March 26, 2013 / 9:00 PM / in 5 years

RPT-Report points to rising costs as Rio's Mongolia mine grows

LONDON/TORONTO, March 26 (Reuters) - Miner Rio Tinto has pointed to rising costs at its giant Oyu Tolgoi copper mine in Mongolia, in technical documents that confirm a $5.1 billion budget for the project’s second phase, but reduce the scale of that planned expansion.

Rio and Mongolia are at loggerheads over Oyu Tolgoi and the future of one of the world’s largest untapped copper deposits, just as the mine ramps up output and the Rio subsidiary that owns it tries to secure $4 billion for the next stage of development.

The report’s evidence of inflation - including a 30 percent rise in the cost of building the underground mine - is unlikely to ease Mongolian fears that rising costs will erode prospective earnings. A feasibility study with revised cost estimates, already delayed, is due to be completed by next year.

A 2013 technical report, released by Rio subsidiary Turquoise Hill, excludes a power plant and the expected expansion of the concentrator to 160,000 tonnes per day from an initial 100,000 tonnes, from the growth plan.

Both were in a 2012 report.

A decision to expand the concentrator to allow it to process ore from the open pit mine also “does not need to be made until 2015,” as the miner considers all options.

The report, released alongside Turquoise Hill’s full-year earnings, does, however, confirm that the first phase of the mine’s development is on time and on budget at $6.2 billion. Commercial production is expected to start in June.

“The scope change could be to put additional pressure on the Mongolian government, as it could be seen that Rio Tinto/Turquoise Hill are unwilling to commit increased levels of capital to a project with uncertain economic outcomes,” BMO mining analyst Tony Robson said in a note to clients.

“Until the political situation has been resolved, the news should weigh on the stock near term.”

Rio and Turquoise Hill are currently in talks with numerous lenders to raise $3 billion to $4 billion in project financing. It expects to have a financing deal in place in the first half of 2013.

Rio is the largest single investor in Mongolia - a country where livestock outnumber people 15 to 1 - and one of few with the financial might and technological know-how to build and run a giant mine.

Turquoise Hill’s shares fell 4.6 percent to C$6.16 in early trading on the Toronto Stock Exchange.

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