An independent scoping study has concluded that
The study evaluated a wide range of development possibilities to assess alternative production rates, mining strategies and processing options. A base-case scenario calls for the initial construction of a 60,000-tonne-per-day (or 20-million-tonne-per-year) conventional flotation process plant, fed by open pits on the Southwest and Central Oyu deposits. In year five, the project would double to 120,000 tonnes per day (40 million tonnes annually) with construction of a second milling circuit, supplemented by feed from the Hugo South pit and higher-grade material from a 12-million-tonne-per-year underground mine at Hugo North.
The base-case scenario provides a project life of 29 years, based on a potential minable inventory of just over 1 billion tonnes averaging 0.95% copper and 0.26 gram gold per tonne. Approximately 78% of this modeled resource is classified as inferred, while the remainder is in the indicated category. Based on average recoveries of 89.6% copper and 65.8% gold, production is expected to total 8.8 million tonnes (or 19.5 billion lbs.) copper and 5.7 million oz. gold over the life of the mine. Cash costs are estimated at US46 per lb. copper, net of gold credits, over the mine’s life, or US36 per lb. for the first five years.
The initial capital cost of constructing stage 1 is estimated at US$529 million, while the overall cost of both stages comes in at US$1.17 billion. “This type of financing is clearly within Ivanhoe’s capability, given that Ivanhoe has the option of selling non-core assets or selling a minority participation in the Oyu Tolgoi project to one or more strategic partners,” states Robert Friedland, Ivanhoe’s chairman.
The company believes it can minimize the capital requirement for the second-stage expansion by using internally derived cash flow. “We think Oyu Tolgoi is one of the few new projects in the world capable of generating large cash flow with a minimal open-pit capital investment,” Friedland says, adding that it will serve the burgeoning need for copper and gold in the Asian economy.
The study uses long-term metal prices of US90 per lb. copper and US$400 per oz. gold to assume a 21.2% after-tax internal rate of return (IRR) on a 100% equity basis, with a payback period of 6.2 years. A copper price movement of US5 per lb. results in a 2% change to the IRR, whereas a US$25-per-oz. gold difference affects the IRR by 0.7%. At a 10% discount, the project has a net present value (NPV) of US$852 million; increasing to US$2.1 billion using a 5% discount.
The scoping study was prepared by an integrated engineering consortium led by Canada’s AMEC E&C Services and Australia’s Ausenco International. The estimates used in the study have an accuracy of not better than plus or minus 35%, which Friedland acknowledged puts them in a large grey area. Details of two other alternative production options were provided in the study, including full-scale development of a 120,000-tonne-per-day operation in one step, and a stand-alone scenario based solely on a 60,000-tonne-per-day capacity. The stand-alone option serves as the building block for the 2-stage base-case expansion. “The advantages of the 2-stage approach are lower initial capital exposure, a higher IRR, self-financing (in part), and incremental development of infrastructure,” says Ed Flood, Ivanhoe’s deputy chairman. “Gold production should average 400,000 oz. per year in the first four years of the project, generating strong cash flow to feed the construction of the second stage.”
The preliminary engineering study proposes the Oyu Tolgoi be developed using the largest available open-pit mining equipment, including 350-tonne haulage trucks and large-capacity electric shovels. The mineralization appears to be amenable to processing in a conventional flotation concentrator. The ore processing plant will be designed to incorporate the largest proven mills into the grinding circuit. It will be built around two grinding modules, each of which is capable of handling 20 million tonnes per year. Each module will consist of a 12.2-metre-diameter semi-autogenous-grinding (SAG) mill, with a 21-MW wrap-around motor coupled with two 7.7-by-11.6-metre, 15.5-MW ball mills. The grinding module will be supported by a flotation circuit. Tailings will be fed to a containment dam area in the southeastern corner of the mining lease.
Ivanhoe has conducted metallurgical tests on all the deposits, though the amount of work done on Hugo is said to be less than that performed on the other deposits. The metallurgical recoveries for both copper and gold vary by grade and between deposits, as do the grinding requirements. Fluorine and arsenic are present in varying amounts and require additional analysis to ensure they do not materially affect on the project.
