LONDON: Rio Tinto is going Genghis on the copper market. The company and its partners in Mongolia committed on May 6 to a $5.3 billion expansion of the Oyu Tolgoi copper mine.
It's a bold bet by Rio's incoming Chief Executive Jean-Sebastien Jacques when prices for the industrial metal, which is closely linked to China's economy, are languishing close to seven-year lows. Odds are that Rio will either cleverly ride an upswing in demand - or take copper into the kind of damaging supply battle now raging in iron ore.
Oyu Tolgoi's success will depend on the market for copper swinging back into surplus. That may happen by the end of the decade. The most optimistic estimates forecast the gap between global supply and demand exceeding 5 million tonnes by 2025, when Rio's mine in the land that birthed the dreaded 12th-century warrior Genghis Khan will be approaching full capacity.
But with costs in the lowest quartile of the industry, Rio's bet will be that even without peak prices it can pose a competitive challenge to more expensive producers.
Unlike the iron on which steel production depends, copper isn't abundant.
Tier-1 deposits of the metal such as Oyu Tolgoi - which are defined as large, expandable and with a lifespan beyond 20 years - are relatively rare. To extract richer grades of high-quality ore can require digging underground mines instead of the open pits that miners find cheaper to operate. Falling prices and weakening demand from China have also dissuaded investment since 2012.
Those are positive conditions for the future price of the red metal.
The danger for Rio is that its decision to press ahead prompts other miners to either expand capacity, acquire new mines, or intensify the search for new greenfield projects.
BHP Billiton shelved its $20 billion plan to expand the Olympic Dam copper, gold and uranium mine in Australia in 2012, but the company hasn't given up hope of increasing production.
Rio's biggest rival is also reviewing the possible expansion of its Spence mine in Chile. Oyu Tolgoi could be the beginning of a golden age for Rio, but a grisly war for the industry.
Comments
Comments are closed.