Rio’s credit profile not affected by Oyu Tolgoi expansion

Fitch Ratings issued a report this week stating that Rio Tinto’s (ASX, LON, NYSE:RIO) credit profile is not negatively affected by the company’s recent announcement related to the increased cost of the expansion project of its Oyu Tolgoi copper-gold-silver mine in Mongolia.

In its analysis, Fitch states that the firm’s product diversification, conservative balance sheet, strong cash flow and position in the global mining sphere safeguards its credit profile from the delay and higher project investment.


“Fitch did not have any earnings from the block cave expansion in its rating case forecast for Rio Tinto due to the complexity of the project and lack of full visibility around the commissioning schedule,” the market researcher’s brief reads.

In mid-July, the world’s No.2 miner revealed that that difficult ground conditions that are causing stability risks could blow out the estimated cost of Oyu Tolgoi’s expansion by as much as an additional $1.9 billion to reach a total of $7.2 billion.

Rio also said that the first sustainable production is now expected between May 2022 and June 2023, a 2.5-year delay in the original plan.

The Anglo-Australian multinational, through its majority-owned Canadian firm Turquoise Hill Resources (TSE, NSYE: TRQ), holds a 66%-interest in the mine, while Mongolia owns the remaining 34%. Once fully operational, the complex is expected to have an output of 500,000 tonnes of copper per year.

Rio Tinto, however, is not alone when it comes to facing challenges related to block caving, the underground hard-rock mining method it plans to employ at Oyu Tolgoi. According to Fitch, CRU Group has reported that capital costs for block cave mining are at more than $5 billion for large-scale block caves.

Despite this prediction, the business intelligence company expects block caves to account for more than a fifth of the growth in potential copper supply by 2025 and to represent around 10% of the unadjusted copper mine supply by 2025.

“The increased copper supply pipeline of brownfield expansions, such as Oyu Tolgoi, and greenfield projects are projected to eliminate any material market deficit in the medium term as China is expected to remain a key driver for demand growth, even as the country’s economy slows,” Fitch’s document reads. “Block caving is the intended mining method for several significant copper projects under development. Key competitors involved in the major block cave copper projects include Rio Tinto, PT-Freeport Indonesia (PT-FI) and Codelco.”

Besides the Mongolian mine, the referred mine expansions are PT-FI’s Grasberg Block Cave and Deep Mill Level Zone in Indonesia’s Papua province and Coldeco’s Chuquicamata Underground in Chile’s Antofagasta region and El Teniente New Mining Level in the South American country’s O’Higgins region.

Grasberg produced approximately 270,000 tonnes of copper ore per day in 2018. Once the Deep Mill Level Zone block cave mine is ready in 2021, it will produce an additional 80,000 tonnes of ore per day. The following year, the underground block cave project is expected to reach full capacity reaching 160,000 tonnes per day of ore.

Codelco’s Chuquicamata, on the other hand, is expected to have an annual production of 320,000 tonnes of fine copper and 15,000 tonnes of molybdenum after the full transition from surface to underground extraction is completed.

El Teniente new mining level, which is about 300 metre below existing infrastructure, is aimed at adding 50 years of operations to the century-old mine which, in turn, will continue to produce 2 billion tonnes of ore per year and 450,000 tonnes of copper.

Fitch’s study indicates that the growth in underground cave mining is being fueled by depletion of orebodies, high production rates, and low operating costs. “The caving industry is also moving toward the next generation of caving geometries and scenarios, involving greater depths and competent rock-mass environments that are likely to be less predictable and present new challenges,” the report states.


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