15 December, 2015

Rio Tinto's USD 4,4 billion copper mine Oyu Tolgoi deal with EBRD-IFC-BNP Paribas

Rio Tinto managed to secure the financing for its Mongolia copper gold mine Oyu Tolgoi. The mine is an enormous asset and the underground reserves are expected to be in excess of 25 billion pounds of copper and 12 million ounces of gold reserves.  Despite the market trends, Rio Tinto business expansions also includes Serbia lithium research project Jadar and potential copper-gold project Timok.

IFIs, ECAs, development and commercial banks lend US$ 4.4 billion for Mongolia project lead by Rio Tinto. Lead by EBRD the IFIs will support Rio Tinto and their own natural resources business portfolio.

EBRD press release transmits that the Bank has arranged a syndicated loan of US$ 1.221 billion to Oyu Tolgoi LLC, a company established to develop the world’s largest undeveloped copper and gold deposit in the South Gobi region of Mongolia. Oyu Tolgoi is already producing copper from an open pit mine, but more than 80 per cent of its value lies in the proposed underground mine. Once fully operational, the underground mine is expected to provide for up to a third of Mongolia’s GDP and contribute to rising standards of living in the country. The EBRD financing is part of a US$ 4.4 billion package put together by international financial institutions, export credit agencies, development banks and commercial banks. Oyu Tolgoi LLC, the borrower, belongs to Turquoise Hill, a subsidiary of Rio Tinto, and Erdenes Oyu Tolgoi which is owned by the state of Mongolia. Riccardo Puliti, EBRD Managing Director for Energy and Natural Resources, said: “The financial closing we achieved today is key for fostering economic growth in Mongolia. “The sheer size of the project puts Mongolia on the mining map as a main host country for large and globally relevant natural resources projects, opening the way for other similar projects to move forward. “The EBRD is pleased to see the successful completion of the financing and the adoption of best practices in all aspects of the development of this project”. The EBRD is providing US$ 400 million on its own account (A-loan) and the remainder is provided by a syndicate of 15 commercial and development banks (B-loan). It is the largest ever syndicated loan for the EBRD. In parallel, the International Finance Corporation (IFC) has arranged an equivalent amount of US$ 1.221 billion under the same A/B structure. The rest of the package comes from lending by export credit agencies, development banks and a tranche by commercial banks covered by the World Bank’s Multilateral Investment Guarantee Agency. EDC, EBRD, IFC and BNP Paribas acted as Initial Mandate Lead Arrangers and Standard Chartered as Initial Lead Arranger. BNP Paribas was the sole bookrunner of the $2.34 billion facilities funded by the commercial banks, together with EBRD and IFC on their respective B-loans concludes the EBRD statement.

Financial commodities market analyst have different opinion on Rio Tinto expansion. The Mongolia expansion is problematic because the assets are already suffering from very depressed prices as supply increases and demand decreases work together.  Goldman Sachs recently stated the dividends were unsustainable. Previously they encouraged higher production and shorting of the commodities.

Even though Rio Tinto is a strong miner that has been prudent in managing their business and developing themselves as a low-cost leader, they can’t buy up the assets if the other companies refuse to sell them. Some of the smaller players with higher cost structures have little reason to be in the business. If they were being seized by the creditors and having their assets liquidated, it would be put Rio Tinto in a desirable position. On the other hand, so long as the less-efficient competitors are not allowed to fail, there may be excess supply going to the market. Put simply, some of the competitors are “zombies”. They have little to no chance at returning to life but their continued operation is increasing the total volume of ore available for sale which holds prices down. If Rio Tinto is not planning to put those companies out of business, the strategy starts to break down. Economic theories do suggest that the world would push towards lower cost production and Rio Tinto is focused on looking internally for ways to reduce their cost of operation. The difficulty here is that the major mining companies are already controlling a substantial portion of the production. If Rio Tinto is holding a singular focus on lower cost production, then they are making an incredible mistake concludes the seekingalpha analyst comment.