REG - Rio Tinto - OT partners reach agreement and approve undercut

Rio TintoAnnouncement

25/01/2022 07:05

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RNS Number : 4564Z  Rio Tinto PLC  25 January 2022

25 January 2022

 

Oyu Tolgoi partners reach comprehensive agreement and approve commencement of
underground mining operations

Rio Tinto, Turquoise Hill Resources (TRQ) and the Government of Mongolia have
reached an agreement that will move the Oyu Tolgoi (OT) project forward,
resetting the relationship between the partners and increasing the value the
project delivers for Mongolia.

 

As a result, the OT Board, comprised of representatives of Rio Tinto, TRQ and
Erdenes Oyu Tolgoi (EOT) which is wholly owned by the Government of Mongolia,
has unanimously approved commencement of underground operations. This step
unlocks the most valuable part of the mine and is expected to begin in the
coming days, with first sustainable production expected in the first half of
2023.

 

Project budget, funding and agreements

As part of a comprehensive package, TRQ will waive the $2.4 billion 1  EOT
carry account loan in full, comprising the amount of common share investments
in OT LLC funded by TRQ on behalf of EOT to build the project to date, plus
accrued interest.

 

The Parliament of Mongolia has approved a resolution (Resolution 103) that
resolves the outstanding issues that have been subject to negotiations with
the Government of Mongolia over the last two years in relation to addressing
Parliament Resolution 92 (December 2019).

 

With this approval, the Parliament of Mongolia has required that certain
measures be completed in order for Resolution 92 to be considered formally
implemented. To date, conditions relating to the following measures have been
addressed: (i) the waiving of the carry account loan; (ii) the improved
cooperation with EOT; (iii) the implementation of measures to monitor OT
underground development financing mechanisms and enhance ESG matters; (iv) the
approval of the Electricity Supply Agreement; and (v) the establishment of a
funding structure at OT that does not incur additional loan financing prior to
sustainable production for Panel 0 (expected in the first half of 2023). Rio
Tinto continues to work with the Government of Mongolia and TRQ to finalise
the remaining outstanding measures of Resolution 92, namely the formal
termination of the Oyu Tolgoi Mine Development and Financing Plan (UDP) and
resolution of the outstanding OT LLC tax arbitration.

 

An updated funding plan has been agreed to address TRQ's current estimated
remaining funding requirement for the OT Underground Project. Until
sustainable underground production is achieved, OT will be funded by cash on
hand and rescheduling of existing debt repayments, together with a pre-paid
copper concentrate sales agreement with TRQ. This is in line with restrictions
on debt financing contained in Resolution 103, passed on 30 December 2021.

 

Rio Tinto and TRQ have amended the Heads of Agreement signed in April 2021 to
ensure they appropriately fund OT. The capital forecast for the project is
$6.925 billion, including $175 million of known COVID-19 impacts to the end of
2021 2 . Forecasted remaining undergound capital expenditure is approximately
$1.8 billion. A reforecast will be undertaken during H1 2022 to determine a
revised cost and schedule estimate that will reflect:

 

·      any further COVID-19 impacts;

·      any additional time-based impacts and market price escalation
arising from resequencing due to 2021 budget constraints (as a result of the
OT Board not approving the capital budget uplift at the time the Definitive
Estimate was finalised); and

·      updated risk ranging reflecting the latest project execution
risks.

 

The key elements under the amended Heads of Agreement include:

 

·      pursuing the rescheduling of principal repayments of existing OT
project finance to potentially reduce the OT funding requirement by up to $1.7
billion;

·      seeking to raise up to $500 million of senior supplemental debt
at OT from selected international financial institutions which could be put in
place after sustainable underground production is achieved;

·      Rio Tinto providing a co-lending project finance facility to OT
of up to $750 million to be made available after sustainable underground
production is achieved (with up to $300 million of such amount being available
under a short-term secured advance directly to TRQ pending such co-lending);
and

·      TRQ agreeing to conduct equity or rights offerings of up to $1.5
billion (with an initial offering of at least $650 million by no later than 31
August 2022).

 

The re-profiling of the existing OT project finance and any additional senior
supplemental debt at OT will be subject to availability and terms and
conditions being acceptable to Rio Tinto and TRQ.

 

Power

The OT Board has also approved the signing of an Electricity Supply Agreement
to provide OT with a long-term source of power from the Mongolian grid, under
terms already agreed with the Government of Mongolia. In meeting OT's
commitment to sourcing power domestically, Rio Tinto will work with the
Government to support long-term renewable energy generation in support of the
Mongolian grid. The Government of Mongolia and OT are in constructive
discussions with the Inner Mongolia Power International Cooperation Company
(IMPIC) for an extension of current power import arrangements beyond the
current agreement of July 2023. IMPIC have indicated their support for an
extension and commercial terms are being finalised.

