The ever-growing Turquoise Hill copper-gold discovery, deep in Mongolia’s South Gobi desert, is on the doorstep of a country that now consumes more copper and more steel than any other region in the world.
“Our project is of China but not physically in China,” says Robert Friedland, chairman of
The 85-sq.-km Oyu Tolgoi project is 530 km south of the capital city of Ulaanbaatar in the Aimag province of Omnigov. There are no roads or infrastructure in place, with the exception of a small airstrip at the project site. It’s a 12-hour journey in a 4-wheel-drive vehicle along a track from Ulaanbaatar.
“There are a lot of misconceptions about the Gobi Desert region,” says Friedland. “Some people picture the Gobi as a Lawrence of Arabia sort of thing, with flowing sands, but it’s really nothing like that.”
At a recent summit meeting between Mongolia and China, the presidents of the two countries pledged to co-operate in the development of Turquoise Hill by expanding infrastructure into the South Gobi region. The Chinese government is making available a US$300-million loan to the Mongolian government for major infrastructure projects, such as new highway and railway links between the two countries.
Authorities in the neighbouring Chinese province of Inner Mongolia have approved the construction and upgrading of a 226-km-long paved highway at the government’s expense. The highway will provide a direct link between the Mongolian border crossing and Trans-China Railway system. Ivanhoe has initiated discussions with both the Mongolian and Chinese governments to extend the highway the final 80 km to the Turquoise Hill project site.
In just two short years of drilling 180,000 metres of core, the Turquoise Hill copper-gold porphyry project has grown to contain an overall resource of 36.9 billion lbs. copper and 20.8 million oz. gold in 2.9 billion tonnes of mineralized rock, based on a cutoff grade of 0.3% copper-equivalent. At a higher cutoff grade of 0.6% copper-equivalent, the contained metal shrinks to 24 billion lbs. copper and 13.6 million oz. gold. Copper-equivalent cutoff grades were calculated using metal prices of US80 per lb. copper and US$350 per oz. gold.
The Chinese economy is only 12% the size of that of the United States but it has already surpassed the U.S. in consumption of steel and copper. During the period 1990 to the end of 2002, Chinese steel consumption rose by a factor of four, while copper and aluminum consumption jumped by a factor of five. By the end of 2003, China will account for around 27% of the world’s steel consumption, 20% of global copper consumption, and a little less than 20% of aluminum consumption, predicts Sir Robert Wilson, Rio Tinto’s executive chairman. “We have seen growth in consumption during the first part of this year continue at the rate of 20%, or maybe more, for each of these metals in terms of consumption in China.”
He cautions that China’s extraordinary growth rate cannot be sustained forever, even though it shows no sign of slowing yet. The economy is heavily focused on infrastructure development and the export of manufactured goods, both of which are dependent on raw materials. “China is becoming the workshop of the world, and is able to manufacture most anything cheaper than any other country,” says Friedland. The increasing use of technology, combined with related low labour costs, is establishing a competitive advantage for China. Labour costs are around one-twentieth of what they are in Japan. The auto and electronic sectors are especially aggressive at pursuing “outsourcing” opportunities in China.
David Humphreys, chief economist at Rio, estimates China produces more than 20% of the world’s refrigerators, 25% of its washing machines, 30% of its air-conditioners and televisions, and half of its cameras, while making significant inroads in the areas of laptop computers and digital video disc players. In the first half of 2003, car production was up 108%, air conditioners up 36%, and computers up 59%.
Wilson believes there is no industrial sector better exposed to events in China than mining-and-metals. “If you are accounting for twenty to twenty-five per cent of world markets and you’re growing at twenty per cent per year, it has one hell of an effect on global supply/demand balance in these commodities.”
There is an acutely short market in iron ore as a consequence of what’s happening in China, while the copper concentrate market is “exceptionally tight” and the aluminum market is “very tight.” Wilson believes it will only be a matter of time before there is a significant increase in the prices of the underlying metals.
The Turquoise Hill project is well-positioned to benefit from China’s insatiable demand for copper metal. “It represents, effectively, a pure play on the tremendous economic growth that we think is likely to continue in China,” says Friedland. “We look south to about a hundred and twenty existing copper smelters that are screaming for feed and willing to refine that metal cheaply.”
