Rio Tinto copper mine costs could blow out by $2.7 billion
Rio Tinto’s flagship copper project is sitting on a deposit the size of Manhattan but its costs just blew out by up to $2.7 billion. What has gone wrong?
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Rio Tinto has warned costs at one of its flagship growth projects, a giant underground copper mine, are likely to blow out by up to $2.7 billion.
The mining major has also flagged it may be forced to write down the value of the troublesome copper development in Mongolia when it reports it first-half results early next month.
Production at the multi-billion-dollar project, which is now expected to come in up to one-third over budget, is set to be delayed by as much as 30 months, Rio announced yesterday.
It is the latest blow to the Oyu Tolgoi copper mine expansion, which has delivered Rio a string of unpredictable political and technical challenges over the past decade.
The underground expansion of the remote mine, in the south Gobi Desert, will make it one of the three biggest copper mines in the world.
Rio has pushed ahead with the project as is singles out copper as a key pillar of future growth with renewable energy, electric vehicles and electronic consumer products fuelling demand for the red metal.
An open-pit mine already operates at Oyu Tolgoi.
For the expansion project, the miner is using a technique known as block caving, where tunnels are carved under the ore body.
The ore body then collapses before being trucked out.
But the resource is crumbling at a faster rate than expected and in the wrong places, meaning Rio may have to reinforce or shift some of the tunnels.
The Anglo-Australian miner said that process was expected to cost between $US1.2 billion and $US1.9 billion ($1.7 billion and $2.7 billion).
“Enhanced geotechnical information and data modelling suggests that there may be some stability risks identified with the approved mine design and so a number of other mine design options are also under consideration,” Rio said.
“Studies to date indicate that these options may result in some of the critical underground infrastructure … being relocated or removed.”
The project, which is targeting a copper deposit the size of New York’s Manhattan Island, was originally estimated to cost $US5.3 billion.
It is now expected to come in between $US6.5 billion and $US7.2 billion, but Rio warned the final estimate would not be known until the middle of next year.
The latest estimate does not include the cost of a power station Rio has been forced by the Mongolian government to build at the site.
First sustainable production at the underground mine is now scheduled to begin between May 2022 and June 2023 — a delay of 16 to 30 months on the original timeline.
Credit Suisse analyst Sam Webb said that, while investors had been bracing for a step up in costs for Oyu Tolgoi, the reported blowout was bigger than expected.
“Despite the new details, there remains a lot more work to be undertaken to fully understand how the stability risks will be addressed by the chosen revived mine plan and the degree to which this will impact the ramp up schedule,” he said in a research report for clients.
The lift in costs is also likely to again cause tension with the Mongolian government, which has previously rewritten its contract with Rio and complained the project is costing too much.
Rio has a controlling stake in Canadian company Turquoise Hill Resources, which owns 66 per cent of Oyu Tolgoi. Mongolia’s government owns the rest.
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The complications in Mongolia topped a lacklustre production update from Rio, which reported it shipped out 85.4 million tonnes of iron ore in the three months to June — 3 per cent less than what it exported in the same period a year ago.
Rio’s Pilbara operations were hit by Tropical Cyclone Veronica in late March. Chief executive Jean-Sebastien Jacques said the group’s operational performance had been “challenging” the past six months.
Shares in Rio fell 0.6 per cent yesterday to close at $103.25.
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