Rio Tinto Gets Green Light Again in Mongolia

Left hand, meet right hand. The two of you ought to know what the other's doing.

Just days after Rio Tinto (NYSE: RIO  ) put expansion plans for its massive Oyu Tolgoi project in Mongolia on hold after being told approval of the plans would need parliament's assent -- and that wouldn't happen anytime soon because it was in summer recess -- the prime minister said the miner doesn't need the governing body's imprimatur and the work can proceed as scheduled.

Shares of Rio Tinto's subsidiary Turquoise Hill Resources (NYSE: TRQ  ) were crushed by the original decision. Turquoise owns two-thirds of the copper mine and its stock tumbled 28% after its parent announced that it was putting the $5 billion underground expansion on the back burner until it could get some resolution on the outstanding "22 points of dispute" it has with the government.

When the prime minister said the project still has the green light and that his cabinet needn't be involved, Turquoise stock jumped more than 10% on Thursday and followed that with another near-8% gain yesterday. Shares of the miner now sit just 10% below where they were when the imbroglio began.

Oyu Tolgoi is one of the five largest copper projects in the world, and Rio Tinto expects it to produce between 75,000 and 85,000 tonnes of copper concentrates this year. Over the life of the mine, it's anticipated that it will annually produce more than 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. Shipments to China began last month after several delays imposed by Mongolia, and analysts predict that if the project gets fully financed and hits peak production, it could boost the country's economy by 35% by 2020.

No doubt the Mongolian government is looking after its own investment. It owns the other 34% stake in the project, and despite some saber-rattling at times about taking a majority stake in the mine and increasing the profits it siphons off, it wants the copper concentrates flowing from Oyu Tolgoi just as much as its partners.

Although the government says the expansion can go as planned, Rio Tinto hasn't yet made a decision as to whether it will or not and the rebound in Turquoise Hill's shares may be a bit premature.

Rio is in the midst of selling off non-core assets and earlier this year posted its first-ever loss of $3 billion. In June it sold U.S.-based nickel-and-copper mining assets to Lundin Mining for $325 million, it sold Palabora Copper in South Africa last month to a consortium of Chinese companies, and it just agreed to sell its 80% stake in an Australian copper and gold mine to China Molybdenum for $820 million. While it wants to sell its diamonds business, too, there's not much of a market at the moment for it, apparently, and it's withdrawn those plans for the time being.

Being able to conserve cash by delaying Oyu Tolgoi's expansion may not necessarily be an undesirable outcome at the moment, even though it will be counting on the copper shipments from it in the future.


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9/23/2014 4:02 PM
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