Cameron McRae – Chief Executive Officer – Oyu Tolgoi LLC
I am pleased to have the opportunity to speak to you today. As CEO of Oyu Tolgoi LLC and Country Director for Rio Tinto, I am proud to see Oyu Tolgoi and Rio Tinto sponsor this important conference. And as someone who currently calls Mongolia my home, I am proud to see this conference attracting so much interest and attendance from around the world.
Today, I will explain how Oyu Tolgoi and Rio Tinto are doing our part in strengthening and growing Mongolia.
But first, I’d like to set the stage by briefly showing how demand for commodities is increasing and where Mongolia – and specifically Oyu Tolgoi – fit into this picture.
The medium to long-term profile for growth in the global copper market is good. It will come as no surprise that China’s consumption fosters this growth. Chinese urbanisation will continue to drive significant investment in copper-intensive infrastructure.
Chinese copper consumption will account for more than 50 per cent of the global total by 2024, and will have increased by more than 10 million tonnes from today’s level.
By-far the largest single end-use in China is electrical infrastructure and wiring – currently accounting for 59per cent of consumption.
China’s per capita energy consumption is only 35 per cent of the OECD average, and yet, as a country, China is already the world’s largest consumer of energy – and her total consumption is set to triple by 2030 – another good news story for copper.
Our proximity to China as the world’s most important source of demand, means that Mongolia and China building a strong, balanced, trade relationship with one another, is important and indeed, necessary, for both country’s success.
Not only is copper demand growing in China and other countries like India, but existing mines will not be able to meet this growth.
This means that emerging regions –where the majority of new resources are found – will have an opportunity to step up.
Major emerging supply regions include countries like: Mexico, Democratic Republic of Congo, Zambia, Kazakhstan, Russia, China, and of course Mongolia.
Of all the projects coming online in Asia, the Oyu Tolgoi mine will be the largest and at its production peak in 2019 it will contribute 24 per cent to the total mine production from Asia.
Oyu Tolgoi is strategic to the copper supply-side.
Oyu Tolgoi is a jewel. It is not only a national treasure, it is also the biggest undeveloped copper and gold project in the world and when it reaches full production in 2018 it will be a top five global copper producer – and one of the world’s biggest producers of gold.
Based on our current projections, production will grow from 179,000 tonnes of copper in 2013 to approximately 467,000 tonnes of copper after the concentrator expansion is complete in 2019. To give you a sense of what that means – that is nearly four times the annual production of the Erdenet copper mine. Our average annual production in our first ten years is forecast to also include 330 thousand ounces of gold and 2.9 million ounces of silver.
With about 3.1 billion tonnes resource and a 1.4 billion tonnes reserve, this mine will be producing for well over 50 years, and there is a lot more potential at Oyu Tolgoi and in Mongolia – where much of the country remains unexplored.
Most importantly, Oyu Tolgoi will be a low-cost producer, in the first quartile globally, which means it can still be profitable even if commodity prices fall to the lower end of expectations.
Ivanhoe and the Government of Mongolia are the shareholders of Oyu Tolgoi, and are active in its leadership.
Rio Tinto is playing a key role in the development of Oyu Tolgoi from a funding and management perspective, together with our partners in local and national Government who are working tirelessly to get Oyu Tolgoi up and running on time.
Over the past five years, Rio Tinto has provided funding of more than US$3.6 billion, much of which was during the financial crisis and at early and higher risk stages of Oyu Tolgoi’s development.
This has funded the current construction phase and has created enormous value for the country and for all shareholders.
Just recently in August, Rio Tinto increased its ownership interest in Ivanhoe to 48.5 percent injecting more funding into Oyu Tolgoi.
The shareholders of Oyu Tolgoi are also pursuing the mining industry’s largest ever project financing. During this period, Rio Tinto is providing further financial support via interim funding.
In December 2010, Rio Tinto assumed formal management of Oyu Tolgoi.
Our vision is that Oyu Tolgoi should not just be a good mine in Asia, it should be a great mine globally - an achievement that will make all Mongolians proud, and that over time will make Mongolia a hub for mining skills and services.
Rio Tinto has been integrating our international best practices across Oyu Tolgoi, from our demanding health and safety standards, our commitment to sustainable development, and our insistence on operational excellence.
What Rio Tinto brings is practical and global experience acquired from operating in over 40 countries. In every area of the business we give Oyu Tolgoi direct access to our accumulated knowledge and train our Mongolian staff in these best practices.
