Turquoise Hill Resources Ltd. today announced that it has successfully reached a mutual understanding for a renewed partnership with the Government of Mongolia and the Oyu Tolgoi LLC ("OT LLC") board of directors has unanimously approved the commencement of the undercut, namely the commencement of blasting that will start the Oyu Tolgoi ("OT") underground mine production. Consequently, the Company expects to begin caving operations in the coming days. With this decision, the Company continues to expect that the underground mine will achieve sustainable production for Panel 0 in the first half of 2023.
The decision to approve the undercut follows resolution of key outstanding issues related to the OT underground mine development project and represents a reset of the relationship with the Government of Mongolia with a view to delivering economic benefits to all stakeholders including the people of Mongolia.
In addition, the Company and Rio Tinto have agreed to a comprehensive and binding, amended funding arrangement that provides a pathway forward to address the Company's estimated funding requirements.
Key Terms agreed with the Government of Mongolia
As part of the agreements with the Government of Mongolia, Turquoise Hill has agreed to waive in full the US$2.4 billion carry account loan of the Government of Mongolia's state-owned entity through which it owns its interest in OT LLC ("Erdenes Oyu Tolgoi" or "EOT"). The loan comprises the amount of equity invested (US$1.4 billion) in OT LLC by Turquoise Hill on behalf of EOT to date, plus US$1.0 billion of accrued interest. Further, the parties have also agreed to improve cooperation with EOT in monitoring the OT underground development and enhancing ESG matters.
Funding of Oyu Tolgoi by Turquoise Hill
Turquoise Hill's estimate of its base case incremental funding requirement, prior to giving effect to the funding elements contemplated by the amended and restated Heads of Agreement (the "Amended HoA") newly entered into between Turquoise Hill and Rio Tinto, replacing the prior Heads of Agreement dated April 9, 2021, is US$3.4 billion as at December 31, 2021 (a decrease of approximately US$200 million from the September 30, 2021 estimate of US$3.6 billion). This Amended HoA is binding and delineates a comprehensive funding arrangement to address the Company's estimated incremental funding requirements.2
Key elements of the Amended HoA include:
- pursuing the rescheduling of principal repayments of existing debt ("Re-profiling") to potentially reduce the base case funding requirement by up to US$1.7 billion;
- seeking to raise up to US$500 million of senior supplemental debt ("SSD");
- Rio Tinto committing to provide a co-lending facility, incremental to the Re-profiling and the SSD, of up to US$750 million to be made available once sustainable production has been achieved;
- Rio Tinto committing to provide a short-term bridge financing directly to the Company by way of one or more secured advances up to a maximum of US$300 million, which would be available during the debt funding restriction period identified in Resolution 103 and would be indirectly repaid out of the proceeds of the US$750 million co-lending facility; and
- the Company agreeing to conduct an equity offering in a form of its choosing of at least US$650 million (including a Rio Tinto pro rata participation) by no later than August 31, 2022.
Under the current base case assumptions, additional equity in excess of the initial US$650 million would not be required if the Re-profiling, SSD and co-lending are fully successful. In addition, the Amended HoA provides that, if necessary, Turquoise Hill could be required to raise up to a total of US$1.5 billion (less the amount raised in the initial equity offering) via equity in a form of its choosing.
In light of the financing debt restrictions in Resolution 103, until sustainable first production is achieved (currently expected in H1 2023), OT LLC's estimated funding requirements are expected to be addressed by cash on hand, the Re-profiling and a pre-paid copper concentrate sale arrangement between Turquoise Hill and OT LLC.
With successful completion of the above elements, the Company currently estimates it can address the US$3.4 billion incremental funding requirement within the new timing framework of the Amended HoA, which sets a target date for the Re-profiling of no later than December 31, 2022 and an outside date for the SSD and co-lending to the earlier of the three months following the lifting of the debt restrictions under Resolution 103 and December 31, 2023.
The full text of the Amended HoA will be filed and will be available under Turquoise Hill's profile on SEDAR at www.sedar.com and its EDGAR profile at www.sec.gov and will also be posted on Turquoise Hill's website at www.turquoisehill.com.
