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Rio Tinto, Turquoise Hill strike funding deal for Oyu Tolgoi FINANCE
ANALYSIS
BY CECILIA JAMASMIE
io Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) and its majority-owned Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) have reached a deal that ends a standoff between the companies over funding for an expansion of the massive Oyu Tolgoi copper-gold mine in Mongolia. The funding plan addresses the remaining US$2.3 billion needed for the underground project, building on and replacing deals set up under a memorandum of understanding inked in September last year. The companies have agreed to restructure debt payments of up to US$1.4 billion with lenders and look to raise up to US$500 million in supplemental debt under existing financing arrangements, Rio Tinto said. The underground expansion has seen costs jump to US$6.75 billion, about US$1.4 billion higher than Rio Tinto’s original estimate, and has led to friction over funding between it and Turquoise Hill. Canada’s Turquoise Hill said the Australian miner had also committed to address any potential shortfalls from the re-profiling and additional supplemental debt of up to US$750 million by providing a senior colending facility on the same terms as the project financing. Turquoise Hill will, in turn, complete a rights offering or placement of common shares up to US$500 million to satisfy any remaining funding shortfall within six months of the colending facility becoming available. “With a binding funding agreement now in place that sets out a process along a known timeline, we will be able to move ahead as expeditiously as possible with the development of the underground project at Oyu Tol-
goi,” Steve Thibeault, interim chief executive officer of Turquoise Hill said in a statement. Rio Tinto’s copper boss Bold Baatar said the agreement represented a major milestone in the development of Oyu Tolgoi, which is expected to become one of the world’s largest mines of the metal, used in construction and green technologies. Tensions between the companies grabbed headlines in recent months as their differences over Oyu Tolgoi deepened. Turquoise Hill’s chief executive quit over the spat, but not before taking Rio Tinto to arbitration. Steve Thibeault’s departure came on the heels of a new deal between Rio Tinto and the government of Mongolia over the polemic expansion. That agreement, yet to be confirmed, would end a three-month impasse between the world’s secondlargest miner and the landlocked East Asian country, as it would give better economic benefits to the state than the current deal. Turquoise Hill had expected the mine’s underground expansion to cost US$5.3 billion when it was approved in 2015. Last year, however, the world’s second-largest miner flagged stability risks associated with the original project design, adding that amendments to it could increase costs by as much as an additional US$1.9 billion. The Vancouver-based miner warned at the time of further delays of up to two and a half years, with first sustainable production from Oyu Tolgoi’s underground expansion expected between May 2022 and June 2023. Once completed, the mine’s underground section will lift production from 125,000–150,000 tonnes in
I
2019 to 560,000 tonnes at peak output, which is now expected by 2025 at the earliest. This would make it the biggest new copper mine to come on stream in several years. Rio Tinto owns the mine through its majority stake in Turquoise Hill, which has a 66% interest in Oyu Tolgoi. The Mongolian state has the remaining 34% of the operation, located in the South Gobi desert near the border with China. TNM
| Demand expected to surge as
long-term supply gap increases
| Agreement ends standoff over copper-gold mine in Mongolia
Processing facilities at the Oyu Tolgoi copper mine in Mongolia. OYU TOLGOI LLC
R
Goldman Sachs calls copper “the new oil” BY TRISH SAYWELL
n a new report on copper, global investment bank Goldman Sachs says meeting the Paris climate goals and supporting the green transition away from fossil fuels and towards electrification will see a surge in copper demand and forecasts a long-term supply gap of 8.2 million tonnes of the metal by 2030, the “highest on record” and “twice the size of the gap that triggered the bull market in copper in the early 2000s.” The authors — Nicholas Snowdon, Daniel Sharp and Jeffrey Currie — estimate that by 2030, copper demand from green electrification “will grow nearly 600% to 5.4Mt [million tonnes] in our base case and 900% to 8.7Mt in the case of hyper adoption of green technologies.” According to their analysis, the amount of ‘green’ copper produced in 2020 was about 1 million tonnes or 3% of total global copper. In their models, that could rise to 2.6 million tonnes, or 9% of total global copper, by 2025, and to 5.4 million tonnes or 16% of total global copper demand by 2030. “We
LITHIUM MINERS OROCOBRE AND GALAXY RESOURCES IN MEGA-MERGER / 8
estimate that green demand will grow at an average annual growth rate of 20% y/y [year-on-year] in the 2020s, generating just under 500kt [500,000 tonnes] per year of growth in demand volumes.” “Crucially, the copper market as it currently stands is not prepared for this demand environment,” the analysts continued. “The market is already tight as pandemic stimulus (particularly in China) have supported a resurgence in demand, set against stagnant supply conditions. Moreover, a decade of poor returns and ESG concerns have curtailed investment in future supply growth, bringing the market the closest it’s ever been to peak supply.” The analysts argue that the mining industry “remains wary of a pivot towards growth after the price collapse in the mid-2010s severely punished any front-foot producers,” and despite the fact that copper prices are up 80% over the last year, “there have been no material greenfield project approvals.” The report also notes that it takes two to four years for brownfield See ANALYSIS / 8
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