While the general economic uncertainty has clouded the prospects of the mining industry, the silver lining is that commodity prices have not fallen to the extent anticipated. That might be the reason why mining giants such as Rio Tinto (NYSE: RIO) are foraying into areas such as copper and gold.
Keeping this in mind, the cancellation of the "poison pill" plan by Ivanhoe Mines (NYSE: IVN) to pave the way for Rio's acquisition of one of the world's largest copper-gold reserves -- the Oyu Tolgoi project in Mongolia -- should work out well for the company.
Why Oyu Tolgoi?
And why not? With expected annual production of more than 544,000 tons of copper spread over the first 10 years once it begins commercial production in 2013, the Oyu Tolgoi project had long been on Rio's priority acquisition list. With the path cleared for a majority stake, Rio can now hope to cash in on a global scenario where demand for copper far exceeds supply, and the project has the potential to become one of its biggest new sources.
Rio Tinto's primary products are iron ore, copper, and aluminum, demand for which is expected to double in emerging markets in the next 20 years, with China and India at the forefront. So it's not for nothing that the company has spent around $4.2 billion to develop its existing 49% stake in the project. Plus, it's one of the few biggies in the mining sector to possess enough cash to fund a project valued at $6 billion.
Slowing things down
However, Rio Tinto has a long way to go if it fully wants to reap the benefits of the Oyu Tolgoi mines. The site has power supply problems. Moreover, with a 34% stake, the Mongolian government is sure to clamor for more local employment with the project.
The Foolish take
Oyu Tolgoi is slated to have a shelf life of at least 50 years. Its proximity to China, whose craving for copper is well-known, translates to lower transportation costs, apart from the availability of a ready market for Rio.
This is one company that is increasing its stakes to counter the effects of the European crisis and should make it in today's metal-starved economies, given the sheer value of its resources. Time to take a serious look at this one.
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