 

Luvsannamsrain Oyun-Erdene, the Prime Minister of Mongolia said "The
commencement of Oyu Tolgoi underground mining operations demonstrates to the
world that Mongolia can work together with investors in a sustainable manner
and become a trusted partner. As part of our "New Recovery Policy", I am happy
to express Mongolia's readiness to work actively and mutually beneficially
with global investors and partners."

 

Rio Tinto Chief Executive Jakob Stausholm said "We would like to thank the
Government of Mongolia for their commitment to working productively with Rio
Tinto and TRQ to reach this crucial agreement, that will see one of the
world's largest copper growth projects move forward and firmly establish
Mongolia as a global investment destination. This agreement represents a reset
of our relationship and resolves historical issues between the OT project
partners. We strongly believe in the future of this country and I am
personally committed to ensuring that the people of Mongolia benefit strongly
from OT along with our shareholders."

 

"I have visited Mongolia twice in the last few months and I cannot help but be
proud of what has been achieved by our workforce, hand-in-hand with
communities, suppliers and other partners. I would like to thank the many
thousands of people involved for what they have achieved."

 

"The OT underground development will consolidate Rio Tinto's position as a
leading global supplier of copper at a time when demand is increasing, driven
by its role in enabling decarbonisation and electrification in the race to net
zero. We will also explore additional opportunities to decarbonise the OT
operations, including sourcing renewable power."

 

Steve Thibeault, Interim Chief Executive Officer of Turquoise Hill Resources
commented "Today is a landmark day for Turquoise Hill and a major milestone in
the development of the Oyu Tolgoi underground development project. We are very
excited to be starting work on the undercut, which is critical to unlocking
the immense potential of this world-class, high grade deposit for the benefit
of all stakeholders. Following the agreements with the Government of Mongolia
and the Amended Heads of Agreement with Rio Tinto being put in place, we now
have greater certainty and confidence to complete construction of this
once-in-a-generation mine that, when finished, is expected to be one of the
largest copper producing mines in the world and a generator of vast economic
value and employment in Mongolia and of returns for our shareholders for years
to come. I want to thank the Government of Mongolia for its commitment to
securing a balanced agreement that helps to advance the project while ensuring
that all stakeholders including the people of Mongolia truly benefit from the
development of this resource. This agreement says a lot about the positive
environment for foreign investment in the country."

 

By 2030 OT is expected to be the fourth largest copper mine in the world. It
is a complex greenfield project comprising an underground block cave mine and
copper concentrator as well as an open pit mine which has been succesfully
operating for almost ten years. It is also one of the most modern, safe,
sustainable and water-efficient operations globally, with a workforce which is
more than 96 per cent Mongolian. Since 2010, OT has spent a total of $13.4
billion in-country, including $3.6 billion of taxes, fees and other payments
to the state budget. The size and quality of this Tier 1 asset provides
additional expansion options, which could see production sustained for many
decades.

 

Notes to Editors

At peak production, OT is expected to operate in the first quartile of the
copper cash cost curve 3 . OT is expected to produce around 500,000 tonnes of
copper per year on average from 2028 to 2036 from the open pit and
underground, and an average of around 350,000 tonnes for a further five
years 4 , compared to 163,000 tonnes in 2021 5 . The underground Ore Reserve
has an average copper grade of 1.52 per cent, which is more than three times
higher than the open pit Ore Reserve, and contains 0.31 grammes per tonne of
gold. 6 

 

Rio Tinto Canadian early warning disclosure

Rio Tinto currently beneficially owns 102,196,643 common shares of TRQ,
representing approximately 50.8% of the issued and outstanding common shares
of TRQ. Rio Tinto also has anti-dilution rights that permit it to acquire
additional securities of TRQ so as to maintain its proportionate equity
interest in TRQ from time to time.

 

As the subscription price for any TRQ equity or rights offering is not
determinable at this time, the number of TRQ common shares Rio Tinto will
beneficially own following closing of any such equity or rights offering
cannot be determined at this time.

 

Except in connection with such equity or rights offerings, Rio Tinto has no
present intention of acquiring additional securities of TRQ. Depending upon
its evaluation of the business, prospects and financial condition of TRQ, the
market for TRQ's securities, general economic and tax conditions and other
factors, Rio Tinto may directly or indirectly acquire or sell some or all of
the securities of TRQ.

 

This announcement is authorised for release to the market by, and a copy of
the related early warning report

may be obtained from Rio Tinto's Group Company Secretary.

