RIO Rio Tinto Limited

By Rhiannon Hoyle 

SYDNEY-- Rio Tinto PLC said it will take longer and cost more than expected to finish building one of the world's biggest copper mines in Mongolia's remote southern Gobi desert.

Prospects of an around two-year delay to an underground mine at the Oyu Tolgoi operation risks worsening a global shortage of copper that is predicted to deepen in coming years. Copper is an industrial commodity used in everything from smartphones to electric cars and power cables, and demand has been rising as households in China and India become wealthier.

At Oyu Tolgoi, located near Mongolia's border with China where locals have historically relied on nomadic herding and animal husbandry, Rio Tinto wants to build a network of underground tunnels some 4,000-feet deep. That's proven to be increasingly difficult, with the varying strength of rocks deep below the Earth's surface heightening a risk of rockfalls.

"The ground conditions are more challenging than expected," said Stephen McIntosh, Rio Tinto's head of growth and innovation. A new mining plan probably won't be ready until next year.

Mining safety has become a more-urgent issue in the wake of two devastating spills of waterlogged waste in Brazil and the deaths of potentially dozens of miners illegally working on an African copper mine owned by Glencore PLC.

Oyu Tolgoi is Rio Tinto's biggest new investment, after management completed a major expansion in Australian iron-ore production. It represents a big shift in global mining away from commodities such as coal that powered Asia's first phase of industrialization to materials used in consumer products.

On Tuesday, Rio Tinto said it may not be able to produce copper sustainably from the underground pit until possibly as late as June 2023. That represents a delay of up to 30 months from its earlier forecast, and means the cost of the project could blow out by as much as US$1.9 billion to US$7.2 billion.

A near-term impact is likely to be on Rio Tinto's net profit, with management reviewing the carrying value of Oyu Tolgoi and planning to update investors on Aug. 1 when it is due to release its half-year result.

Rio Tinto, which manages the Oyu Tolgoi project, has an indirect interest in the mine. It holds 50.8% of publicly traded Turquoise Hill Resources Ltd., which in turn controls 66% of Oyu Tolgoi LLC, the mine's owner. The Mongolian government owns 34%.

The development of Oyu Tolgoi was for a long time overseen by Jean-Sébastien Jacques before his promotion to chief executive from head of Rio Tinto's copper unit.

Oyu Tolgoi has a track record of delays--a victim of fraught talks with Mongolia's government over how to divide profits. While copper has been produced via an open pit since 2013, Rio Tinto needs to dig underground to access the most valuable ore. Management estimate 80% of the value can't be reached directly from the surface.

When the underground mine is completed, Oyu Tolgoi will be the world's third-largest copper mine, according to Rio Tinto's projections.

Rio Tinto believes the world will need the same amount of copper in the next 25 years that was produced in the previous five centuries to meet global demand. That estimate is tied to continued economic growth in China and emerging markets, as well as a rising global population and a ballooning middle class.

Global copper output totals around 25 million metric tons annually, but the market is expected to record a deficit of 190,000 tons this year, widening to 250,000 tons in 2020, according to the International Copper Study Group, an organization of copper-producing and -consuming countries. Many analysts think that will deepen next decade.

Rio Tinto's other main copper project, Resolution, a joint venture with BHP Group Ltd. in Superior, Ariz., isn't expected to be built until the middle or later part of the next decade. It recently discovered a copper deposit in Australia, called Winu, where exploration drilling is continuing.

(END) Dow Jones Newswires

July 16, 2019 00:39 ET (04:39 GMT)

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