Mongolia's Oyu Tolgoi to Start Copper and Gold Production in Late 2012

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As Chile is hit by falling ore grades and Peru is hit by delays due to populist agitation, the copper market is pinning a lot on the start of copper production later this year at Rio and Ivanhoe’s Oyu Tolgoi mine in southern Mongolia’s Gobi desert.

First identified over ten years ago, Rio and their subsidiary, Ivanhoe, along with the Mongolian government that holds a 34 percent stake, have poured billions into what is one of the most exciting mining projects in the world. Admittedly not as large as Chile’s Escondida, Oyu Tolgoi still holds the promise to yield some 450,000 tons per year of copper and 330,000 ounces of gold when it reaches full production sometime in 2013.

The ore body is growing in estimation as further exploration is done, but already extends over 30 kilometers (19 miles) long by 1 kilometer wide (0.65 mile) and over a kilometer (up to a mile) deep. Oyu Tolgoi is estimated to have reserves of at least 36 million tons of copper and 45 million ounces of gold, enough for a 45-year mine life.

The region’s position just 50 miles from the border with China places it ideally for delivery to the world’s largest consumer, easing global copper supply by replacing supplies China would have pulled from elsewhere.

Is There a Catch?

But bringing this vast resource to productive life has not been without its challenges.

Resource nationalism simmers beneath the surface in Mongolia, struggling as it does with widespread poverty, poor employment prospects and weak governments prone to caving in to populist pressure, seen as a legacy of its socialist past when Mongolia was part of the Soviet Union. Those in power arenot blind to the balancing act they must pull off, maximizing the country’s return for the exploitation of its natural resources while continuing to encourage new investment for future projects elsewhere.

As points out when it quotes Bloomberg Businessweek’s Dexter Roberts, “Four-fifths of the country is still un-surveyed. Over the next decade copper production is expected to double, iron ore to triple, coal to grow by six times, and gold and oil by 10 and 13 times, respectively.” With such riches available, Mongolia does not want to scare off the foreign investment and knows that will be needed to realize such wealth.

Oyu Tolgoi will go some way to replacing the “lost” production from chronic under-investment by the industry a decade ago — at 3 percent of global production, the mine will make a sizeable contribution, but as Reuters points out, it will take further investment at Escondida, the realization of projects currently underway in Peru and BHP’s Olympic Dam to achieve capacity before the copper market can be said to have a sustainable supply outlook.

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