Tuesday, October 28, 2008


Ulaanbaatar, /MONTSAME/ Cost projections for mining the Oyu Tolgoi deposit in Mongolia's Gobi desert have risen significantly and financing is harder, even as foreign miners await the terms of a minerals law being drafted by Mongolia's government, the head of the joint venture developing the mine said to a Australian media.

Rio Tinto bought a stake in Canada's Ivanhoe Mines in order to jointly develop Oyu Tolgoi, one of the world's largest copper deposits. The deposit's size and promise prompted Mongolia to revise its laws, to ensure a state share in the country's mineral wealth. Oyu Tolgoi is expected to produce an average of 440,000 tonnes of copper and 320,000 ounces of gold a year over a 35-year life.

"It's a robust project. Once we get the green light on discussions and negotiations with the government, we'd certainly be hopeful to move forward," said Keith Marshall, a managing director for the two firms in Mongolia. "However, I don't suppose it's going to be immune, and if the world's capital availability is reduced, there could be a situation where the project is delayed for other reasons than the development of the minerals law and the investment agreement.'' The cost projections for mining Oyu Tolgoi have increased significantly since Ivanhoe's last public report, he said, while a global credit crunch makes financing more difficult to secure.

Worldwide, miners are revising their plans for projects that are only viable when metals prices are high, as copper prices slide to their lowest level since early 2006. But in Mongolia, Rio has signed on Ivanhoe employees, in a sign of optimism.

Marshall did not give the minimum copper price at which Oyu Tolgoi would be profitable. Much depends upon the framework of Mongolian law, and the terms the miners can negotiate.

"The average ore grade of the average copper mine is around 1.2% to 1.5%. Oyu Tolgoi compares favourably with those,'' Marshall said, referring to the lower-grade but more easily accessible ore closer to the surface. The promise of Oyu Tolgoi lies in its 2.5% ore, found in a deeper deposit. "We certainly hope costs would be in the lowest quartile.''

Foreign miners are hoping that the sharp drop in copper prices in the last few months will persuade the Mongolian government to seek royalties and taxes from deposits like Oyu Tolgoi, but not the state share of up to 51% that the government has considered.

"People are starting to become more realistic now, with the impact of the global economic crisis, especially now that the price of copper has gone down to $US1.70 a pound,'' Marshall said.

"I think reality is setting in, and the reality is that the government would not be able to participate in the capital needed to build the mine. And I don't think it's a particularly wise use of a government or a country's funds, to invest in the mining industry.''

A large government share, unaccompanied by capital contribution, increases the cash that the partners must contribute up front.

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