Santa Comes Late for Rio: Energy Agreement for Oyu Tolgoi

Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) has received a late Christmas present, announcing on Monday (December 31) that it had signed a power-supply agreement with the government of Mongolia for the Oyu Tolgoi copper mine after months of delays.

The operator of the mine, Turquoise Hill Resources (TSX:TRQ), said in a release that it now had a framework agreement with Ulaanbaatar that “establishes the basis for a long-term domestic power solution for the mine.”

The agreement is a significant step forward for questions around the power supply for Oyu Tolgoi, which has been beset by delays and domestic wrangling over ownership and location.

Under the framework agreement, which Turquoise Hill said was binding, both Turquoise Hill and the Mongolian Government now have set roles in constructing the plant, and an amended timeframe for it to come to fruition.

CEO of Turquoise Hill, Ulf Quellmann, said that that the framework agreement was “pivotal” in the development of Oyu Tolgoi.

“Resolving Oyu Tolgoi’s long-term power requirements is critically important to the mine’s long-term development and today’s signing of the (framework agreement) is a positive milestone toward that goal.

“We will continue to work closely and collaboratively with our partners to finalize the details of the power project, which will allow this truly great world-class asset to achieve its full potential for the benefit of all stakeholders.”

Under the framework construction of the 300-megawatt plant will begin in 2020 following further studies.

The plant, which will be built close to the Tavan Tolgoi coalfields, is expected to be commissioned in 2023 and will be majority owned by Oyu Tolgoi.

“Oyu Tolgoi will now move forward to confirm the technical design of the project and finalize the commercial arrangements,” said the company.

The Oyu Tolgoi project is 34-percent owned by the Mongolian state, which had stipulated that the mine have a domestic power source, effectively kiboshing Rio Tinto’s existing practice of importing energy from neighbouring China for over US$100 million each year.

The remainder of Oyu Tolgoi is owned by Turquoise HIll, of which Rio Tinto is the controlling shareholder.

According to reporting by Reuters in September 2018, nationalist sentiment among government leaders was causing instability and slowing the overall power plant permitting process for Rio, which had so far invited, but not chosen from, three Chinese state-run companies to build a power plant in Mongolia.

The new amended timeframe for the power supply agreed to by Turquoise Hill and Ulaanbaatar represents a reprieve for the company, which previously had until 2022 to make a decision to construct, and then bring online a power source for the mine.

Oyu Tolgoi is projected to produce 560,000 tonnes of copper annually from 2020 following a US$5.6-billion underground expansion currently underway.

Earlier in 2018, Rio executive Arnaud Soirat had pleaded with the government of Mongolia to take a more hands-off approach to Oyu Tolgoi, saying that “[Rio Tinto is] confident we can pull it off but we do need your trust, patience and support, please let us get on with the work of continuing to build a world class business.”

Rio Tinto has so far invested US$7 billion in Mongolia, and Soirat said that by the end of ongoing underground development works the company could have invested US$12 billion — more than Mongolia’s annual GDP.

On the Toronto Stock Exchange, Turquoise Hill was up by 5.69 percent on Monday, trading at C$2.23. Year-to-date, the company is down 49.89 percent after starting 2018 at C$4.44.

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