Deutsche Bank Is Upbeat About Rio Tinto Breaking The Logjam On Its Huge Mongolian Mine

Rio’s Oyu Tolgoi operation in Mongolia. Image: Rio Tinto.

Deutsche Bank is confident the dispute between Rio Tinto and the Mongolian government over the company’s $US4.9 billion Oyu Tolgoi copper and gold project could be resolved as early as next quarter.

The massive expansion plan for the mine has been delayed for several years by a number of disputes between Rio Tinto and the Mongolian government which has a 34% stake in the operation.

On Tuesday Rio CEO Sam Walsh said a change of prime minister in the country, after Norovan Altankhuyag stepped down last week, could push the project along.

Walsh told Bloomberg television, “I’m hoping it will be a positive sign.”

In a research note today Deutsche Bank also said it was confident stage two would get going again in coming months.

“While the political delays have been disappointing, the time has been spent upgrading the underground mine plan including the addition of a decline which will increase the potential mine output and increase the project options,” the bank said. It adds: “Meetings with a number of government representatives also lead us to believe that the dispute resolution could occur within in the next quarter and lead to additional value for all stake holders.”

Deutsche analysts recently visited the operation and said they left with a view that, “there is an end in sight for the complex politics in the region and then ongoing value accretion for all stakeholders.”

Located between Russia and China, Mongolia with its young democracy, is protective of its resources and doesn’t want to see the value attached to them controlled by foreign entities. It’s this sovereign risk Rio has been having to contend with.

However, Deutsche said after a period of political instability in Mongolia, during which it was unlikely any decision over a tax dispute would be agreed upon, “The eventual appointment of a new PM could well be a catalyst for resolution”.

The tax dispute began in February 2013 when the government flagged a $US130 million tax bill which has since been reduced to about $US30 million.

Rio is also making changes to the existing operation to cut $200 million from its costs to around $US1 billion, a move Deutsche said it believes seems achievable.

With the delays, first ore is now expected to be delivered from Oyu Tolgoi’s underground operation in 2019 however the government still needs to sign off on the mine’s feasibility study before mining can be restarted.

“While it is disappointing that the underground development is still not progressing, the time spent in negotiation with Government has been put to good use with a number of changes made to the site development plan,” Deutsche said.

“We think all approvals will be received by the end of 1Q15.”

The bank has also increased its valuation of Rio’s 33.5% stake in the project from $US5.8 billion to $US6.8 billion. The bank’s total valuation of $US11.9 billion remains well above the independent valuation of $US7.4 billion.

Deutsche’s increased valuation was the result of its assumption the mine will expand from 100,000 tonnes to 200,000 tonnes per day, its long run copper price is higher at $US3.22/lb than listed Canadian company Turquoise Hill’s forecast of $US3.08/lb, and that the inclusion of a second lift and lower capex will boost revenues and productivity.

Rio holds a 51% stake in Turquoise Hill for a 34% interest in the Oyu Tolgoi project.

The bank expects Oyu Tolgoi to make up between $US1 billion to $US1.2 billion a year or between 5-7% of Rio’s earnings over the next decade.

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