 

Additional disclosures

This press release does not constitute an offer to sell or the solicitation of
an offer to buy any securities. Any offers, solicitations or offers to buy, or
any sales of securities will be made in accordance with registration
requirements under applicable law.

 

Forward-looking statements

This press release includes "forward-looking statements" within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts included in this report, including,
without limitation, those regarding capital and funding requirements, are
forward-looking statements. The words "intend", "forecast", "project",
"anticipate", "estimate", "plan", "believes", "expects", "may", "should",
"will", "target", "pursue", "seek" or similar expressions, commonly identify
such forward-looking statements. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements speak only as of
the date of this press release. Rio Tinto and TRQ each expressly disclaims any
obligation or undertaking (except as required by applicable law, the UK
Listing Rules, the Disclosure Guidance and Transparency Rules of the Financial
Conduct Authority and the Listing Rules of the Australian Securities Exchange)
to release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in their respective expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based.

 

LEI: 213800YOEO5OQ72G2R82

Classification: 3.1. Additional regulated information required to be disclosed
under the laws of a Member State.

 

 

 

 

 

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This announcement is authorised for release to the market by Steve Allen, Rio
Tinto's Group Company Secretary.

 

riotinto.com

 

 

 

(( 1 ))( )Financial reporting impact of waiver

Rio Tinto's accounting treatment for its share in the carry account loan is
explained in note 1 (xii) on page 221 and note 32 (l) on page 264 of the 2020
Annual Report. Prior to the waiver agreement, the carry account was expected
to be repaid via a pledge over EOT's share of future OT common share
dividends. For this reason, and because the arrangement is between TRQ and EOT
rather than with OTLLC itself, both the principal and interest are treated as
transactions with owners acting in their capacity as owners. Consequently, the
carry account is currently recorded as a reduction in the share of equity
attributable to non-controlling interests, resulting in an increase to the
effective interest in OT attributable to owners of Rio Tinto. The carry
account is not classified as a loan receivable in the Group Balance Sheet, and
there is no interest income shown in the Group Income Statement; accumulation
of interest on the carry account increases the share of profit attributable to
Rio Tinto as it is accrued.

 

Waiving the carry account loan increases EOT's economic share arising through
entitlement to cash flows from future dividends of OT. In the 2022 Group
Accounts, there will be no Income Statement charge for loan forgiveness or
write-off as a result of the waiver, and net assets and liabilities for OT
included in the Group Balance sheet remain unchanged. There is no exchange of
cash or other financial assets between parties and there will be no change to
the underlying free cash flows of the OT operations and development project. A
reallocation of the net asset value allocation between the owners of OT will
be recorded in the Group Statement of Changes in Equity for 2022 by reducing
equity attributable to owners of Rio Tinto and increasing equity attributable
to non-controlling interests.

 

(2 )These estimates exclude any impacts of delays to work schedules caused by
restricted approved budgets since the start of 2021. This impact, and the
impact of any ongoing COVID-19 impacts will be assessed following the
commencement of underground operations with further updates provided to the
market in due course. Panels 1 and 2 studies will be ongoing throughout 2022.
Further study work is also underway to assess the extraction methodology and
ultimate recovery of the Panel 0 recoverable pillars.

 

 3  Wood Mackenzie copper equivalent cash cost curve (Q4 2021)

 

 4  The 500ktpa target (stated as recovered metal) for the Oyu Tolgoi
underground and open pit mines is underpinned 17 per cent by Proved Ore
Reserves and 83 per cent by Probable Ore Reserves for the years
2028-2036. The 350ktpa production target for the following 5 years is
underpinned 18 per cent by Proved Ore Reserves and 82 per cent by Probable Ore
Reserves. These production targets have been scheduled from current mine
designs by Competent Persons in accordance with the requirements of the
Australasian Code for Reporting of Exploration Results, Minerals Resources and
Ore Reserves, 2012 Edition (the JORC code).

 

 5  Rio Tinto Fourth Quarter Operations Review,
published 17 January 2022.

 

 6  This information in relation to the underground Ore Reserves was
previously reported in the release to the ASX dated 16 December 2020. The
Competent Persons responsible for reporting the Ore Reserves were Ferrin
Prince and Mark Bixley, Competent Persons, who are a Member and Fellow
respectively of The Australasian Institute of Mining and Metallurgy. Rio Tinto
is not aware of any new information or data that materially affects these Ore
Reserve estimates and confirms that all material assumptions and technical
parameters underpinning the estimates continue to apply and have not
materially changed. The form and context in which the Competent Persons'
findings are presented have not been materially modified from the release
dated 16 December 2020.

 

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