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TABLE OF CONTENTS Sep 2 - 8, 2013 Volume 99 Number 29 - 0 comments

Turquoise Hill posts Q2, updates Oyu Tolgoi

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By: Trish Saywell

Speaking on a conference call in mid-August from Ulaanbaatar, CEO Kay Priestly of Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) confirmed that development of the Oyu Tolgoi underground copper-gold mine was being delayed until matters including project financing are resolved with the Mongolian government.

The company and major shareholder Rio Tinto (NYSE: RIO; LSE: RIO) are working with the government to resolve a range of outstanding issues, the CEO said.

“Given the likely time needed to gain consent for project financing, funding for further underground construction has been deferred,” Priestly told analysts and investors on the conference call. “We are in ongoing discussions with the Mongolian government and are working hard to have project financing in place and draw down funds by the end of 2013.”

She noted that “in addition to project financing, we are discussing a range of other matters with the government. We have agreed to keep the details confidential.”

Rio Tinto told Bloomberg on Aug. 14 that it would lay off 1,700 employees and contractors at the mine. At the end of June, 13,500 people were on the payroll at the operation.

In July Reuters quoted Tserenbat Sedvanchig — executive director of Erdenes Oyu Tolgoi, the state-owned company that owns 34% of the copper-gold project — as saying that the Mongolian government still has “twenty-two points of dispute” with Rio Tinto. Topping the list is the capital cost for the existing open pit.

Chief financial officer Chris Bateman said that “we’re still looking at demobilization costs — we can’t switch off the lights immediately. From a cash-flow perspective, you’re looking at a 45- to 60-day lag.”

Priestly added that “we’re carefully moving through the process. It’s not a complete shutdown. We are demobilizing and stopping expenditures on lateral development and sinking of shafts. We’ll continue to have ventilation. It will be a careful, thoughtful way of putting the underground on care and maintenance.”

During the second quarter, 1,400 metres of underground lateral development was completed at Hugo North, along with progress in sinking shafts two and five. At the end of June, 14.9 km had been excavated.

If project financing funds are not available by year-end, Turquoise Hill will launch a rights offering, Priestly said, who previously was a senior executive at Rio Tinto, and most recently served as chief financial officer of the company’s global copper product group. “In discussions with many of our institutional investors over the last few weeks, you’ve said clearly that you prefer us to use debt versus equity for funding until project financing can be completed,” she said. “Our first priority for funding Oyu Tolgoi is using debt, with the completion of project financing. In the event equity is needed before year-end because project financing isn’t available, all investors will be given the opportunity to participate in the rights offering. That said, we are working hard at having project financing in place by year-end.”

In early August, US$235 million was advanced to Turquoise Hill in connection with the sale of its 50% stake in Altynalmas Gold, a private company that owns 100% of the Kyzyl gold project in northeastern Kazakhstan, and shortly afterwards the company signed a binding term sheet with Rio Tinto for a new funding package.

“The funding plan is designed to meet our cash needs for the balance of the year and allow for the con­tinued ramp-up of Oyu Tolgoi,” Priestly explained, adding that as part of that agreement, the short-term bridge facility has been extended and is available to the company until it can finalize the new funding plan, which should occur by September. “The new funding plan includes a new US$600-million bridge facility that matures on Dec. 31, 2013,” she said. “Importantly, Rio Tinto has waived the conversion feature of the short-term bridge facility, and the new bridge facility does not include any conversion provision.” Priestly noted that the proposed project financing package supports repayment of the new bridge facility and the US$1.8-billion interim funding facility, both of which are due at the end of 2013. Rio Tinto agreed to the interim funding facility in December 2010.

The package requires parliamentary approval. Priestly said that it was the company’s understanding that based on the current terms of the financing package and all issues related to it, “there would be many levels of approval needed from the government.”

She said that “the key thing is to focus on what is needed next, and we are addressing that . . . we are completely aligned [with the government] to keep these discussions going and progress the project — it’s in everyone’s interests to have stability.”

On a positive note, Priestly said the production ramp-up was progressing and that the concentrator is achieving throughput rates above 80% of design capa­city, and is expected to reach full capacity in the second half of the year. Oyu Tolgoi started shipping concentrate from the open-pit mine to customers in China on July 9, with an initial sale of 5,800 tonnes. As of the end of the second quarter, Oyu Tolgoi held 50,200 tonnes of concentrate in inventory.

As of Sept. 1, the mine will have achieved the “commencement of production,” as outlined in the terms of the 2009 investment agreement. The company expects Oyu Tolgoi will produce 75,000 to 85,000 tonnes of copper in concentrates for the year.

“We’ve been shipping for about five weeks now, and will continue to ramp up logistics,” Bateman said. “Oyu Tolgoi is working with shipping vendors and fine-tuning the process on both sides of the Mongolian border to ramp up shipments.”

Bateman also noted that by year-end Turquoise Hill expects to build up a concentrate inventory equal to four to eight weeks of production, and said the mine should operate with positive cash flow by year-end.

Meanwhile, the Oyu Tolgoi-Gashuun Sukhait road to an existing toll road is expected by January 2014, and the diversion of the Undai River is substantially complete. Long-term sales contracts have been entered into for 75% of Oyu Tolgoi’s concentrate production over the first three to six years of production.

The feasibility study for the expansion of the Oyu Tologi mine is expected before March 2014. For the quarter Turquoise Hill reported a headline loss of US$105 million, or US10¢ per share, compared to a net loss of US$285.9 million, or US35¢ per share, in the second quarter of 2012.

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Trucks moving material at Turquoise Hill Resources' Oyu Tolgoi copper-gold project in Mongolia.  Source: Turquoise Hill Resources
Trucks moving material at Turquoise Hill Resources' Oyu...

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