Mongolia
The Oyu Tolgoi project is in the remote South Gobi region of Mongolia, 570 km south of the capital city of Ulaanbaatar. Ivanhoe owns all of the project, which also goes by the name “Turquoise Hill.” The company recently purchased a 2% net smelter return royalty held by
There is no infrastructure in place, with the exception of a small airstrip at the project site. Under good conditions, it’s a 12-hour journey in a 4-wheel-drive vehicle along a dirt track from Ulaanbaatar. The closest community is Khanbogd, 45 km to the east, with a population of about 2,000.
Known as “the land of the blue sky,” Mongolia is a vast highland country, land-locked between Russia to the north and China to the south. The land mass is 1.5 million sq. km, slightly smaller than Alaska, and the population is estimated at 2.7 million. About 700,000 people live in the capital.
Mongolia is a low-income country. Some 40% of the population reside in the countryside, primarily subsisting as nomadic livestock herders; the rest live in small cities or settlements scattered throughout the country.
The country is largely homogenous, with 85% of the population consisting of Khalkha Mongols. The largest minority group is the Turkic Kazakhs, representing about 7% of the population. The official language is Mongolian, and Buddhism is the main religion.
The country experiences extreme continental climatic conditions, with large daily and seasonal temperature fluctuations and low annual rainfall. Most precipitation falls during the brief summer, while winter is generally dry and cold. The annual rainfall in the South Gobi region averages about 80 mm. The wintertime temperature fluctuates between minus 5 and minus 31C, without accounting for wind-chill. In the Gobi, winds often develop into fierce storms. The project is in an active seismic zone, requiring further detailed studies.
The Mongols gained prominence in the 13th century, when, under the leadership of Genghis Khan and his heirs, they conquered a huge Eurasian empire stretching from Korea to Hungary and as far south as Vietnam. The empire began to break apart by the mid-14th century, and by the late 17th century, the original steppe homelands of what is known today as Mongolia and Inner Mongolia came under the rule of China’s Manchu Qing Empire. Following the collapse of the Qing Empire and subsequently the Russian Revolution, Mongolia secured its independence, in 1921, with Russia’s backing.
For close to 70 years, Mongolia remained closely aligned with the Soviet Union and developed similar political and economic systems. The coming of glasnost and the beginning of Soviet troop withdrawals from Mongolia in 1989 led to the fall of the communist regime. The country’s first fully democratic, multi-party election was held in 1990. The Mongolian Democratic Union Coalition won the elections in June 1996, ending 75 years of unbroken communist rule. In July 2000, the ex-communist Mongolian People’s Revolutionary Party regained power, sweeping 72 of the 76 seats in parliament for a 4-year term. In addition to parliamentary elections, Mongolian voters directly elect a president to a 4-year term of office.
Since 1990, the Mongolian government has pursued political and economic reforms aimed at stabilizing the economy, strengthening the role of the private sector, increasing private investment, and generally improving the environment for foreign investment.
Traditionally, economic activity has been based on livestock breeding and agriculture. The mining industry is a pillar of the Mongolian economy, accounting for 30% of the total industrial output and 65% of export revenue. Coal, copper, molybdenum, tin, fluorspar and gold dominate the mining sector. The mining and cashmere-processing sectors are the main contributors to the country’s gross domestic product (GDP), which rose 5% in 2003 and 4% in 2002.
A new mining law, passed in 1997, has greatly improved the legal environment for investors and offered greater transparency, with clearly defined legal rules, a simplified licensing process, guaranteed tenure, and reduced royalty and exploration fees. In early 2004, the Mongolian government reported it had reduced the general corporate tax rate and maximum personal tax rate to 30% from the previous level of 40%. Friedland says the large size of the Oyu Tolgoi project renders it eligible for significant tax concessions and that discussions to that effect are ongoing. The scoping study has assumed a 5-year tax holiday on the startup of the first concentrator, as well as a 5-year holiday on starting the second concentrator.
Erdenet
Mongolia’s single-largest mining operation is the Erdenet copper-molybdenum mine, 365 km northwest of the capital. In operation since 1978, the open-pit mine is run by Erdenet Mining, a 51-49 joint venture between the Mongolian and Russian governments.
Erdenet is considered a typical stockwork copper-molybdenum porphyry deposit occurring within a larger intrusion-volcanic complex. Four separate stockwork zones are defined, of which the largest, the Main stockwork, measures 2,400 metres long, 300-1,300 metres wide, and 600-1,000 metres deep. Ore reserves at the end of 2002 exceeded 1.2 billion tonnes averaging 0.5% copper, 0.014% molybdenum, 1.81 grams silver and trace gold, equivalent to 5.5 million tonnes copper and 154,000 tonnes molybdenum.
