Rio Tinto  has expressed confidence that it would reach an agreement with China
over power supply to the Oyu Tolgoi project well in time so that production
begins on schedule. Oyu Tolgoi  is one of the world’s largest undeveloped
copper and gold assets, with a resource base estimated at 41 billion pounds of
copper and 21 million ounces of gold. Rio Tinto is spending close to $6.2
billion on the mine’s development in the first phase. Around 94% of the work is
complete. Initial output of copper and gold concentrate is set to begin
before the end of this year, and commercial production is expected to start in
the first half of 2013.  

The Final Hurdle

Oyu Tolgoi is located close to the Chinese border, and there is a paucity of
power options near Oyu Tolgoi, which is located in the South Gobi desert.
Hence, Rio needs to rely on importing power from China, at least for the
initial years of its operations.

The power transmission lines in both Mongolia and China are already in
place. They have been tested with full power loads and are ready for
commissioning. However, a power supply agreement with China remains mired in
negotiations even though one whole year has passed since the talks began.
Mongolia and China have had a tense relationship over many centuries, so
striking a deal between the governments can be tricky. The Mongolian government
holds a 34% stake in the Oyu Tolgoi project and hence is a party to
negotiations. If negotiations aren’t successful, Rio Tinto will have to
build a dedicated power plant, which would cause a delay in the production
schedule.

Impact On Rio

Oyu Tolgoi arguably ranks as Rio Tinto’s most important growth project.
The mine is expected to have an average annual output of 425,000 tons of copper
and 460,000 ounces of gold. To put things in perspective, Rio produced 520,000
tons of copper last year. Increased copper production from Oyu
Tolgoi will help Rio Tinto diversify its income stream. Iron
ore contributed to 78% of Rio’s profit last year, followed by copper at
12%.

We believe that the power supply agreement with China will be finalized
sooner or later, and Rio won’t have to set up a plant of its own. This is
because China is going to be the primary consumer of what is produced at Oyu
Tolgoi, so it is in its own interest to have the project online at the
earliest. Due to geographical proximity of Mongolia to China, copper from Oyu
Tolgoi will come at a much lower price to China.

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