Rio Tinto, Mongolia Reach Agreement For Massive Oyu Tolgoi Expansion

Rio Tinto, Mongolia Reach Agreement for Massive Oyu Tolgoi ExpansionRio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) and the government of Mongolia have reached an agreement to move forward with a massive underground expansion at the Oyu Tolgoi copper mine.

The project features an open-pit operation that has been producing for roughly two years. However, development of a $5-billion Phase 2 underground mine has been stalled since 2013 due to disagreements between Rio and the government over taxes and costs for the project. The company has said that roughly 80 percent of Oyu Tolgoi's value lies in the underground mine.

Rio controls the mine through its majority interest in Turquoise Hill Resources (TSX: TRQ,NYSE:TRQ), which owns 66 percent of the project. The Mongolian government owns the remaining 34 percent, and Rio Tinto manages the project.

"Our joint announcement today reflects tremendous leadership by all parties and paves the way for work to resume on the underground development, which is expected to deliver significant value to shareholders," said Rio Tinto's copper and coal chief executive, Jean-Sébastien Jacques, in a statement.

Canadian junior Entrée Gold (TSX:ETG) is also involved in Oyu Tolgoi through its Lookout Hill property. Lookout Hill completely surrounds the Oyu Tolgoi mining license, and Entrée has a 20-percent carried joint venture interest in two deposits that cross over the license boundaries: the Hugo North Extension and Heruga deposits.

"Achievement of this major milestone signals that the parties involved are firmly committed to moving the underground development forward," commented Entree Gold CEO Gregory Crowe in a company release regarding the news. "Oyu Tolgoi's immense size and exceptionally high grades are seldom seen in our industry and this project is poised to benefit the country of Mongolia for decades to come."

Under the terms of the agreement, Turquoise Hill will give up a 2-percent NSR from BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT), and has agreed to change how royalties for the project will be calculated. Management fees for underground development at Oyu Tolgoi have also been reduced from 6 percent to 3 percent of capital costs, and the amount of tax the company owes the Mongolian government has been reduced from $127 million to $30 million.

Overall, the companies are pleased with the arrangement. Turquoise Hill has suggested that the value impact for the company will be less than 2 percent of the mine's $7.4-billion value.

Furthermore, the development is being seen as positive for Mongolia's economy and for the investment climate in the country. As Reuters notes, Oyu Tolgoi is the largest single foreign investment in Mongolia, and it isn't the only project that's been held up in recent years.

"Unlocking Oyu Tolgoi's underground mine with have a significant impact on the Mongolian economy, which will benefit Mongolian citizens for generations to come," said Mongolian Prime Minister Chimediin Saikhanbileg in a statement. "Our joint agreement clearly positions Mongolia as an attractive country for investment and underscores the fact that Mongolia is open for business."

With the agreement in hand, Rio and Turquoise Hill will look to both finalize a feasibility study for Oyu Tolgoi and secure financing and permits for the project.

"The intent for all parties is to move as quickly as we can," Jacques told Reuters. According to the news outlet, analysts expect the underground mine to begin commercial production as early as 2019 or 2020.

 

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Entrée Gold is a client of the Investing News Network. This article is not paid-for content.

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