The mine and concentrator, along with all its infrastructure needs, including roads, rail lines, power, water and a complete new town, were built with massive Soviet assistance in the 1970s. The mine initially treated 3.6 million tonnes of ore per year, but subsequent expansions have taken Erdenet to an annual capacity exceeding 22 million tonnes.
In 2002, the mine produced 119,470 tonnes copper and 1,443 tonnes molybdenum from concentrate by processing 22.2 million tonnes of ore grading 0.65% copper and 0.02% moly. This compares with a 2001 production of 121,100 tonnes copper and 1,291 tonnes moly from the treatment of 21.6 million tonnes grading 0.68% copper and 0.02% moly. Recoveries averaged 83.3% for copper and 33.1% for moly in 2002, versus 82.9% copper and 30.3% moly in 2001.
The mine turned a profit of US$21.1 million on sales of US$149 million in 2002, compared with a US$5.6-million profit and sales of US$140 million in the previous year. Erdenet Mining has a workforce of about 5,900, including 600 foreign specialists from Russia, Kazakstan and other countries.
In recent developments, the US$75-million construction of the new Boroo gold mine, 110 km northwest of Ulaanbaatar, was completed at the end of 2003, with the first gold pour in December. The gold division of uranium giant
The mine is expected to reach commercial production in the first quarter of 2004 and produce 210,000 oz. gold for the year at a cash cost of US$170 per oz. Boroo is a conventional open-pit and milling facility designed with a capacity rate in excess of 1.7 million tonnes per year. Capital costs are almost double the original estimate of US$40 million, due in part to a decision to go with a mine-owned fleet rather than rely on contractor- supplied equipment. Additional improvements to the processing facilities have also eaten into the capital costs.
Ore reserves at Boroo are estimated at 10.3 million tonnes grading 3.52 grams gold per tonne, equivalent to almost 1.2 million oz., based on a gold price of US$325 per oz. Gold production should average 175,000 oz. annually over an approximate 8-year mine life.
On the strength of Ivanhoe’s Oyu Tolgoi porphyry discovery, several Canadian junior exploration companies have set up shop in Mongolia.
QGX is currently drilling its Golden Hills project in western Mongolia, where it has intersected encouraging gold-silver values in a near-surface gossanous oxide layer that overlies deeper copper-bearing massive sulphides, with precious metal credits. By spending US$450,000 before July 2005, QGX can earn an initial 80% interest in the property. The remaining 20% can then be bought out for a US$1-million payment.
Other juniors active, or with holdings, in Mongolia, include Ivanhoe’s 51%-owned
Friedland has promoted Oyu Tolgoi based on its proximity to China, a country with a seemingly unquenchable thirst for base metals. “We have discovered copper and gold right on the dragon’s doorstep,” Friedland told delegates attending the Mineral Exploration Roundup, held recently in Vancouver. “We are of China but not in China.”
Oyu Tolgoi is just 80 km north of the border with North China’s Inner Mongolia autonomous region. Friedland says there is a huge industrial base in northwestern China, including electrical generation. “The Chinese are adding 30,000 MW of coal-burning power to Inner Mongolia in the next two years,” he remarked. “Most of that power is now exported to Beijing. They are generating power at under a penny per kilowatt-hour.”
The scoping study assumes power will be supplied via overhead transmission lines from China. Last year, Chinese authorities upgraded a 226-km-long paved road from the Wuyan railhead to the Mongolian border crossing. “Last year there was no highway, and people were talking about this project being remote,” says Friedland.
Ivanhoe is negotiating with both the Mongolian and Chinese governments to extend the highway 80 km into Mongolia to the Oyu Tolgoi project site, providing a direct link to the Chinese railway system. The base-case assumption in the scoping report is that concentrates will be sold to Chinese smelters, though Ivanhoe is investigating what upside an on-site copper smelter might offer the project.
Adequate supply
“It is difficult to describe how important it is for the Chinese government at the senior level to have an adequate supply of nickel, copper, iron ore, crude oil and natural gas,” says Friedland. China has surpassed the U.S. and now consumes more copper than any other country in the world, accounting for about 20% of global consumption.
