Rio Tinto’s ‘all or nothing’ $10bn copper bet finally takes shape

The CEO of global mining giant Rio Tinto is determined to reset a fractured relationship to get its Mongolian mine firing again.

Rio Tinto’s Jakob Stausholm and Mongolia’s Prime Minister, Oyun-Erdene Luvsannamsrai, 1200m underground. Picture: Eric Johnston

More than a kilometre underground deep in the Gobi Desert, the Rio Tinto boss steps out of a dusty steel cage into a bet that has been $US7bn ($10.5bn) and three decades in the making.

While the surface temperature is pushing six degrees below zero, it’s mild down below as Jakob Stausholm walks into one of the world’s biggest sources of copper, which is ready to be tapped.

For Rio Tinto, it represents a future beyond iron ore.

Stausholm is here in the Mongolian desert to officially launch underground production at the giant Oyu Tolgoi copper mine – a project that almost didn’t get off the ground.

“For me personally it’s been it’s been quite a journey,” Stausholm says in an interview.

“When I took over two years ago it was very clear that Oyu Tolgoi was one of the biggest opportunities but also challenges and it was not entirely clear how to solve it”.

Namjilmaa Tumenjargal, a mine development officer underground at the Oyu Tolgoi copper mine. Picture: Eric Johnston

“It’s not been a smooth ride. Let’s be honest about that.

“We have had our challenges. We have had our setbacks. But frankly, we have learned like you wouldn’t believe it.”

Indeed, it’s been a long, difficult road to get to this point thanks to tensions between Rio Tinto, the mine’s biggest shareholder and operator, and the Mongolian government, which owns 33 per cent.

Disputes over investment and revenue sharing at one point resulted in construction of the underground mine halting for nearly two years.

Then the Covid-19 pandemic also represented a massive challenge, securing materials and labour just as the mine construction was hitting a critical stage.

Finally, Rio had to clean up a messy ownership structure by buying out minority partners of Canadian miner Turquoise Hill last year for $US3.3bn. Turquoise was the mine’s owner, although Rio was its operator.

Oyu Tolgoi’s development officer Jacques van Tonder stands in one of the tunnels of the Mongolian copper mine some 1200 meters below the surface.

To highlight how relations have changed, Stausholm is joined below the surface by Mongolian Prime Minister Oyun-Erdene Luvsannamsrai – both were grinning and clearly looking at the potential.

Speaking underground at the mine, he said the expansion represents the single biggest investment in Mongolia, which has helped the country strengthen its independence since breaking away from communism three decades ago.

“There was nothing in the Gobi before we started this development and it is with thanks to all the hard work of the miners here,” Luvsannamsrai says.

He said talks with Rio were open, transparent and mutually productive, and it was a joint effort that led to the opening.

“For many years we’ve had negotiations back and forward and this was driven by the desire to maximise the benefits of the project for the people of Mongolia”.

“I think this is going to be a foundation to help us for a future partnership. We declare that we are open for business,” he says.  

Mega mine

At its peak, the Oyu Tolgoi mine is expected to produce about 500,000 tonnes of copper concentrate annually, and it is likely to be one of the lowest-cost producers in the world. The mega mine will be the fourth largest in the world.

For Rio, it represents a move away from its reliance on iron ore income, giving it a stake in the massive demand for copper as the world shifts to renewables.

Currently, a vast open pit produces 120,000 tonnes of copper concentrate a year, but the higher grades and volume are deep in the ore body way below the surface. The higher volumes are also needed to make it viable to run a concentrator on site.

The location of the mine represents isolation in the country of vast spaces. It is nearly 800km from the bustling Mongolian capital of Ulaanbaatar, but importantly sits a little over 100km from the Chinese border – the country that consumes almost half of the world’s annual copper production.

The relations between Rio and Mongolia had hit a stalemate until Stausholm made it one of his priorities to rescue it when he took charge two years ago.

Early last year relations were “reset” with Rio wiping an investment obligation and a revenue sharing deal was reworked.

Mongolia's Prime Minister Luvsannamsrai Oyun-Erdene (L) shakes hands with CEO of Rio Tinto Jakob Stausholm at the Oyu Tolgoi copper mine in southern Mongolia. Picture: AFP

Now the two shareholders are pulling in the same direction and the mega-mine is playing squarely into the green transition. Electric vehicles require 10 times the amount of copper; so too wind turbines are hungry for the base metal. This is on top of the growing industrial demand for copper’s everyday use.

“You cannot address climate change without having more of at least three buckets of materials. One is copper and the other one is aluminium. And the third is battery materials,” Stausholm says.

Despite the agreement struck last year with the Mongolian government, there are still some differences, including about the tax take.

Copper concentrate ready to be shipped

Even so, they are in arbitration, underscoring the willingness of both sides to find common ground. Nor was the dispute about to put a dampener on the opening.

For Mongolia, it too needs this mine and the partnership to work. Current output from the open-cut operations generates about a third of the nation’s annual GDP.

The expansion through the new underground mine will deliver as much as half of the country’s total GDP, which is a staggering figure.

The mine employs 20,000 workers, and nearly half are on site at any one time in a mini city. Stausholm is quick to point out that 97 per cent of these workers are Mongolians – from digital developers and finance managers back in Ulaanbaatar, to camp cooks and engineers deep at the bottom of the mine.

All of these are rapidly creating a middle class for the country that was until the early 1990s was effectively part of the communist Russia.

Now Stausholm sees the partnership with Mongolia and the project itself as a template for what it can do elsewhere, particularly as the miner pushes ahead with developing a giant iron ore deposit in Simandou, Guinea.

“I think there’s so much we can learn from here and it gives me confidence that we can do it elsewhere,” he says.

The author visited Oyu Tolgoi, Mongolia as a guest of Rio Tinto.

Originally published as Rio Tinto’s ‘all or nothing’ $10bn copper bet finally takes shape