Power
The OT LLC board of directors has approved the signing of an Electricity Supply Agreement to provide OT with a long-term source of power from the Mongolian grid on terms fully agreed with the Government of Mongolia. Once the Mongolian grid is capable of reliably meeting OT's requirements, this agreement provides the framework for OT LLC to obtain access to a reliable and secure domestic power source and, therefore, assists in providing OT LLC and Turquoise Hill with a pathway to satisfy its power sourcing obligations under the Investment Agreement.
While the Mongolian national grid prepares to connect to the OT mine, OT LLC will continue to import its power from Inner Mongolia, China. An agreement in-principle has been reached between the National Power Transmission Grid ("NPTG") and the Inner Mongolia Power International Cooperation Company ("IMPIC") for a three-year fixed term extension to 2026, followed by an extension to up to 2030, if required (the current agreement expires in July 2023). Outstanding commercial terms are in the process of being finalized.
Luvsannamsrain Oyun-Erdene, the Prime Minister of Mongolia said "The commencement of Oyu Tolgoi underground mining operations demonstrates to the world that Mongolia can work together with investors in a sustainable manner and become a trusted partner. As part of our "New Recovery Policy", I am happy to express Mongolia's readiness to work actively and mutually beneficially with global investors and partners."
Steve Thibeault, Interim Chief Executive Officer of Turquoise Hill commented: "Today is a landmark day for Turquoise Hill and a major milestone in the development of the Oyu Tolgoi underground development project. We are very excited to be starting work on the undercut, which is critical to unlocking the immense potential of this world-class, high grade deposit for the benefit of all stakeholders. Following the agreements with the Government of Mongolia and the Amended Heads of Agreement with Rio Tinto being put in place, we now have greater certainty and confidence to complete construction of this once-in-a-generation mine that, when finished, is expected to be one of the largest copper producing mines in the world and a generator of vast economic value and employment in Mongolia and of returns for our shareholders for years to come. I want to thank the Government of Mongolia for its commitment to securing balanced solutions that allow us to advance the project while ensuring that all stakeholders including the people of Mongolia truly benefit from the development of this resource. This partnership says a lot about the positive environment for foreign investment in the country."
Rio Tinto Chief Executive Jakob Stausholm said "We would like to thank the Government of Mongolia for their commitment to working productively with Rio Tinto and TRQ to reach this crucial agreement, that will see one of the world's largest copper growth projects move forward and firmly establish Mongolia as a global investment destination. This agreement represents a reset of our relationship and resolves historical issues between the OT project partners. We strongly believe in the future of this country and I am personally committed to ensuring that the people of Mongolia benefit strongly from OT along with our shareholders."
Oyu Tolgoi
At peak production, OT is expected to operate in the first quartile of the copper cash cost curve. OT is expected to produce around 500,000 tonnes of copper per year on average from 2028 to 2036 from the open pit and underground, and an average of around 350,000 tonnes for a further five years, compared to 163,000 tonnes in 2021. The underground Ore Reserve has an average copper grade of 1.52 per cent, which is more than three times higher than the open pit Ore Reserve, and contains 0.31 grammes per tonne of gold.
Update on Cost Overrun and Schedule Delay Review
As previously disclosed by the Company, a special committee of Turquoise Hill's Board of Directors (the "Board"), comprised solely of independent directors of the Company (the "Special Committee"), has been independently reviewing the construction delays and cost overruns that were disclosed to Turquoise Hill by Rio Tinto OT Management Limited, a subsidiary of Rio Tinto, ("Rio Tinto Manager") and publicly announced by the Company and Rio Tinto in July 2019. The Special Committee was formally constituted in December 2020 to carry out this review.
Also, in December 2020, the Company announced that it supported the formation of a special committee (the "OT Special Committee") of the board of OT LLC to investigate the increase in cost and the schedule extension of the OT underground project during the period between the 2016 Mongolian Statutory Study (previously referred to as the "2016 Feasibility Study"7) and the December 2020 Definitive Estimate. The OT Special Committee commissioned a report from a group of consultants (the "The Independent Consulting Group" or "ICG") to conduct the review on behalf of the OT Special Committee. The work of the ICG did not include any analysis of the legal rights of OT LLC with respect to the role of Rio Tinto Manager or assess whether the conduct of Rio Tinto Manager failed to meet the standards of performance under the management agreement.
