Rio Tinto signs power supply deal for Mongolian copper mine

Turquoise Hill Resources Ltd. [TRQ-TSX], a 51%-owned affiliate of Rio Tinto Plc [RIO-NYSE] Group, said Monday December 31 that it has signed a power source framework agreement (PSFA) that covers the supply of power to the giant Oyu Tolgoi copper mine extension in Mongolia.

The mine is located in the Gobi Desert, close to the border with China, approximately 550 km south of the Mongolian capital, Ulaanbaatar.

In October, 2009, Turquoise Hill and Rio Tinto signed a long-term, comprehensive investment agreement with the government of Mongolia for the construction and operation of the Oyu Tolgoi copper-gold mine complex.

The agreement created a partnership between the Mongolian Government – which acquired a 34% interest in the project – and Turquoise Hill, which retained a controlling 66% interest in Oyu Tolgoi. Rio Tinto has been managing the development of Oyu Tolgoi since December, 2010.

Oyu Tolgoi has the potential to operate for approximately 100 years from five known mineralized deposits. The first of those (the Oyut deposit) was put into production as an open-pit operation in 2013.

A second deposit, Hugo North (Lift One), is under development as an underground operation and is scheduled to begin sustainable production by 2021.

With the current development schedule, Turquoise Hill expects Oyu Tolgoi will be the world’s third-largest copper producer at peak production in 2025.

Once the expansion is fully complete, Oyu Tolgoi will be literally swimming in copper, producing 550,000 tonnes annually and 450,000 ounces of gold per year.

The expansion in Mongolia fits with Rio’s bid to become one of the world’s leading copper producers. In doing so, it hopes to reduce its reliance on iron ore.

Under the PSFA, a coal-fired power plant will be built in an area known as the Tavan Tolgoi coal fields. The power plant will be connected directly to the mine’s central substation via a dedicated double circuit electricity line. The power plant intends to draw water from the western side of the Naimdain Khundi Water Basin.

The 300-megawatt plant will be majority owned by Oyu Tolgoi LLC.

“We are encouraged by the pivotal decision to proceed with the power project at Tavan Tolgoi,” said Turquoise Hill CEO Ulf Quellmann. “Resolving Oyu Tolgoi’s long-term power requirements is critically important to the mine’s long term development and today’s signing of the PFSA is a positive milestone towards that goal,” he said.

Quellmann went on to say that Turquoise Hill will continue to work closely and collaboratively with its partners to finalize the details of the power project, which will allow this truly world-class asset to achieve its full potential for the benefit of all stakeholders.

The PSFA formalizes the role of each party and sets out an amended timetable for Oyu Tolgoi to source power domestically. Construction is expected to start in 2020 following further studies and commissioning of the power plant is scheduled for mid-2023.

Oyu Tolgoi will now move forward to confirm the technical design of the project and finalize the commercial arrangements, including financing, underpinning the PSFA.