Costs At Rio Tinto’s Massive Mongolian Copper Mine Blow-Out

By Glenn Dyer | More Articles by Glenn Dyer

Rio Tinto shares hardly moved yesterday despite the news of a major delay and cost blowout of up to 36% of the original $US5.3 billion estimate at its huge copper mine and underground project in Mongolia.

And there’s no certainty the latest estimate is accurate with Rio revealing of difficult conditions in Mongolia and other problems.

Warnings about stability problems, difficult mining conditions, and other problems will raise questions about the continuing spend on the project and eventual production costs.

Rio shares finished down 0.6% at $103.25 after it told the market that the cost of its Oyu Tolgoi underground copper mine in Mongolia has grown by up to $US1.9 billion ($A2.7 billion), and its “first sustainable production” could now be delayed by up to two and a half years.

In the statement, Rio said geotechnical information and data modeling had confirmed possible stability risks with the approved mine design for its Oyu Tolgoi underground project and that this would have cost and timing implications.

“As previously advised, enhanced geotechnical information and data modeling 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 to complete the Project,” Rio said.

“Studies to date indicate that these options may result in some of the critical underground infrastructure, such as the mid-access drive and the ore handling system, being relocated or removed. Options relating to the sequence of crossing the panel boundaries during mining operations are also being analysed.

“Preliminary estimates for development capital spend for the project…is now $US6.5 billion to $US7.2 billion, an increase of $US1.2 billion to $US1.9 billion from the $US5.3 billion previously disclosed,” it said.

The company warned that this was a preliminary estimate only, subject to a range of productivity assumptions and that it could change again prior to completion of the final estimate.

Rio said first sustainable production could be achieved between May 2022 and June 2023, which would be a “delay of 16 to 30 months compared to the original feasibility study guidance in 2016”.

“This range includes contingency of up to eight months reflecting the unexpected and challenging geotechnical issues, complexities in the construction of shaft 2 and the detailed work still required to reach a more precise estimate,” Rio warned.

Because further technical work is required, Rio said the “definitive estimate” for Oyu Tolgoi, which includes the final schedule for the remainder of the underground mine project and its final cost estimate, is now expected to be released in the second half of 2020.

Aside from the geotechnical and cost challenges experienced by the project, Rio insisted that Oyu Tolgoi had “continued to progress in 2019 towards its path to become one of the largest copper mines in the world”.

You have to ask how long will it be before shareholders start questioning the higher spending and dodgy mining conditions.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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