The proposed site infrastructure includes roads, accommodations, medical facilities, primary and emergency heat generation facilities, offices, workshops, warehouses, and water distribution.
Indeed, the project will consume large quantities of water. Groundwater supply investigations by consultant Aquaterra of Australia have been ongoing since April 2002. Preliminary work has identified three deep sedimentary-bearing aquifers within 100 km of the project site. While Ivanhoe remains confident it will be able to meet the water demand for a production rate of 40 million tonnes per year, additional work is required to confirm the productivity of the aquifers and the individual bore holes. The scoping study points out that uncertainty with respect to water supply will exist until Ivanhoe actually secures the long-term rights to the water and obtains dispensation for lowering the water table.
The scoping study assumes capital and operating costs can be reduced over what would be experienced in Western countries by sourcing equipment, material and labour from China. These “China factors” were used to reduce the direct cost estimates of the process plant by 30% of that for which a similar plant would be constructed in a Western country. Ivanhoe believes this remains an area of significant upside for the project.
Chain of deposits
Ivanhoe was granted a mining licence at the end of 2003 covering a period of 60 years for the 85-sq.-km Oyu Tolgoi property, with an option to extend the licence for an additional 40 years. The property hosts a 5.2-km-long chain of co-genetic, porphyry-related copper-gold deposits, including Southwest Oyu, South Oyu, Central Oyu and Hugo Dummett (formerly known as the Far North zone). Since the initial discovery in June 2001, when Ivanhoe pulled 508 metres averaging 0.81% copper and 1.17 grams gold (including 278 metres of 1.02% copper and 1.6 grams gold) from the discovery hole into the Southwest zone, the growth of the Oyu Tolgoi has been phenomenal.
The most recent estimate, last updated by AMEC in November 2003, has the project containing total inferred resources of 1.28 billion tonnes grading 1.13% copper and 0.24 gram gold, equivalent to 14.6 million tonnes (30.1 billion lbs.) copper and 9.7 million oz. gold, at a 0.6% copper-equivalent cutoff. In addition, the Southwest Oyu deposit hosts an indicated portion of 267 million tonnes grading 0.53% copper and 0.86 gram gold, equivalent to 1.4 million tonnes (3.1 billion lbs.) copper and 7.3 million oz. gold, at a cutoff grade of 0.6% copper-equivalent.
The Southwest deposit is a gold-enriched porphyry system, characterized by a pipe-like core of greater than 1 gram gold that measures 250 metres in diameter and extends over 700 metres vertically. The high-grade core is enclosed by a large, low-grade shell, defined by 0.3% copper and 0.3 gram gold, and measuring 600 by 2,000 metres in area. The porphyry system is related to several generations of porphyritic quartz monodiorite dykes (metres to tens of metres thick) intruding massive porphyritic augite basalt. More than 80% of the deposit is hosted in the basaltic wall rocks. Strong quartz veining and secondary biotite alteration define the core of the porphyry system. Sulphide mineralization consists mainly of finely disseminated pyrite and chalcopyrite, with minor bornite. Molybdenite occurs locally on late-stage structures.
Open at depth
The pit shell of Southwest is modeled to contain 357 million tonnes of mineralization grading 0.48% copper and 0.48 gram gold to a depth of 500 metres, at a waste-to-ore stripping ratio of 1.17-to-1. The deposit remains open at depth and continues to at least 850 metres. “We are in the process of modeling that deeper ore to 700 metres of depth as an open-pit,” says Gordon Toll. “This has the potential to add about 10 years of life to the project.”
The South deposit is a copper porphyry, developed mainly in basaltic volcanics and related to small, strongly sericite altered quartz monzodiorite dykes. It is characterized by secondary biotite, magnetite and moderate intensity quartz veining (10% by volume), with strong late-stage overprinting by intermediate argillic alteration. The geometry of the zone is still poorly understood, but the prospect covers an area of about 400 by 300 metres and extends to depths of greater than 500 metres. It is bounded on its north and south sides by major east-northeast-oriented faults. The main sulphide minerals are finely disseminated pyrite-chalcopyrite and bornite. Unlike the nearby Southwest system, it is not rich in gold.
