Rio Tinto Starts Shipments From Oyu Tolgoi Copper Mine

Jun.14.13 | About: Rio Tinto (RIO)

By Stuart Burns

Rio Tinto (NYSE:RIO) often gets beaten up for an over-reliance on iron ore as a revenue stream.

Buying Alcan at a 65% premium back in 2007 to widen its sources of revenue and hence spread its risk might earn Rio the title of ‘most disastrous diversification attempt.’

Copper hasn’t gone so well these past couple of months either. The firm’s two principal assets, Bingham Canyon in Utah and its 40% stake in the Grasberg mine in Indonesia have both hit problems following a landslide at Bingham Canyon and the collapse of two tunnels at Grasberg halting production.

So the first exports from the company’s $ 6.2 bn Oyu Tolgoi mine in Mongolia on Friday will prove a welcome boost for the firm.

According to Reuters, Rio began production at Oyu Tolgoi several months ago. The company has aimed to start exporting by the end of June. But it maintained it would not start shipping until it resolved disputes with the Mongolian government over royalties, costs, management fees and project financing.

If one considers the project crucial for Rio, one could consider it even more crucial for Mongolia.

In the first 10 years, annual output at Oyu Tolgoi will average 330,000 tons of copper and 495,000 ounces of gold. But by 2020, the mine could make up a third of Mongolia’s economy, notwithstanding new projects due to come on stream elsewhere in the country. Rio appears close to securing financing for a $5 billion-plus underground expansion of the mine and clearly sees Oyu Tolgoi as a major plank in its non iron ore expansion plans.

The mine will produce more than 550,000 tons of copper, 650,000 ounces of gold and 3 million ounces of silver each year if built to capacity according to mining.com. By which time it would rank among the top five copper mines in the world. But even so Mark Crosby, an associate professor at the University of Melbourne’s business school, said the OT mine would likely account for only 3% of global copper production in the former years. Not that the world has a shortage of copper production after record investment in recent years. The supply tightness that characterized the last decade has eased as supply has caught up with and now exceeds demand, if not massively at least comfortably.

At current prices, last year’s surplus of some 127,000 tons will likely remain in positive territory and OT will no doubt play its part for decades to come.