TIDMRIO
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.
Contacts Please direct all enquiries to media.enquiries@riotinto.com
Media Relations, UK Media Relations, Australia
Illtud Harri Jonathan Rose
M +44 7920 503 600 M +61 447 028 913
David Outhwaite Matt Chambers
M +44 7787 597 493 M +61 433 525 739
Media Relations, Americas Jesse Riseborough
Matthew Klar M +61 436 653 412
T +1 514 608 4429 Investor Relations, Australia
Investor Relations, UK Natalie Worley
Menno Sanderse M +61 409 210 462
M: +44 7825 195 178 Amar Jambaa
David Ovington M +61 472 865 948
M +44 7920 010 978
Clare Peever
M +44 7788 967 877
Rio Tinto plc Rio Tinto Limited
6 St James's Square Level 7, 360 Collins Street
London SW1Y 4AD Melbourne 3000
United Kingdom Australia
T +61 3 9283 3333
T +44 20 7781 2000 Registered in Australia
Registered in England ABN 96 004 458 404
No. 719885
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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