Rio's Mongolia mine clears major hurdle

Oyu Tolgoi, Rio Tinto's flagship Mongolian copper-gold mine, is set to begin production in less than three months, after finally resolving the issue of power supply from neighbouring China that had caused delays to the nearly USD 6bn project.

The start of production at Oyu Tolgoi will be a major landmark for Mongolia. The mine already accounts for a third of Mongolia's gross domestic product and will be among the world's five biggest copper mines once it reaches full production.

After more than two years of difficult construction work in the Gobi desert, the final hurdle for the mine to move ahead was cleared on Sunday when Oyu Tolgoi signed an agreement to buy power from China.

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Ownership of the mine is split between the Mongolian government, which owns 34 per cent, and Canada-listed Turquoise Hill, which owns the remaining 66 per cent and is in turn controlled by Rio Tinto through a majority ownership stake.

Erdenebulgan Oyun, the Mongolian vice-minister for mining, told the Financial Times on Monday that the power deal had been sealed, adding: "It is great news for us." Turquoise Hill confirmed the news in a statement.

"Finalisation of the power purchase agreement will enable Oyu Tolgoi to complete commissioning, leading to the first production of copper-gold concentrate," said Kay Priestly, chief executive of Turquoise Hill. "We are on the verge of Oyu Tolgoi becoming a world class operational mine and delivering long-term benefits to Mongolia."

The agreement paves the way for initial copper production at the mine to begin in less than three months, with commercial production of copper starting three to five months thereafter. Andrew Harding, head of copper for Rio Tinto, said the mine was on track to start production in the first half of 2013.

The negotiations over power supply were complex and unexpectedly prolonged as Oyu Tolgoi and the electricity supplier, China's Inner Mongolia Power Corporation, wrangled for the best commercial terms. The deal, which also involved diplomatic negotiations between Beijing and Ulan Bator, marks the first cross-border power supply agreement between the two countries.

Now that the electricity deal has been secured, the government's attention is likely to turn to the investment agreement that governs Oyu Tolgoi's development. In October, the Mongolian government sent a letter to Turquoise Hill requesting fresh discussions over the investment agreement, a request the miner rejected.

Mr Erdenebulgan said the government still wanted to discuss details of the investment agreement with Turquoise Hill, including royalty fees and the government's share of payment for the start-up costs.

Because the cost of building the mine has risen, the government wants to clarify how much of the cost it must shoulder, Mr Erdenebulgan said, adding that the government was not seeking to change or increase its 34 per cent share of the mine.