Friedland recently met with Chinese government officials of the Inner Mongolian province. The Autonomous Region of Inner Mongolia covers 1.2 million sq. km and forms part of China’s northern border with Mongolia and Russia. “The governor is extremely keen on developing this resource,” says Friedland. This part of China already contains a 7-million-tonne-per-year integrated steel mill operation, and
At present, there are 13 drill rigs turning round the clock on the Far North zone, one of four co-genetic, porphyry-related, mineralized deposits that occur along a 5-km-long structurally controlled zone at Turquoise Hill (Oyu Tolgoi). The deposits are known as Southwest Oyu, South Oyu, Central Oyu and Far North Oyu.
Bigger and bigger
Since its discovery last fall, the growth of the Far North zone has been phenomenal. “Every day that we get out of bed, the deposit has grown from what it was the night before,” says Friedland. It now contains about 76% of the project’s overall inferred copper resource and 36% of the gold at a cutoff of 0.3% copper-equivalent, based on an updated independent resource estimate prepared by AMEC E&C Services. The Far North zone is estimated to contain inferred resources of 618 million tonnes grading 1.19% copper and 0.1 gram gold per tonne, equivalent to 16.3 billion lbs. copper and 2 million oz. gold, at a cutoff of 0.6% copper-equivalent. At a lower cutoff of 0.3%, the tonnage jumps to 1.6 billion tonnes grading 0.69% copper and 0.08 gram gold, equivalent to 24.5 billion contained pounds of copper and 4 million oz. gold.
The Far North zone extends over a strike length of 2 km and has not been closed off in any direction, though Friedland acknowledges that there is a limit to Ivanhoe’s ability to expand. “We’re already looking at the limits of the system, because to the north we’re cut off by a large granitic complex.”
Ivanhoe has discovered a high-grade core at depth in the northern extension of the Far North zone, returning some of the highest overall grades produced by the project to date. In just four months, Ivanhoe has more than doubled the inferred resources of a 2% copper-equivalent grade shell to 68.8 million tonnes grading 2.92% copper and 0.28 gram gold, equivalent to 4.4 billion lbs. copper and 620,000 oz. gold. This includes 16.4 million tonnes averaging 3.74% copper and 0.45 gram gold at a cutoff of 3.5%.
“We have seen a progressive increase in gold grades as we pursue the deposit to depth and into a porphyry host on the northern end of the Far North zone,” says Ivanhoe’s deputy chairman, Edward Flood.
Friedland concurs: “As we’re getting into the higher temperature portions of this system, we’re seeing dramatic increases not only in copper grades but in gold grades.” This increase is best illustrated by hole 367A, which intercepted a previously reported 144 metres grading 4.41% copper and 1.61 grams gold starting at a down-hole depth of 1,062 metres, or more than 800 metres vertically.
Southwest zone
Recent drilling has encountered thick intercepts of visually strong mineralization in bornite-rich, quartz stockwork hosted by altered basalt similar to the gold-enriched Southwest zone, which contains the bulk of the project’s gold resource. The Southwest zone hosts an indicated resource of 509 million tonnes grading 0.4% copper and 0.59 gram gold, or 4.5 billion lbs. copper and 9.7 million oz. gold, at a 0.3% copper-equivalent cutoff grade. An additional 291 million tonnes grading 0.32% copper and 0.5 gram gold, representing 2 billion lbs. copper and 4.7 million oz., are inferred.
“From this point forward, we’re drilling for gold and high-grade mineralization that can dramatically boost the net present values,” explains Friedland. “We’re not running 13 drill rigs to drill more of the same; we’re running 13 drill rigs because we’re getting into the guts of the high-grade system in the Far North. By the time you’ve got 3 billion tonnes of mineralization, it’s academic. We’re drilling for high-grade and we’re drilling to find the kitchen of the system. We think we’re right now getting into the guts of the high-grade porphyry underneath the Far North.”
Ongoing drilling in the Far North zone will convert the inferred resource to the indicated category over the next several months as Ivanhoe advances toward development.
Says Flood: “An important point in relation to the Turquoise Hill project is the excellent success we have had in converting inferred to indicated resources in the more advanced Southwest zone, where we have almost a minimal loss of attributable tonnage. That means that we have excellent continuity in these bodies. They are typical copper-gold porphyries, and we expect to have good continuity as we continue to drill.”
Initial metallurgical work has been encouraging, adds Friedland, who says Ivanhoe can produce high-grade concentrates based on preliminary batch flotation tests on representative drill core samples.
Development
On a parallel track, Ivanhoe is making rapid progress with respect to development. The company has commissioned a preliminary economic assessment of the project, which is being conducted by a consortium consisting of AMEC, Ausenco of Australia, GRD Minproc, and SRK Consulting of Australia. The consortium is based in Perth, Australia, which shares Central Mongolia’s time zone.