The Central deposit contains several styles of mineralization, including high-sulphidation (covellite-chalcocite-enargite) and copper-gold porphyry styles, as well as a chalcocite enrichment blanket. The high-sulphidation system is centred on multiple quartz monzodiorite dykes that intrude porphyritic augite basalt and possibly dacitic ash flow tuff. The volcanic wall rocks comprise less than 20% of the deposit in the top 300 metres of the system. The covellite mineralization is finely disseminated and generally averages 0.7% copper, with a strong pyrite content of 7-10%. It is mineralogically complex and contains minor amounts of chalcopyrite, bornite, enargite, tetrahedrite and tennantite.
A chalcocite enrichment blanket, up to 40 metres thick, is developed over parts of the Central deposit and usually corresponds directly to the most strongly quartz-veined zones in monzodiorite.
The open-pit model for the Central deposit holds 127 million tonnes averaging 0.75% copper and 0.14 gram gold at a stripping ratio of 1.63-to-1.
Hugo Dummett is the northernmost of the deposits. Discovered in the fall of 2002, it extends over a strike length of 2.6 km and contains 78% of the project’s total copper resource and 32% of the gold at a cutoff of 0.6% copper-equivalent. The deposit can be partitioned into two mineralized zones. The southern end, referred to as Hugo South, is a high-sulphidation type hosted in quartz-rich zones of mainly dacitic ash flow tuff. In contrast, deep high-grade copper-gold mineralization in Hugo North is hosted almost entirely in the underlying basalt, which has been intruded by varying degrees of mineralized quartz-monzodiorite dykes along the strike extent of the deposit.
Bornite-chalcopyrite mineralization centres on a zone of intense quartz veining that extends along the axis of the entire deposit. A high-grade, pipe-like core of greater than 1% copper measures about 200-300 metres in diameter. The bornite-rich core laterally zones outward into chalcopyrite, followed by hundreds of metres of pyrite-rich (10%) mineralization.
After first assessing the underground potential of Hugo South, the scoping study proposes mining of the South zone in a massive open-pit containing 378 million tonnes grading 0.97% copper and 0.05 gram gold at modelled stripping ratio of 4.7-to-1. The deep, higher-grade zone in Hugo North, hosting 176 million tonnes of 1.99% copper and 0.35 gram gold, appears to be amenable to underground block-caving methods, based on preliminary data. The underground zone was modelled using a 2% copper-equivalent cutoff and remains open in most directions for expansion.
Block caving
Charles Forster, project geologist at Oyu Tolgoi, says there is plenty of room to optimize Hugo North as the geometry of the deposit still requires firming-up with additional drilling. To the end of October 2003, Hugo North and South had been tested with 136 holes for 129,680 metres. In order to confirm the viability of block caving, additional infill drilling and underground development are required so that the necessary geotechnical data can be collected.
Ivanhoe expects to initiate a shaft-sinking program on Hugo North by mid-year to gain a better understanding of the deposit through underground drilling, while quantifying dilution and underground infrastructure requirements.
The most recent resource estimates for the Southwest, South and Central deposits were based on drilling completed to Jan. 30, 2003, for just over 46,200 metres in 74 holes on Southwest, 7,500 metres in 23 holes for South, and 26,700 metres in 57 holes for Central.
Ivanhoe believes there is still good potential to expand the resources in the project area and enhance the overall stripping ratio. With a fleet of 18 rigs on-site, Ivanhoe is drilling out the resources in each of the modelled pits to a measured and indicated category, while continuing to explore the limits of the Hugo North zone. Drilling on the Central Oyu zone is essentially finished.
Ivanhoe is working on a timeline to update the scoping work to the prefeasibility stage, and complete a full feasibility study on the first stage of the project by the end of 2004. This could put the project on the fast track to production by 2007, and possibly as soon as the third or fourth quarter of 2006. Keeping such a schedule in mind, Ivanhoe would have to begin purchase commitments for major lead-time items in the third quarter of this year.
The scoping study is dynamic in nature and merely provides a snapshot of possible production options based on the data that were available at the time of study. “The study provides a development road map that highlights areas of potential enhancement and a guide to the evolution of the upcoming feasibility work,” stressed Ed Flood. “The study outlines numerous upside opportunities to optimize the current deposit, expand the known resources, and improve the metallurgical recoveries, and, as a consequence, increase the value of the project itself.”
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