Oyu Tolgoi Underground to See Cost Hike, Production Delay

Major miner Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) broke some less than pleasant news to shareholders this week with the announcement that its prized Oyu Tolgoi project will experience significant delays and a hefty capital increase for underground operation.

Located in Mongolia, Oyu Tolgoi is set to become one of the world’s largest copper mines, with its underground component set to see annual output of over 500,000 tonnes of copper upon full ramp up.

Rio approved the development of the underground operation in 2016 with first production estimated for 2020; the project’s open pit began production in 2013.

However, in an update released on Tuesday (July 16), Rio explained that potential stability risks have been identified with the approved mine design. As such, Rio is going back to the drawing board and weighing other mine design options, pushing back the 2020 production estimate.

“Preliminary information now suggests that, depending on which mine design options are adopted, first sustainable production could be achieved between May 2022 and June 2023, a delay of 16 to 30 months, compared to the original feasibility study guidance in 2016,” the statement reads.

The range includes a contingency of up to eight months due to unexpected and challenging geotechnical issues, shaft two construction complexities and further required work to reach a precise estimate.

On top of the fresh delays, the project is being hit with a boosted price tag. Originally set to cost US$5.3 billion, preliminary development capital estimates are now set at US$6.5 billion to US$7.2 billion dependent on the outcome of the aforementioned work.

The company stated that it will work to minimize the impact on Oyu Tolgoi’s schedule and costs by going through the details and testing of each mine design option.

“We have made significant progress on a number of key elements in the construction of the underground project during 2019. However, the ground conditions are more challenging than expected and we are having to review our mine plan and consider a number of options,” Stephen McIntosh, group executive of growth and innovation, said in the statement.

“Delays are not unusual for such a large and complex project, but we are very focused as a team on finding the right pathway to deliver this high value project.”

As of Monday (July 15), copper was trading at US$5,997 per tonne on the London Metal Exchange.

Rio’s share price was down 0.64 percent on Tuesday, ending the day of trading at AU$103.25.

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.