THE feasibility study for the underground expansion at Turquoise Hill Resources’ Oyu Tolgoi (OT) mine in southern Mongolia is expected to be complete by the end of June. Following completion the study must be approved by shareholders as well as the Mongolian Minerals Council.

Turquoise Hill, its majority shareholder Rio Tinto and the Government of Mongolia continue to work together with the aim of resolving outstanding shareholder issues and finalizing project finance for further development of the underground mine. Progress is being made and some matters have been resolved.

While discussions remain constructive, it may not be possible to resolve the shareholder issues until the underground feasibility study has been completed, reviewed and approved by all parties and all necessary permits have been received. The project finance was not closed before the expiry of the lender commitments on March 31 and shareholders will, therefore, consider requesting an extension of the commitments from the project finance lenders. Finalization of the project financing is likely to be deferred to the second half of 2014.

Some sales volumes previously expected during the first quarter of 2014 were deferred into the second and third quarters due to technical issues at two of OT’s receiving smelters. Also, sales were slower than expected during January and February 2014 but began to accelerate during March 2014.

As at March 24, 2014, about 43,000 tonnes of concentrate had been sold in 2014. During the second quarter sales are expected to increase and match production, and during the second half of 2014, OT is expected to begin a drawdown of inventory. OT will monitor production levels and only if necessary, match them to meet customer requirements, with the goal of returning to more normal levels of inventory by the end of 2014.

First quarter production was impacted by various post-commissioning issues including the failure of rake blades in the tailings thickeners. This resulted in a shutdown of one line, about 50% feed rate, for seven weeks. Repairs to the rakes were completed and full production resumed on March 24. In addition, certain post-commissioning de-bottlenecking projects have been deferred in order to preserve cash.

Turquoise Hill now expects OT to produce 135,000 to 160,000 tonnes of copper-in-concentrates and 600,000 to 700,000 ounces of gold-in-concentrates in 2014.

OT has signed agreements expected to provide the mine with additional liquidity: a $126 million non-revolving copper concentrate prepayment agreement with one of its customers whereby OT can request the customer to prepay up to 80% of the provisional value of copper concentrate produced but not yet delivered; and an unsecured $200 million revolving credit facility with two banks.

Sales contracts have been signed for 74% and 84% of OT’s expected 2014 and 2015 concentrate production respectively, while 40% of concentrate production is contracted for eight years (subject to renewals). Discussions are ongoing with potential customers to place the remaining tonnage under long-term agreements.

Negotiations with the OT Trade Union have also been finalized resulting in a new collective agreement. The new two-year agreement is a departure from Mongolian labour agreements which are typically for 12 months. All parties see the new agreement as a positive step in positioning OT for long-term operations. At the end of 2013, about 92% of OT employees were Mongolian nationals.

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