Source: Turquoise Hill
Turquoise Hill Resources Ltd. today announced that it has successfully reached a mutual understanding for a renewed partnership with the Government of Mongolia and the Oyu Tolgoi LLC ("OT LLC") board of directors has unanimously approved the commencement of the undercut, namely the commencement of blasting that will start the Oyu Tolgoi ("OT") underground mine production. Consequently, the Company expects to begin caving operations in the coming days. With this decision, the Company continues to expect that the underground mine will achieve sustainable production for Panel 0 in the first half of 2023.
The decision to approve the undercut follows resolution of key outstanding issues related to the OT underground mine development project and represents a reset of the relationship with the Government of Mongolia with a view to delivering economic benefits to all stakeholders including the people of Mongolia.
In addition, the Company and Rio Tinto have agreed to a comprehensive and binding, amended funding arrangement that provides a pathway forward to address the Company's estimated funding requirements.
Key Terms agreed with the Government of Mongolia
As part of the agreements with the Government of Mongolia, Turquoise Hill has agreed to waive in full the US$2.4 billion carry account loan of the Government of Mongolia's state-owned entity through which it owns its interest in OT LLC ("Erdenes Oyu Tolgoi" or "EOT"). The loan comprises the amount of equity invested (US$1.4 billion) in OT LLC by Turquoise Hill on behalf of EOT to date, plus US$1.0 billion of accrued interest. Further, the parties have also agreed to improve cooperation with EOT in monitoring the OT underground development and enhancing ESG matters.
Funding of Oyu Tolgoi by Turquoise Hill
Turquoise Hill's estimate of its base case incremental funding requirement, prior to giving effect to the funding elements contemplated by the amended and restated Heads of Agreement (the "Amended HoA") newly entered into between Turquoise Hill and Rio Tinto, replacing the prior Heads of Agreement dated April 9, 2021, is US$3.4 billion as at December 31, 2021 (a decrease of approximately US$200 million from the September 30, 2021 estimate of US$3.6 billion). This Amended HoA is binding and delineates a comprehensive funding arrangement to address the Company's estimated incremental funding requirements.2
Key elements of the Amended HoA include:
- pursuing the rescheduling of principal repayments of existing debt ("Re-profiling") to potentially reduce the base case funding requirement by up to US$1.7 billion;
- seeking to raise up to US$500 million of senior supplemental debt ("SSD");
- Rio Tinto committing to provide a co-lending facility, incremental to the Re-profiling and the SSD, of up to US$750 million to be made available once sustainable production has been achieved;
- Rio Tinto committing to provide a short-term bridge financing directly to the Company by way of one or more secured advances up to a maximum of US$300 million, which would be available during the debt funding restriction period identified in Resolution 103 and would be indirectly repaid out of the proceeds of the US$750 million co-lending facility; and
- the Company agreeing to conduct an equity offering in a form of its choosing of at least US$650 million (including a Rio Tinto pro rata participation) by no later than August 31, 2022.
Under the current base case assumptions, additional equity in excess of the initial US$650 million would not be required if the Re-profiling, SSD and co-lending are fully successful. In addition, the Amended HoA provides that, if necessary, Turquoise Hill could be required to raise up to a total of US$1.5 billion (less the amount raised in the initial equity offering) via equity in a form of its choosing.
In light of the financing debt restrictions in Resolution 103, until sustainable first production is achieved (currently expected in H1 2023), OT LLC's estimated funding requirements are expected to be addressed by cash on hand, the Re-profiling and a pre-paid copper concentrate sale arrangement between Turquoise Hill and OT LLC.
With successful completion of the above elements, the Company currently estimates it can address the US$3.4 billion incremental funding requirement within the new timing framework of the Amended HoA, which sets a target date for the Re-profiling of no later than December 31, 2022 and an outside date for the SSD and co-lending to the earlier of the three months following the lifting of the debt restrictions under Resolution 103 and December 31, 2023.
The full text of the Amended HoA will be filed and will be available under Turquoise Hill's profile on SEDAR at www.sedar.com and its EDGAR profile at www.sec.gov and will also be posted on Turquoise Hill's website at www.turquoisehill.com.