The study will form the basis for a prefeasibility study to establish the viability of a commercial mining operation at Turquoise Hill and determine capital and operating costs.
Preliminary internal scoping studies are showing strong economics for a stand-alone 40,000-to-50,000-tonne-per-day open-pit operation on the Southwest Oyu zone. Southwest Oyu does contain a high-grade core of 120 million tonnes grading 0.7% copper and 1.55 grams gold, equivalent to 1.8 billion lbs. copper and 6 million oz. gold. The higher-grade zone is contained in a sub-vertical, pipe-like body that is 300 metres in diameter and extends to at least 1,000 metres below surface.
Internal scoping work indicates that an open-pit operation at the Southwest zone could form the basis for initial, low-cost production, which could then be expanded and enhanced with high-grade underground production from the Far North zone.
The company has begun to assess the costs of sinking a shaft and driving a production-size decline into the Far North zone to accelerate development.
In order to firm up some of the capital and operating costs relevant to an operation in the South Gobi, Ivanhoe has had a team of engineering consultants conducting studies and making site visits to several Chinese open-pit and underground operations.
“The early findings are nothing short of astounding,” says Friedland. “Not only are the Chinese mines that we have looked at efficient and built with state-of-the-art equipment; their capital and operating costs are substantially lower than Western comparables.”
Ivanhoe’s fact-finding team is looking at the costs of all manners of input, including concrete, fabricated steel, and labour. “This project is interested in quantifying the Chinese discount,” adds Friedland. “Our concept is to combine the best of Western engineering with the best of Chinese procurement and detailed construction technology to get the best of both worlds.
Powerline
In terms of power, the Chinese government infrastructure loan will cover power generation in the Gobi. Friedland says the Chinese are more than willing to supply Turquoise Hill with both coal and energy. “It may be more efficient to just string a powerline up from a large power plant south of the border and avoid the capital cost, or we may work with the government of Mongolia to put power generation into the Gobi with local coal, which would have the added benefit of providing cheap power to the local community.”
Ivanhoe has considered the possibility of developing large, open-pit coal deposits 140 km west of the project site, though, more recently, it has discovered significant coal occurrences on its own lands. One of these occurrences has enough coal to run a large power plant for 100 years, says Friedland.
Ongoing efforts to drill for water have been successful, as the company has discovered several large aquifers 30-50 km away from the project site. An independent assessment suggests that the aquifiers could provide sufficient water to meet the requirements of at least a 50,000-tonne-per-day mine. Ivanhoe’s goal is to identify water resources to support a production rate of at least 100,000 tonnes per day. The environmental baseline studies on the project are under way.
Ivanhoe’s Oyu Tolgoi discovery ranks among the world’s largest copper-gold deposits. By comparison,
Grasberg has three mines in operation, including the Grasberg open-pit, and underground operations on the Intermediate and Deep ore zones. The operations produced a record 1.8 billion lbs. copper in 2002, along with 2.9 million oz. gold and 4.9 million oz. silver, at an average cash cost of US8 per lb., net of gold and silver credits. Mill throughput averaged 235,600 tonnes per day during 2002, compared with 237,800 tonnes in 2001.
CITIC
Earlier this year, Ivanhoe entered into a joint agreement with China International Trust & Investment Corporation (CITIC) to develop Asian mineral projects. CITIC is a Chinese state-owned enterprise that reports directly to the governing State Council. Ivanhoe and CITIC have expressed a willingness to invest jointly in the Turquoise Hill project, and to investigate collaborations on various Chinese gold projects held by CITIC Gold, a wholly owned subsidiary that controls 15 mines in China.
“We’re talking about a broad specific strategic relationship with the Chinese government for both Oyu Tolgoi and the exploration business in all of greater China,” says Friedland. “I have never seen a geological field of endeavour with as large an upside as we’re experiencing on both sides of the Chinese-Mongolian border.”
Ivanhoe now controls about 110,000 sq. km of land, including 96,000 sq. km in central and southern Mongolia. The company is exploring both north and south of the border, including several programs operated jointly with the Chinese government in Inner Mongolia. “Because of the pressure of competitor activity, we have elected to remain quiet about our regional exploration program,” says Friedland. “We have targets that are plain gold targets and some that are copper-gold targets.”
He adds: “There are no infrastructure issues in China itself, and we have a Chinese government that is hungry to help us achieve copper and gold production. We’re also taking a look at nickel and platinum projects in the Chinese mainland.”
Ivanhoe also owns a 36.4% interest in
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