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TABLE OF CONTENTS Sep 10 - 16, 2012 Volume 98 Number 30 - 0 comments

Turquoise Hill, Rio Tinto push ahead at Oyu Tolgoi

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By: Salma Tarikh

Turquoise Hill Resources (TRQ-T, TRQ-N), formerly known as Ivanhoe Mines, says the first construction phase at its sizeable 66%-held Oyu Tolgoi copper-gold project in Mongolia’s South Gobi desert is wrapping up, with initial production expected by year-end.  

Oyu Tolgoi — Mongolian for “turquoise hill” — got its name from the colour of rocks in the area that contained patches of oxidized copper.

The property is 550 km south of the country’s capital of Ulaanbaatar and comprises several deposits hosting copper, gold, silver and molybdenum mineralization. The deposits are part of the Oyu Tolgoi trend, which spans 26 km and is located 80 km north of the China-Mongolia border.

 The Mongolian government acquired a 34% interest in the project in 2009, after Turquoise Hill and its major shareholder, Rio Tinto (RIO-N, RIO-L), signed an investment agreement with the country’s officials. While Turquoise Hill retains the rest of the project, its  51%-shareholder Rio Tinto manages construction at Oyu Tolgoi.

Oyu Tolgoi will begin as an open-pit operation, with first production of copper-gold-silver concentrate expected later this year. Commercial production is anticipated to kick off in the first half of 2013, but full production — including underground mining — is set for 2018.

During its first 10 years, the project could churn out an average annual production of 1.2 billion lb. copper, 650,000 oz. gold and 3 million oz. silver, and run for at least 50 years.

Described as the “biggest economic undertaking” in Mongolia, Oyu Tolgoi is forecast to add one-third to the country’s gross domestic product by 2020.

The cost to get the project — which is the size of Manhattan — up and running is US$6.2 billion, a 3% increase over an earlier estimate.  

Turquoise Hill says it invested US$5.2 billion in the project’s first phase of construction by mid-year, which included building the 100,000-tonne-per-day copper concentrator and processing facilities for open-pit mining. That phase was 90% complete by the end of June, and at the end of July it advanced to the 94% mark. During that month, miners delivered the first ore from the open pit to the project’s primary crusher for pre-commissioning of the crusher, overland conveyor and coarse-ore stockpile circuits.

Workers finished pre-stripping the open-pit mine and building 95% of the copper concentrator in June. They also tested the newly installed 87 km, 220-kilovolt transmission line that goes from the electrical distribution grid in China’s Inner Mongolia to the China-Mongolia border. The Vancouver-based company plans for the project’s initial years to draw power from China.

“Although the power line to China has been completed and tested, a separate power-purchase agreement between Mongolia and China is required before power from China can be imported into Mongolia,” TD Securities’ analyst Craig Miller writes in a note.

While commercial discussions on the terms of the power-purchase agreement are ongoing, Turquoise Hill cautions that if it is unable to import power from China to the site by the third quarter, commercial production at Oyu Tolgoi will likely be delayed.

Turquoise Hill’s spokesperson Tony Shaffer says that a resolution to the power situation is the last major item required for commissioning.

“We remain confident that a power solution will be reached soon to enable commissioning and the start of production in the second half of this year,” he writes in an email.   

BMO Capital Markets’ analyst Tony Robson outlines, according to, that the two countries signed a memorandum of understanding (MoU) to temporarily import power from China for the Oyu Tolgoi project, but adds that the terms were not included on the website.

“The announcement is positive as power supply is the remaining key project risk, and the MoU demonstrates progress in negotiations,” Robson writes in a note.
vBut he points out that this good news has been offset by reports that Mongolia’s new mining minister seeks to renegotiate the existing investment agreement, and increase the government’s 34% stake in the project to 50%.

In an interview with Mongolian daily Udriin Sonin, Davaajav Gankhuyag says that he hopes Mongolia’s new government implements the “Resolution 57” previously passed by parliament. This would allow the state to acquire 50% of Oyu Tolgoi once Turquoise Hill and Rio Tinto recoup their initial investments.

According to the 2009 investment agreement, the government can buy another 16% of Oyu Tolgoi after the mine has been in commercial production for 30 years.

A similar call has been made in the past by a group of parliamentarians, with no amendments being made to the 2009 agreement, Robson concludes in the note.

Meanwhile, to meet the current power needs to finish construction, the company is installing additional diesel-generating capacity.

It adds that progress is being made at the second shaft in the Hugo North deposit, with underground lateral development anticipated to resume in September.

Turquoise Hill aims to develop an 85,000-tonne-per-day underground block-cave mine at the Hugo North deposit. A feasibility study for the underground portion is expected late this year.

“This is a very important study, in our view, given that we estimate that eighty-seven percent of the contained metal value is in the underground,” Tom Meyer, an analyst at Scotiabank, pens in a note.

The company says that underground mining should start in 2016, and it plans to boost the mill capacity from 100,000 tonnes a day to 160,000 tonnes to process ore from the underground and open-pit mines by 2018.

Meanwhile, Turquoise Hill and Rio Tinto are working to complete an international US$3-billion to US$4-billion project-financing package by year-end to help fund further underground development.

The Vancouver-based producer says the environmental and social impact assessment initiated as part of the project-finance process should be out in August.

On Aug. 14, Turquoise Hill reported a cash position of US$2.2 billion after completing its US$1.8-billion rights offering.

But it posted a lacklustre second quarter: consolidated net loss came in at US$285.9 million on sales revenues of US$28.2 million.

Consequently, Meyer at Scotiabank reduced his target price on Turquoise Hill to $9.34 from $9.50 a share, after including the higher-than-expected start-up costs and the weak second-quarter results.

Miller at TD Securities recently cut his target from $11 to $10.50, and maintained a “hold” rating on the stock.

Turquoise Hill’s other investments include a 58% stake in SouthGobi Resources (SGQ-T) and a 59% interest in Ivanhoe Australia (IVA-T).

SouthGobi owns the Ovoot Tolgoi coal mine in Mongolia’s South Gobi region, and was being pursued by Chalco. The Chinese entity in April said it intended to acquire up to 60% of SouthGobi, but the Mongolian government, wanting more control of its assets, appeared hesitant to approve the deal. Chalco — which had its deadline to table a bid extended twice due to regulatory uncertainty — recently dropped its offer.

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