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TABLE OF CONTENTS Feb 25 - Mar 3, 2013 Volume 99 Number 2 - 0 comments

Oyu Tolgoi's feasibility study delayed

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Turquoise Hill Resources (TRQ-T, TRQ-N) updated the market with good and bad news about its 66%-held Oyu Tolgoi copper-gold project in Mongolia’s South Gobi desert.

It noted that the mine’s first-phase development was virtually complete at the end of 2012, with final costs anticipated at US$6.2 billion, or 3% over its initial budget. The company, which is majority-owned by Rio Tinto (RIO-N, RIO-L), said that US$6 billion had been invested in the first phase before 2013.

The project, comprising several copper-gold-silver-molybdenum deposits, will be mined as an open-pit and underground operation, with first-phase mining targeting near-surface pits, where ore will be processed in a 100,000-tonne-per-day copper concentrator plant. Once the open pit ramps up, the company plans to add ounces from a proposed underground mine and expand the mill capacity to 160,000 daily tonnes.

Processing the near-surface ore began in early January, with the first copper-gold concentrate delivered on Jan. 31.
“We are making good progress on our timetable leading to the start of commercial production,” the Vancouver-based firm said.

On Feb. 14, it added that first commercial production from the open pit would start by the end of June, depending on whether it could resolve the Mongolian government’s concerns about implementing the investment agreement, the companion shareholders’ agreement and project financing.

The Mongolian government acquired 34% of the primary copper-gold property after entering an investment agreement with Turquoise Hill and Rio Tinto in late 2009. But several officials have pushed to renegotiate the contract so that the government can increase its stake to 50%.

Turquoise Hill says discussions are ongoing to ensure no changes are made to the investment and shareholder agreements.

Once surface activities ramp-up, the companies intend to develop an 85,000-tonne-per-day underground block-cave mine at the Hugo North deposit, where the ongoing feasibility study has been delayed to early 2014.

“This follows earlier postponements from fourth-quarter 2012; to first-half 2013; second-half 2013; and now into next year,” BMO Capital Markets analyst Tony Robson writes, adding that he isn’t sure the setbacks have anything to do with the country’s political risk or technical and geological study issues.

The U.K.-based analyst also suggests that Turquoise Hill and Rio Tinto are waiting for the government to reaffirm the investment agreement, before another US$7 billion to $8 billion is invested into Oyu Tolgoi.

Despite the feasibility delay, Turquoise Hill hasn’t made any changes to its underground production guidance, slated to begin in 2016, with full production from both underground and open pit to follow by 2018.

But Robson remains cautious, saying that “although work on the shaft is ongoing, a delay to the feasibility study puts that timeline at risk.”

Oyu Tolgoi is located 550 km south of the capital of Ulaanbaatar, and 80 km north of the China-Mongolia border.

The large-scale project could produce 1.2 billion lb. copper, 650,000 oz. gold and 3 million oz. silver per year in its first 10 years. Oyu Tolgoi has an estimated mine life of 50 years.

To focus on the long-life, capital-intensive project, Turquoise Hill recently agreed to sell its 50% stake in Altynalmas Gold, a private company advancing the Kyzyl gold project in Kazakhstan, to Sumeru Gold for US$300 million. The sale should close by the end of June.

The Vancouver-based outfit also holds a 58% stake in Mongolia-focused SouthGobi Resources (SGQ-T) and 57% of copper-gold miner Ivanhoe Australia (IVA-T).

On Feb. 14, Turquoise Hill and Rio Tinto were both down nearly 2% on the Toronto and London bourses to $7.41 and £36.93 per share.

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Pit stripping and excavation activity at Turquoise Hill Resources' Oyu Tolgoi copper-gold project in Mongolia's South Gobi dessert. Sources: Turquoise Hill Resources
Pit stripping and excavation activity at Turquoise Hill...

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