Rio Tinto Will Finally Begin Shipments From Crucial Oyu Tolgoi Mine This Week

Jun.12.13 | About: Rio Tinto (RIO)

After a long wait, Rio Tinto (NYSE:RIO) will finally commence copper shipments from the Oyu Tolgoi mine on Friday, June 14. The company has been producing copper at Oyu Tolgoi since February, but had said that it wouldn't start shipping until it resolved disputes with the Mongolian government over royalties, costs, management fees, and project financing. While Rio hasn't issued any statements to announce the resolution of these disputes, the commencement of shipping is an indicator that all major issues have been sorted out. [Source]

The Oyu Tolgoi mine is important to both Rio Tinto and Mongolia. The mine is expected to eventually account for one-third of Mongolia's economy and will be a major component of its Gross Domestic Product (GDP). Also, Rio has been struggling with setbacks at its Bingham Canyon copper mine in Utah and the Grasberg copper mine in Indonesia. If shipments of copper concentrates are allowed from Oyu Tolgoi, it could make up for the lost volumes to some extent. In the long term, Oyu Tolgoi is significant for Rio's growth and diversification away from iron ore.

Problems At Bingham Canyon And Grasberg

In April, Kennecott Utah Copper's Bingham Canyon Mine experienced a slide estimated in excess of 150 million tonnes of material along a geo-technical fault-line of its north-eastern wall. The copper concentrator had to be shut down while the smelter and refinery are operating at reduced levels. At Bingham Canyon, the output of mined copper will be affected by 125,000 tonnes and that of refined copper by about 100,000 tonnes for the whole year. Last year, refined copper output was 162,700 tonnes at this mine. [Source]

In May, the Grasberg mine in Indonesia was ordered to suspend operations following two accidents at the mine that involved underground tunnels collapsing. Grasberg is majorly owned and run by Freeport McMoran (NYSE:FCX) through its subsidiary PT Freeport Indonesia. Rio Tinto has a 40% interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2021 in Block A of PT Freeport Indonesia's Contract of Work. After 2021, Rio will have a 40% interest in all production from Block A. [Company 10-K]

Operations at the mine will remain suspended till the time the government finishes its investigations and this may take 2-3 months. Freeport hasn't quantified the estimated impact on production till now. ((Freeport Indonesia mine seen shut for two months: Company, Reuters))

Importance Of Oyu Tolgoi To Rio

At full capacity, the production from the $6.2 billion Oyu Tolgoi mine will account for nearly a third of Mongolia's, economy while Rio Tinto is dependent on the mine to drive growth outside its massive iron ore business. Having suffered massive writedowns in its aluminum business for two consecutive years, Rio is looking for avenues to allow significant yet profitable diversification from iron ore. Also, almost all of Rio's iron ore production is tied up in the Pilbara region of Australia, where cyclones are quite common and lead to production outages.

In the first 10 years, the annual output at Oyu Tolgoi is expected to average 330,000 tonnes of copper and 495,000 ounces of gold. Rio is also in the process of securing financing for a $5 billion underground expansion at the mine.

We have a Trefis price estimate for Rio of $56.

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