Business Maverick

Business Maverick

Rio Tinto digs deep as prized $7bn copper mine finally delivers

Rio Tinto digs deep as prized $7bn copper mine finally delivers
Workers in the underground portion of the Oyu Tolgoi mine in Khanbogd, Mongolia, on March 13. (Photo: SeongJoon Cho/Bloomberg)

Rio Tinto has begun digging copper from the underground portion of its giant mine in Mongolia, an expansion that will turn the operation into one of the world’s largest, after years of delays, cost blow-outs and billion-dollar disputes with the country’s government.

The Oyu Tolgoi project is now producing ore from 1.3km below the surface of the Gobi Desert, Rio’s CEO Jakob Stausholm told reporters gathered at the site. The world’s No 2 miner is spending $7-billion on the underground project that’s a cornerstone of the company’s growth plans.

“It’s not been a smooth ride, let’s be honest about that,” said Stausholm, referring to the mine’s long and troubled journey as lawmakers in the resource-dependent country repeatedly sought better terms. Mongolia had “very skilfully handled” negotiations, he said.

The prize for Rio is one of the world’s few large-scale new sources of a metal needed in vastly expanded volumes as the energy transition accelerates. At its peak in 2030, Rio says its Mongolian operation will be the world’s fourth-biggest source of copper, churning out half a million tons a year. That’s enough for around 6 million electric vehicles or 60 of the biggest wind farms.

Long road

But the difficult route to underground production at Oyu Tolgoi – the launch was once envisaged for 2015 – reflects the challenges in bringing on new supplies. One reason is mineral-rich nations like Mongolia increasingly demanding better terms from global mining companies. Oyu Tolgoi could add a third to the size of the Central Asian nation’s economy.

Rio became Mongolia’s biggest foreign investor in 2009, when it struck a 30-year deal to develop Oyu Tolgoi. Surface mining started in 2013, but the more lucrative underground project was log-jammed as lawmakers in the boisterous democracy repeatedly challenged Rio. Claims of foreigners pillaging the country’s mineral wealth dominated election campaigns. Swings in global commodity markets and the Covid-19 pandemic didn’t help either.

Mongolian leader Oyun-Erdene Luvsannamsrai, speaking at the underground opening ceremony, acknowledged many “hiccups” for the project. Difficult negotiations with Rio were driven by a desire to maximise benefit for the country’s people, he said.

A 2021 agreement for Rio to write off $2.4-billion of state debt was crucial for Stausholm – chief financial officer until he was appointed to the top job in late 2020 – to get to today’s juncture. The company has already spent around $15-billion in Mongolia, including $4-billion of taxes or other payments to the state, Rio said. 

The government retains a 36% stake in Oyu Tolgoi, where some 80% of the value lies underground. Many of the world’s open-pit mines are gradually expiring, while quality new resources like this one are getting harder to find. 

Copper exposure

Progress at Oyu Tolgoi is a coup for CEO Stausholm, who replaced Jean-Sebastien Jacques following the 2020 Juukan Gorge scandal in Australia, when Rio blew up ancient Aboriginal rock shelters. Big miners like Rio and rival BHP Group are rushing to be part of the anticipated copper boom, and both were involved in multibillion dollar takeovers last year.

Oyu Tolgoi’s ore holds about 1.5% copper, well above the global average of around 0.6% for all copper mines, according to researcher Wood Mackenzie. Extracting the material from 1,300m or more below the surface offers a very different challenge from surface digging. 

Rio is using a method called “block cave mining” that involves drilling spaces under the ore body, using controlled explosions to collapse the roof, then collecting the fragmented rock. This is much more costly and technically demanding than the open pits at Rio’s massive iron ore mines in Western Australia.

Despite its comparatively large size, Oyu Tolgoi will still only meet 1% of global copper demand by 2035, according to demand estimates from S&P Global Commodity Insights, which put annual demand by then at around 50 million tons per annum. The mine also has a relatively short life, with peak production expected from 2028 to 2036.

“It’s been a tough journey so far” for Rio in Mongolia, said David Radclyffe, managing director of consultancy Global Mining Research. But “it fulfils a lot of what Rio and peers are trying to do at the moment, which is to maximise exposure to copper in the current market”. BM/DM

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