Turquoise Hill secures power for Oyu Tolgoi

Turquoise Hill Resources (TRQ-T, TRQ-N) rose more than 11% after announcing it has finalized a much-anticipated power purchase agreement (PPA) for its Oyu Tolgoi copper-gold mine in Mongolia’s South Gobi desert. 

In a press release before the market opened on Nov. 5, Turquoise Hill said it had signed a PPA with Inner Mongolia Power to supply power to its 66%-held mine and finish commissioning so that it could start production. The Mongolian government holds the remainder. 

“The physical infrastructure to transmit power is already in place, and the agreement means the last issue critical to the mine-start has been overcome,” BMO Capital Markets analyst Tony Robson writes in a note. 

In the third quarter the company tested the 87 km, 220-kilovolt transmission line that connects the power grid in China’s Inner Mongolia to the China-Mongolia border. 

The PPA now allows the Vancouver-based firm to shortly start a seven-week commissioning of the process plant. First copper-gold concentrate should follow within one month, with commercial production slated to begin three to five months thereafter, nearing the end of the company’s target to reach commercial production in the first half of next year.

“BMO notes, however, that with delays to obtaining this agreement, the schedule for commercial production in the first half of 2013 could be tight,” Robson says. 

Bank of America (BOA) Merrill Lynch analysts Oscar Cabrera and David Foster write that they “originally expected a PPA to be concluded in third-quarter 2012 after Mongolia’s parliamentary elections,” but add that despite the delay, the PAA remains a positive development. According to the investment agreement the company and its majority shareholder Rio Tinto (RIO-N, RIO-L) signed in 2009 with the government, Turquoise Hill can source power inside or outside of Mongolia, including China, for the mine’s first four years of commercial production, after which all power must come from within the country.

The agreement notes that Turquoise Hill can build or sub-contract construction for a coal-fired power plant in Mongolia’s South Gobi region, a plan that is being reviewed. 

With the PPA concluded, BOA analysts highlight an underground feasibility study expected in the first half of 2013, and a US$3-billion to US$4-billion project financing with Rio Tinto, for which final documentation should close early next year, with funding to follow in the first half of 2013. 

Underground production is anticipated in 2016, with full production slated for 2018.

During its first 10 years, Oyu Tolgoi could generate 1.2 billion lb. copper, 650,000 oz. gold and 3 million oz. silver a year. Mine life could extend at least 50 years.

“OT is a world-class copper-gold mine, the third-largest copper mineral resource and one of the lowest C1 life-of-mine cash costs, due to its large, precious metal by-product credits,” BOA analysts conclude.

Turquoise Hill was up 90¢ to $8.97 at press time.