A Look At Rio Tinto’s Oyu Tolgoi Copper Mine

+14.82%
Upside
62.27
Market
71.50
Trefis
RIO: Rio Tinto logo
RIO
Rio Tinto

The Oyu Tolgoi copper mine in Mongolia constitutes one of the world’s largest copper deposits. The mine is operated by Turquoise Hill Resources, a subsidiary of Rio Tinto (NYSE:RIO). The Oyu Tolgoi mine had commenced operations in 2014, but the development of the underground phase of mining operations had been put on hold due to a dispute between the Mongolian government and Turquoise Hill Resources over unpaid taxes. [1] Rio Tinto recently announced that the outstanding disputes holding up the development of the mine have been resolved, paving the way for the development of underground mining operations. [2] In this article, we will take a look at the implications of this news for Rio Tinto.

See our complete analysis for Rio Tinto

The Oyu Tolgoi Mine

Turquoise Hill Resources owns a 66% stake in the Oyu Tolgoi mine, with the balance held by the Mongolian government. [3] Rio Tinto holds a 51% stake in Turquiose Hill Resources, which effectively gives the company a 33.5% interest in the Oyu Tolgoi mine. [4] As per the figures reported by Rio Tinto, the Oyu Tolgoi mine accounted for 49,8oo tons, or around 8%, of the company’s mined copper production in 2014. [4] This figure includes Rio’s 33.5% share of production from Oyu Tolgoi.

The Oyu Tolgoi mine boasts 2.7 million tons of  recoverable copper and 1.7 million ounces of recoverable gold reserves. [3] With the development of the underground mine, Oyu Tolgoi’s copper production is expected to average close to 430,000 tons of copper a year over its mine life. [3] The mine is expected to ramp up to full production by 2021. ((Oyu Tolgoi Mine, Rio Tinto Website)) The company’s equity share of production from the mine would average approximately 144,000 tons, which is around 25% of the company’s current mined copper production. Thus, the Oyu Tolgoi mine would significantly boost the company’s copper output, going forward.

Copper Prices

(Copper Prices, Source: London Metal Exchange)

Relevant Articles
  1. Down 9% This Year, What’s Next For Rio Tinto Stock?
  2. After Tough 2022 Results, What’s Next For Rio Stock?
  3. Is Rio Tinto Stock Still Good Value Following The Recent Iron Ore Rally?
  4. With Iron Ore Prices Under Pressure, What’s Next For Rio Stock?
  5. With Iron Ore Prices Volatile, Is Rio Tinto Stock Worth A Look?
  6. Will Rio Tinto Stock Continue Its Momentum?

Copper has diverse industrial applications, particularly in the manufacturing, power, and infrastructure sectors. London Metal Exchange (LME) copper prices fell sharply from over $7,000 per ton at the start of 2014 to levels below $5,400 per ton earlier on in 2015. [5] The fall in prices was mainly because of concerns over copper demand from China due to its recent signs of economic sluggishness. China’s GDP growth is expected to slow to 6.8% in 2015, down from 7.4% and 7.8%, in 2014 and 2013, respectively. [6] China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for copper. [7]. Thus, concerns over weakening demand from the world’s largest consumer of copper weighed on prices earlier in the year.

Despite signs of weakness, copper prices have recovered somewhat lately, and currently stand at levels of over $6,300 per ton. The recent rally in prices has largely been due to expectations of the tightening of copper supply. [8] As a result of the weakness in copper prices, large copper mining companies have put on hold several new projects. In addition, given the adverse pricing environment, funding has become hard to come by for smaller copper mining companies. [8] Furthermore, declining ore grades have negatively impacted copper output for many mining companies. As a result of these supply side constraints, copper prices have risen over the past couple of months. Prices have also been bolstered by improving economic conditions in the developed world, particularly in the U.S., and to a lesser extent, in Europe and Japan. [9] The improved pricing environment has certainly boosted the prospects of copper mining companies.

Given the decline in new copper projects, demand for copper is expected to exceed supply in the coming years. [8] Though the exact timing of such a supply deficit materializing is debatable, a supply deficit is likely to provide  a boost to copper prices. Given that the Oyu Tolgoi mine is expected to ramp up its production in the coming years, reaching peak production by 2021, it could benefit from higher copper prices. Thus, the resolution of the issues surrounding the Oyu Tolgoi mine couldn’t have come at a better time for Rio Tinto.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research


 

Notes:
  1. Rio Tinto’s Oyu Tolgoi Mine in Mongolia Hits Another Snag, Wall Street Journal []
  2. Oyu Tolgoi shareholders sign agreement to progress the development of underground mine, Rio Tinto News Release []
  3. Oyu Tolgoi Mine, Rio Tinto Website [] [] []
  4. Rio Tinto’s 2014 20-F, SEC [] []
  5. LME Copper Prices, LME []
  6. World Economic Outlook, IMF []
  7. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  8. Copper producers position for price recovery, Financial Times [] [] []
  9. Copper Rebound Seen by Barclays as Miners Struggle on Output, Bloomberg []