Postcards from Oyu Tolgoi

I was fortunate to participate in a recent site tour of Oyu Tolgoi, alongside other investors, and I brought home some insights and reflections which cannot be obtained through desktop research alone. 

Oyu Tolgoi, Rio Tinto’s copper mine in Southern Mongolia, highlights both the opportunities and challenges created by the decarbonisation and mining paradox.

As copper grades decline, and large orebodies in stable jurisdictions reach end of life, it is becoming widely acknowledged that we will need to venture further into developing countries to explore and mine transition materials like copper.

Rio Tinto Chairman Dominic Barton alluded to this mineral intensity at the Mongolian Economic Forum.  He commented, “To deliver on our net zero goals and deliver 3.5 per cent GDP growth, the world will require more than 700 million tonnes of copper over the next 25 years,”[i]. This is equivalent to all copper mined throughout history to now.  

While Oyu Tolgoi represents a small proportion of my current valuation of Rio Tinto, Rio estimates that the mine will fuel 80% of their plan to double copper production by 2030.

An agreement with the Government reached in January 2022 has allowed for a step-change in production, as the mine transitions from open-pit to underground, and accesses 3 times higher grade ore.

My recent visit revealed the mine was tracking ahead of schedule on its way to becoming the fourth largest copper mine in the world by 2030, mining an orebody the size of Manhattan.

I left particularly impressed by the cutting-edge ground monitoring technology, supported by a Wi-Fi signal strong enough to video call home and send this photo to the office from 1.3km below the Gobi Desert!  (That’s stronger than some of my Wi-Fi connections I receive at home on occasion!) 

Rio have been able to apply their block cave mining experience from their Argyle diamond mine in WA and formerly owned NorthParkes copper mine in NSW.  This block caving mining method is highly technical and as we start to mine for lower grade copper, deeper underground in bulk tonnages, this experience will be extremely valuable.

Importantly, I believe Oyu Tolgoi also symbolises Rio Tinto’s CEO Jakob Stausholm’s efforts to reset government and community relations after their widely known failings at Juukan Gorge, which bodes well for a pipeline of projects with similar permitting challenges including Resolution, the Oyu Tolgoi of Arizona, and Simandou, a high-grade iron ore project in Guinea.

The observations I made at Oyu Tolgoi go far beyond my analysis of Rio Tinto and the site itself.  It emphasises the challenges mining companies will face in extracting those minerals as ESG standards and social licenses are increasingly scrutinised. In our paper entitled “the decarbonisation and mining paradox”,[ii] we discuss the mineral intensity of decarbonisation and explore this paradox.

We will rely on companies like Rio to act in good faith by establishing long-term relationships with communities and governments to ensure mines are delivered sustainably while also lifting development in the region.

Mines are also likely to be deeper and lower grade, requiring more upfront capital expenditure and technical experience to bring into production, often using bulk mining methods like block caving.

In this way, it was reassuring to see Rio’s focus on building strong government relations, as well as developing their capabilities in block cave mining, as we will need both areas of expertise to enable the global transition to net zero.