Rio Tinto’s First Copper Shipment From Oyu Tolgoi Marks A Milestone

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After a long wait and a final unexpected delay of nearly 20 days, Rio Tinto (NYSE:RIO) has finally commenced copper shipments from the Oyu Tolgoi mine on July 8, sending 600 metric tonnes of copper concentrate to China. Further shipments of 5,800 metric tonnes are planned over the next two weeks. [1]

The company has been producing copper at Oyu Tolgoi since February but had said that it wouldn’t start shipping until it resolved disputes with the Mongolian government over royalties, costs, management fees, and project financing. It was all set to begin shipments on June 21 but had to abort at the request of the Mongolian government.

The Oyu Tolgoi mine is important to both Rio Tinto and Mongolia. The mine is expected to account for one-third of Mongolia’s economy by 2020 and will thus be a major component of its Gross Domestic Product (GDP). Also, Rio has been struggling with setbacks at its Bingham Canyon copper mine in Utah and the Grasberg copper mine in Indonesia. If shipments of copper concentrates are allowed from Oyu Tolgoi, it could make up for the lost volumes to some extent. In the long term, Oyu Tolgoi is significant for Rio’s growth and diversification away from iron ore.

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What Was Holding Up Shipments?

Although it was never publicly confirmed by Rio, officials in the Mongolian government had indicated that there was disagreement over where to keep the revenues generated from sales of copper. Rio was keen to repatriate earnings from Mongolia while the latter wanted them to remain within the Mongolian financial system, perhaps to provide greater fillip to economic activity in the country. Also, the government wanted the $8 billion worth of sales contracts signed with Chinese customers to be shown to its representatives on the Oyu Tolgoi board. The original agreement governing the project gave Rio full freedom to put export revenue wherever it wished. [2]

The issue appears to have been resolved but there isn’t much clarity on the final arrangement agreed upon. The Mongolian mining minister, Davaajav Gankhuyag, said in a Twitter post that sales revenues will go through Mongolian and Oyu Tolgoi’s registered accounts. No further elaboration has been made so far but commencement of shipments indicates resolution of the issue. There has been no word on the issue of making sales contract agreements available to government representatives. [3]

Importance Of Oyu Tolgoi To Rio

Oyu Tolgoi is one of the biggest deposits of copper in existence. The Escondida mine in Chile, the biggest deposit of copper ever found, is in decline after years of mining. BHP Billiton operates the mine but Rio holds a 30% stake in it. Oyu Tolgoi can make up for that decline. At full capacity, the production from the $6.2 billion mine will account for nearly a third of Mongolia’s economy while Rio Tinto is dependent on the mine to drive growth outside its massive iron ore business. Having suffered massive writedowns in its aluminum business for two consecutive years, Rio is looking for avenues to allow significant yet profitable diversification from iron ore whose price has been very volatile in the last few years. Also, almost all of Rio’s iron ore production is tied up in the Pilbara region of Australia where cyclones are quite common and lead to production outages. [4]

In the first 10 years, the annual output at Oyu Tolgoi is expected to average 330,000 tonnes of copper and 495,000 ounces of gold. Rio is also in the process of securing financing for a $5 billion underground expansion at the mine.

We have a Trefis price estimate for Rio of $56.

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Notes:
  1. Rio Tinto Starts Shipping Copper From Oyu Tolgoi, WSJ []
  2. UPDATE 3-Mongolia tells Rio Tinto to delay Oyu Tolgoi copper exports, Reuters []
  3. Mongolia Says Rio’s Copper Mine Can Start China Shipments, Bloomberg []
  4. Mongolia’s Oyu Tolgoi copper exports underway -Rio Tinto, Reuters []