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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