Rio's Oyu Tolgoi hit with cost blowout

The Oyu Tolgoi copper and gold project in Mongolia — already beset by tensions between Rio Tinto and the Mongolian government — was hit with a fresh setback this week when Rio announced a significant cost blowout that wipes $US1.5 billion ($A1.4 billion) of value, while forcing down forecast production and raising expected operating costs, according to The Australian.

Rio's announcement, through its Turquoise Hill subsidiary building the mine, that increased capital costs had prompted it to cut the expected net present value of its base case Oyu Tolgoi development by $US1.5 billion to $US9.9 billion comes as the company is locked in negotiations with the Mongolian government.

Mongolian officials have proposed a 2013 government budget that threatens to break a 2010 investment agreement by imposing a progressive royalty scheme on the project.

Rio for the first time admitted the dispute could delay production at Oyu Tolgoi.

“Commencement of commercial production is expected by the end of June 2013, subject to the resolution of the issues being discussed with the Mongolian government,” Turquoise Hill, which is 51 per cent owned by Rio, said, according to The Australian.

Operating costs for the first 10 years of the project are estimated to be 37 per cent higher, at 89 US cents per pound of copper, because the project is no longer planning to build its own power station.

Earlier this year, Rio threatened to freeze work at its Simandou iron ore project in Guinea if it could not get an investment agreement signed as the miner takes a more aggressive stance with governments.

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Rio seems to be putting out some amazing spin on this project and are now totally mis informing the market, at a meeting of Mongolian senior executives held in Ikh Tenger, it was reported that the upsetting of the Mongolians centred on why RIO wont provide the Mongolian government with an official explanation for 2 billion USD over-spend by Rio Tinto, and why they give reasons for the increased cost of commencing the underground mine, which pre-feasibility studies estimated to be 14.6 billion USD, but which is now expected to cost as much as 24.4 billion USD. Its that $10b extra which has hurt relationships and why RIO are lying about the way they are informing the market.The group representing the Mongolian government is headed by Minister of Mining D.Gankhuyag, and includes Finance Minister Ch.Ulaan; Environment and Green Development Minister S.Oyun; Economic Development Minister N.Batbayar; and Ts.Sedvaanchig, the Director of Erdenes Oyu Tolgoi, a state-owned company that oversees Mongolia’s 34 percent stake in the Oyu Tolgoi project. To a man they are trashing Sam Walshs reputation for truth. RIO tried to bluff the Mongolians into a believe that they would extend that extra $10b credit, but are now insisting the Mongolians seek funding otherwise they will stop work, besides the power station, and water improvements raods and schools, it seems Rio has WALSHED on everything.