Oyu Tolgoi could be one of world’s biggest mines

An independent study of Oyu Tolgoi shows Ivanhoe Mines (IVN-T, IVN-N, IVN-Q) to have one of the world’s largest copper and gold projects on its hands.

On a conference call, Ivanhoe’s founder and chairman Robert Friedland said the report outlines a mine that will make Mongolia a leader amongst Asian countries in terms of economic growth.

The report, created by 18 different independent consultants, says Oyu Tolgoi could produce 1.2 billion lbs. copper and 650,000 oz. gold a year for its first 10 years, making it one of the world’s top three copper and gold mines.

The report also outlined the first underground reserves for the project as it put 437 million tonnes of ore grading 1.9% copper and 0.42 gram gold in the Hugo North deposit. Ore at Hugo North will be accessed by an already completed Shaft 1 and will be mined via block caving methods.

The new figures for the project are born out of an integrated development plan for the site, which updates a previous study completed in 2005. Ivanhoe had been in negotiations with the government for an investment agreement since that time, and finally had the agreement signed off on in October 2009. The agreement gave the Mongolian government a 34% stake in the project.

The new plan increases estimated total copper production by 50% over the old plan to 52.5 billion lbs. and increases gold production by 126% to 26.4 million oz.

Reserves at Oyu Tolgoi now stand at 1.4 billion tonnes grading 0.93% copper and 0.37 gram gold. Measured and indicated resources come in at 1.4 billion tonnes grading 1.33% copper and 0.47 gram gold with an additional 2.4 billion tonnes in the inferred category with an average grade of 0.78% copper and 0.33 gram gold.

In all, the site hosts 81.3 billion lbs. copper and 46.4 million oz. gold — enough to keep it in operation for 59 years. Taking only reserves into account, the project has a mine life of 27 years.

Staying with a “reserves only” outlook, the project has a net present value of US$4.7 billion and a payback period of 6.5 years. Those numbers were arrived at using a discount rate of 8%, US$2 per lb. copper, US$850 per oz. gold and US$13.5 per oz. silver.

The size of the deposits and the cash flows they are set to generate put the project in the same league as Freeport-McMoRan Copper & Gold’s (FCX-N) Grasberg gold mine in Indonesia, BHP Billiton’s (BHP-N, BLT-L) majority-controlled Escondida project in Chile and Chilean state-controlled Codelco’s Codelco Norte project, which is also in Chile.

Oyu Tolgoi is expected to be in production by mid-2013. Rio Tinto (RTP-N, RIO-L) currently holds 22.4% of Ivanhoe’s shares but has options to move up to a 46.6% stake over the next two years.

Getting into production will cost another $4.6 billion in capital.

That number would climb, however, if the company were to build an onsite smelter. The Mongolian government has stated its preference for such a facility, and ac- cording to John Macken, Ivanhoe’s president and chief executive, Rio Tinto would also prefer to have a smelter that was controlled by the miners.

But Macken said Ivanhoe preferred to have a stake in any smelter, so that the company could keep an eye on things, while not owning it outright. He cited finding a home for the necessary sulphuric acid as an obstacle to building such a facility.

Friedland added that the company has an agreement with the government whereby Ivanhoe will study the feasibility of building a smelter.

Another large capex project, which could be added on, is the construction of a power plant.

“We wouldn’t do it ourselves but in conjunction with others,” Macken said. “There are two large coal deposits to the north of us and both envisage having a power plant. We are in discussion on the opportunity to build such a plant.”

Macken said it would take three to five years to build such a power facility. Currently, Ivanhoe plans to draw power from a yet-to-be-built transmission line that extends out of Inner Mongolia in China to the project.

He listed the engineering of that power line as the second most time-sensitive priority of the company, putting only the covering of the milling facility ahead of it. Macken said the mill had to be covered before the winter of 2011 so that Ivanhoe could be on track to begin commercial production in 2013.