Rio Tinto flashes its new copper jewel

The tour of the mine which has caused Rio Tinto a seemingly endless round of ownership, technical and government relations problems is designed to show that the company has moved on - in more ways than one. Fading, but still handsomely profitable, is the Australian iron ore engine room which has generated the lion's share of the company's profits for the past 30 years. Rising, or more correctly returning, is copper which formed the core of the original company after it acquired the Rio Tinto (Red River) mine from the Spanish Government in 1873. Analyst tripInvestors can expect to hear a lot about Oyu Tolgoi and Mongolia from the Mongolia Economic Forum in the country's capital Ulaanbaatar over the weekend with Rio Tinto one of the prime sponsors of the government-run event. After the talkfest it's into Oyu Tolgoi's open pit starter project which launched the operation in 2011, followed by a trip down the almost complete one-kilometre-deep block-cave underground mine in the Gobi Desert close to the Mongolian boarder with China. The importance of Oyu Tolgoi to Rio Tinto (and Mongolia) cannot be overstated. Not only is it a world-class project 66% owned by the company and 34% by the government but also for the way it is changing the way investors will value Rio Tinto in the future. Morgan Stanley was one of the investment banks to this week alert clients to the importance of the mine with a pre-trip review of Rio Tinto as it builds momentum in its copper division which had dropped to 9% of pre-tax profit last year but is expected to grow to 27% in 2025. The bank said the upcoming Oyu Tolgoi site visit would encourage investors to look closer at the "organic copper momentum" inside Rio Tinto with the site visit a catalyst for the market to refocus. "Rio Tinto's portfolio boasts a compelling and under-appreciated copper business that can deliver volume growth of 10% over the next five years … the highest among its diversified peers," Morgan Stanley. TRQ-Oyu-Tolgoi.jpg The bank estimates that Glencore's copper volume will only grow by 1%, Anglo American will not grow at all, and BHP's copper volume will fall by 2%. Oyu Tolgoi is expected to produce 290,000t of copper for at least the next 30 years with plans to expand to 500,000t a year. Underground development consists of five shafts and 200 kilometres of tunnels. Copper concentrate produced at the mine is primarily sold to China with delivery via an access road from the mine to the border crossing. The construction of a railway is being considered by the Mongolian Government. As well as Oyu Tolgoi, Rio Tinto's copper portfolio includes the Kennecott mine in the US, a minority stake in the Escondida mine in Chile and potential development at the part-owned Resolution project in the US, and La Granja in Peru, while the wholly-owned Winu project in Australia has been delayed in the approvals process. Citi says Oyu Tolgoi must deliverCiti, another investment bank, is also enthusiastic about the Oyu Tolgoi site visit, but with greater caution, telling clients that with $13.1 billion invested in the mine it was time for the project to deliver on its promise. "Rio Tinto expects that by 2030 Oyu Tolgoi will be the world's fourth largest copper mine," Citi said. It is expected to operate in the first quartile of the copper cash curve and has an underground ore reserve averaging 1.52% copper and 0.31 grams of gold/t. Citi's cautionary comments included a warning that "a lot can go wrong at block cave" including unexpected rock movements which can lead to irregular draw rates from the block cave. "What we hope to achieve (from the site visit) is a better sense of the timing of panels one and two (in the block cave), overall capital expenditure and whether there is any change in anticipated production levels and operating expenditure," Citi said. Both Morgan Stanley and Citi have retained buy recommendations on Rio Tinto whereas UBS, a third investment bank with its eye on next week's site visit, has a sell tip based on falling iron ore revenue even as copper's profit share rises.

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