The Oyu Tolgoi mine is approximately 550 kilometres south of Ulaanbaatar, Mongolia’s capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Oyut deposit and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension).
The Oyu Tolgoi mine was initially developed as an open-pit operation. The copper concentrator plant, with related facilities and necessary infrastructure, was originally designed to process approximately 100,000 tonnes of ore per day from the Oyut open pit. However since 2014, the concentrator has improved operating practices and gained experience, which has helped achieve a consistent throughput of over 110,000 tonnes per day. This is expected to continue through 2017 with softer ores from the Central zone.
In August 2013, development of the underground mine was suspended pending resolution of matters with the Government of Mongolia. Following signing of the Oyu Tolgoi Underground Mine Development and Financing Plan (Underground Plan) in May 2015 and the signing of a $4.4 billion project finance facility in December 2015, Oyu Tolgoi received the formal notice to proceed approval by the boards of Turquoise Hill, Rio Tinto and Oyu Tolgoi LLC in May
2016, which was the final requirement for the re-start of underground development. Underground construction recommenced in May 2016.
Oyu Tolgoi is expected to be the world’s third-largest copper mine at peak production in 2025. Copper production is expected to increase by more than 300% between 2017 and 2025 when Hugo North Lift 1 reaches peak production.
Average production from 2025 to 2030 is expected to be more than 550,000 tonnes of copper per year.
Underground development progress
The main focus of underground development programs during Q3’17 continued to be underground lateral development, sinking of Shafts 2 and 5, support infrastructure and the convey-to-surface system, which all progressed during the
quarter. Approximately 89% of the underground workforce are Mongolian nationals. After more than a year of construction progress, Rio Tinto is currently undertaking a schedule and cost review, which is common with large-scale, complex development project such as Hugo North Lift 1. The Company continues to plan for first draw bell in mid-2020 and sustainable first production in 2021.
Oyu Tolgoi spent $205.6 million on underground expansion during Q3’17. As of September 30, 2017, total underground project spend since January 1, 2016 was $753.5 million. In addition, Oyu Tolgoi had further capital commitments2 of $1.1 billion as of September 30, 2017.
During Q3’17, underground lateral development made good progress with approximately 1.4 equivalent kilometres completed. Since the re-start of development, a total of 5.4 equivalent kilometres of lateral development has been completed. During Q3’17, the third development crew was deployed. Crews four and five were in training during the quarter and are expected to be deployed during Q4’17. Also during Q3’17, commissioning of the new 3,500 tonne per day development crusher was completed. With the deployment of crews four and five, a step up in lateral development rates is expected to begin in Q4’17. At the end of Q3’17, lateral development was in-line with the development timeline in the 2016 Oyu Tolgoi Technical Report.
At the end of Q3’17, Shaft 2 sinking was at 1,249 metres and work had commenced on the service-level excavation that has a floor at 1,256 metres. Shaft 2 sinking is expected to be complete in 2017 at a final depth of 1,284 metres with fit out occurring over 2018. Shaft 2 is key to future increases in lateral development activity.
Shaft 5 sinking progressed approximately 214 metres during Q3’17. During September, the underground team achieved the best sinking rate for Shaft 5 since project re-start averaging 2.6 metres per day. Sinking of Shaft 5 began slower than expected due to an extended construction re-start period and lower productivity with completion now likely in early 2018.
When completed, Shaft 5 will be dedicated to ventilation thereby increasing the capacity for underground activities;
however, with good early progress and continued on-plan lateral development, the completion of Shaft 5 sinking in early 2018 is not expected to materially impact the lateral development plan.
During Q3’17, Oyu Tolgoi set three operational records for total material mined, ore treated and average daily concentrator throughput. Copper production in Q3’17 was essentially flat compared to Q2’17 while Q3’17 gold production increased 29.2% over Q2’17 due to higher head grades from the medium-grade stockpile and Phase 4A. In Q3’17, open pit material mined increased 9.0% over Q2’17 and ore treated increased 10.1% over Q2’17. During Q2’17, the concentrator underwent a scheduled maintenance shutdown. Average daily concentrator throughput for Q3’17 of 115,400 tonnes per day increased 8.9% over Q2’17. Higher gold grades during Q3’17 resulted in a 26.1% increase in gold sales volumes compared to Q2’17.
Oyu Tolgoi is expected to produce 130,000 to 160,000 tonnes of copper and 100,000 to 140,000 ounces of gold in concentrates for 2017. Open-pit operations are expected to mine in Phases 4 and 6 during the year. In addition, stockpiled ore will continue to be processed during the year.
Funding of Oyu Tolgoi by Turquoise Hill
In accordance with the Amended and Restated Shareholders’ Agreement (ARSHA) dated June 8, 2011, Turquoise Hill has funded Oyu Tolgoi’s cash requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.
For amounts funded by debt, Oyu Tolgoi must repay such amounts, including accrued interest, before it can pay common share dividends. As of September 30, 2017, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to Oyu Tolgoi was $3.6 billion, including accrued interest of $0.3 billion. These loans bear interest at an effective annual rate of LIBOR plus 6.5%.