Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) and the Mongolian government have resolved several issues that have been holding up the underground expansion of the Oyu Tolgoi copper-gold mine in the country, according to media reports.
Turquoise Hill, the mine’s operator and 66% owner, suspended work on the underground development last August, citing uncertainty over matters between itself and the government, which owns 34% of Oyu Tolgoi.
Those matters ranged from permitting and financing to the breakdown of costs and profits between it and the government.
The Mongolian government owns 34% of Oyu Tolgoi, which officially began production last September.
The impasse was compounded when in June, the Mongolian Tax Authority presented the miner with a $130-million bill for unpaid taxes, penalties and other charges related to the mine’s development.
Turquoise Hill, which is 51% owned by Rio Tinto (NYSE: RIO; LSE: RIO), fought the bill, insisting it was paid up under the Investment Agreement signed with Mongolia and under Mongolian law.
On the tax issue, Mongolia’s vice-minister of mining, Oyun Erdenebulgan, confirmed on Monday that the two sides had settled on a tax payment of US$30 million, down from US$130 million the government said it was owed a few months ago.
Erdenebulgan told Reuters that neither party wanted a delay because of the tax issue and said that the project would resume construction in the first quarter of 2015.
However, Turquoise Hill has so far been silent on the matter, except to confirm it had received a written decision from the Mongolian Tax Authority, and would update the market once it had translated and interpreted the implications of the decision.
Other than declaring that all outstanding disputes had been settled, Erdenebulgan did not shed any light on the other issues that Turquoise Hill has said must be resolved in order for underground development to start again, including an agreement on financing and on how the economic value from the mine will be shared, as well as the receipt of permits.
The apparent resolution comes just a couple of weeks ahead of a Sept. 30 deadline set by international lenders for the parties to work out an agreement. The lenders, which have committed to providing US$4 billion in debt financing for the underground development, have already extended the deadline once this year.
Tony Robson, a mining analyst at BMO Capital Markets, noted that the deadline was unlikely to be met.
“At this stage it is highly unlikely that the Sept. 30 deadline for the US$4-billion financing will be met, and BMO Research assumes this is rolled over again,” Robson wrote in a note.
“Any quick resolution would be somewhat surprising given that the Mongolian Parliament is not due to sit until Oct. 1 (depending on what can be ratified by the government ministers or relevant departments and what part by Parliament).”
Erdenebulgan said both sides were waiting for the completion of a feasibility study on underground development that will outline expected capital costs. Turquoise Hill said last month the study was largely complete.
The initial open-pit mine cost US$6.2 billion to develop.
Robson, who has an “outperform” rating on Turquoise and a target price of $5.50, noted that the government has started to make more mining-friendly overtures to lure back investment to the country.
“Recent statements by the government of Mongolia and various government ministers or senior politicians have, from the (Turquoise Hill) shareholder point of view, become more positive in recent weeks and months, probably driven by collapsing foreign direct investment and a weakening currency,” Robson wrote.
The government has passed a series of new laws and amendments to existing laws this year aimed at encouraging mining investment, including a repeal of the 2010 ban on issuing new exploration licences, opening up more land to exploration, and increasing the period of exploration to twelve years from nine.
However, there are still unresolved issues with exploration licences that have been revoked without recourse — many of them related to a corruption case against former Mineral Resource Authority of Mongolia bureaucrats.
Oyu Tolgoi is located in the remote South Gobi region of Mongolia, 550 km south of Ulaanbaatar and 80 km north of the Mongolian-China border.
Turquoise Hill expects to produce 135,000-160,000 tonnes of copper in concentrates and 600,000-700,000 oz. gold in concentrates this year.
In its initial open-pit phase, the 100,000-tonne-per-day operation is mining the Southern Oyu deposits (Southwest and Central Oyu).
In its second phase, the mine will see up to 95,000 tonnes per day of underground production via block-caving from the high-grade Hugo North and Hugo South deposits.
Before the suspension of underground work last year, lateral development at Hugo North had advanced for 16 km and the sinking of Shafts #2 and #5 had progressed to 91% and 17%, respectively, of their final depths.
The Southern Oyu deposits contain proven and probable reserves of 1 billion tonnes grading 0.46% copper, 0.31 gram gold, and 1.23 grams silver per tonne for 8.6 billion lbs. copper, 7.8 million oz. gold, and 32.1 million oz. silver.
Hugo North contains proven and probable reserves of 491 million tonnes grading 1.8% copper, 0.39 gram gold per tonne, and 3.74 grams silver for 17.8 billion lbs. copper, 5.1 million oz. gold, and 50.9 million oz. silver.
Turquoise Hill shares recently traded at $4.38 in Toronto. The shares are up by 73¢ or 20% since Sept. 9 and have traded in a 52-week window of $3.20-5.45. The company has 2 billion shares outstanding.