 years.

To focus on the long-life, capital intensive project, Turquoise Hill recently agreed to sell its 50% stake in Altynalmas Gold, a private company advancing the Kyzyl gold project in Kazakhstan, to Sumeru Gold for US$300 million. The sale should close by the end of June.

The Vancouver-based outfit also holds a 58% stake in Mongolia-focused SouthGobi Resources (SGQ-T) and 57% of the copper-gold miner Ivanhoe Australia (IVA-T). 

On Feb. 14, Turquoise Hill and Rio Tinto were both down nearly 2% on the Toronto and London bourses to $7.41 and £36.93 per share.