Power
The OT LLC board of directors has approved the signing of an Electricity Supply Agreement to provide OT with a long-term source of power from the Mongolian grid on terms fully agreed with the Government of Mongolia. Once the Mongolian grid is capable of reliably meeting OT's requirements, this agreement provides the framework for OT LLC to obtain access to a reliable and secure domestic power source and, therefore, assists in providing OT LLC and Turquoise Hill with a pathway to satisfy its power sourcing obligations under the Investment Agreement.
While the Mongolian national grid prepares to connect to the OT mine, OT LLC will continue to import its power from Inner Mongolia, China. An agreement in-principle has been reached between the National Power Transmission Grid ("NPTG") and the Inner Mongolia Power International Cooperation Company ("IMPIC") for a three-year fixed term extension to 2026, followed by an extension to up to 2030, if required (the current agreement expires in July 2023). Outstanding commercial terms are in the process of being finalized.
Luvsannamsrain Oyun-Erdene, the Prime Minister of Mongolia said "The commencement of Oyu Tolgoi underground mining operations demonstrates to the world that Mongolia can work together with investors in a sustainable manner and become a trusted partner. As part of our "New Recovery Policy", I am happy to express Mongolia's readiness to work actively and mutually beneficially with global investors and partners."
Steve Thibeault, Interim Chief Executive Officer of Turquoise Hill commented: "Today is a landmark day for Turquoise Hill and a major milestone in the development of the Oyu Tolgoi underground development project. We are very excited to be starting work on the undercut, which is critical to unlocking the immense potential of this world-class, high grade deposit for the benefit of all stakeholders. Following the agreements with the Government of Mongolia and the Amended Heads of Agreement with Rio Tinto being put in place, we now have greater certainty and confidence to complete construction of this once-in-a-generation mine that, when finished, is expected to be one of the largest copper producing mines in the world and a generator of vast economic value and employment in Mongolia and of returns for our shareholders for years to come. I want to thank the Government of Mongolia for its commitment to securing balanced solutions that allow us to advance the project while ensuring that all stakeholders including the people of Mongolia truly benefit from the development of this resource. This partnership says a lot about the positive environment for foreign investment in the country."
Rio Tinto Chief Executive Jakob Stausholm said "We would like to thank the Government of Mongolia for their commitment to working productively with Rio Tinto and TRQ to reach this crucial agreement, that will see one of the world's largest copper growth projects move forward and firmly establish Mongolia as a global investment destination. This agreement represents a reset of our relationship and resolves historical issues between the OT project partners. We strongly believe in the future of this country and I am personally committed to ensuring that the people of Mongolia benefit strongly from OT along with our shareholders."
Oyu Tolgoi
At peak production, OT is expected to operate in the first quartile of the copper cash cost curve. OT is expected to produce around 500,000 tonnes of copper per year on average from 2028 to 2036 from the open pit and underground, and an average of around 350,000 tonnes for a further five years, compared to 163,000 tonnes in 2021. The underground Ore Reserve has an average copper grade of 1.52 per cent, which is more than three times higher than the open pit Ore Reserve, and contains 0.31 grammes per tonne of gold.
Update on Cost Overrun and Schedule Delay Review
As previously disclosed by the Company, a special committee of Turquoise Hill's Board of Directors (the "Board"), comprised solely of independent directors of the Company (the "Special Committee"), has been independently reviewing the construction delays and cost overruns that were disclosed to Turquoise Hill by Rio Tinto OT Management Limited, a subsidiary of Rio Tinto, ("Rio Tinto Manager") and publicly announced by the Company and Rio Tinto in July 2019. The Special Committee was formally constituted in December 2020 to carry out this review.
Also, in December 2020, the Company announced that it supported the formation of a special committee (the "OT Special Committee") of the board of OT LLC to investigate the increase in cost and the schedule extension of the OT underground project during the period between the 2016 Mongolian Statutory Study (previously referred to as the "2016 Feasibility Study"7) and the December 2020 Definitive Estimate. The OT Special Committee commissioned a report from a group of consultants (the "The Independent Consulting Group" or "ICG") to conduct the review on behalf of the OT Special Committee. The work of the ICG did not include any analysis of the legal rights of OT LLC with respect to the role of Rio Tinto Manager or assess whether the conduct of Rio Tinto Manager failed to meet the standards of performance under the management agreement.
Source: Turquoise Hill