Importantly, Rio Tinto will be bringing new technologies to Mongolia, specifically block-caving, so we can effectively mine the underground portion of the Oyu Tolgoi deposit. Currently, block caving is used at only 10 mines in the world – 3 of which Rio Tinto owns and/or manages. We will ensure that this innovative process is fully understood by our Mongolian staff, as one of our greatest legacies will be the skills we leave the next generation of Mongolian engineers. But we are not just training engineers – we are also training accountants, managers, environmental engineers and many others with transferable skills that will help across Mongolian society.
For every one direct job created by Oyu Tolgoi, we anticipate that four more will be created in Mongolia.
In Mongolia, investor confidence is high. But maintaining this confidence requires stability and the rule of law. The signing of the Oyu Tolgoi Investment Agreement in 2009, visibly demonstrated to the world that Mongolia understood this, was committed to such stability, and was open for business. And it worked.
On the strength of these pieces of paper, and the belief in Mongolia’s commitment to stability, Rio Tinto made the decision to invest. Remember that US$7 billion will have been spent before the first truckload of concentrate leaves site.
Oyu Tolgoi’s investors needed the Investment Agreement to have the confidence to invest such mammoth sums and to pursue the mining industry’s largest ever project financing. As a result, Mongolia is now perfectly positioned to launch a series of world class projects, such as the IPO of Tavan Tolgoi, and numerous other infrastructure and industrial development projects. And is seeing concrete growth in the economy, from foreign direct investment to job creation.
If even a few voices call for Mongolia’s commitments to be broken, and agreements to be changed, there is a risk that this will undermine investor confidence. These few will have to answer to the many Mongolian’s whose jobs will be on the line, and the local businesses whose prospects will be jeopardised.
We are confident that Mongolia will not let this happen, that stability and the rule of law will prevail, and that Mongolia’s long-awaited economic promise will become a reality.
The Investment Agreement is already boosting government revenues.
In 2011 alone, the Government of Mongolia will receive more than US$220 million in taxes from Oyu Tolgoi.
Before our first truckload of concentrate departs in late 2012, the Government of Mongolia will have received US$700 million in tax revenues and prepayments from Oyu Tolgoi.
The Investment Agreement is creating jobs directly and indirectly for Mongolians.
We are at the peak of construction, and are employing about 14,000 employees and contractors – at least 60 per cent of which are Mongolian.
Of the US$2.5 billion Oyu Tolgoi has spent in the last 18 month, over $700 million was with over 1,000 Mongolian suppliers.
Five of the major Oyu Tolgoi construction projects underway in the South Gobi are 100 percent managed by Mongolian contractors.
Under the Investment Agreement we are training Mongolians to increase technical capability that will lead to new opportunities.
Oyu Tolgoi is investing US$85 million in training and education over five years.
We have funded the largest vocational training program ever established in Mongolia; we are building three new professional training and vocational centres and we are upgrading four other centres and colleges around Mongolia.
Oyu Tolgoi has sponsored a mining training programme that has just had 200 mining technicians graduate in its first year. We will welcome an additional 150 next year.
There are also numerous indirect benefits of the Oyu Tolgoi Investment Agreement that are already impacting the broader economy.
You don’t have to travel far in Ulaanbaatar to see that there is a boom. More people are eating out. Retails sales are up. Manufacturing is up. Construction is up.
Much of this is due to the multiplier effect of our investment at Oyu Tolgoi. The Investment Agreement has indirectly given other investors increased confidence to bring dollars into Mongolia, further enabling growth.
Looking longer term, we expect the Mongolian economy to grow by over 10per cent a year for the next 10years as Oyu Tolgoi ramps up to full production. This means that by the year 2020 the size of the economy will more than double.
Oyu Tolgoi is projected to be responsible for half of this annual growth.
Rio Tinto is committed to supporting the success of Oyu Tolgoi. We also feel Mongolia offers great potential for other mining investments in the future.
We expect to be active in Mongolia for many decades to come.
As a part of this long term commitment to Mongolia, we are contributing to the social development of the country.
Here is a snapshot of some of our recent activities:
Rio Tinto is supporting an extensive biodiversity eco-regional assessment in the South Gobi – not just around our site.
We are the sole sponsor of the Project CURE Event in the US on the 16 September, honouring the First Lady of Mongolia. This event is targeted to raise more than US$2million to bring medical equipment to Mongolia.
Rio Tinto is directly developing highly talented Mongolians by providing training and placements at other Rio Tinto operations around the globe. An additional 50 graduates and secondments will be offered in 2012-2013.
We are the first official Gold Sponsor of the Mongolian National Olympic Committee. We are also the official provider of all the metal used to produce the 4,700 gold, silver and bronze medals for the London Olympic and Paralympic games. This metal comes in part from Oyu Tolgoi; we are thrilled that metals mined in Mongolia will be used to produce the medals for the 2012 Games. Won’t it be great to see some of these medals around Mongolian necks.
In closing, I believe that the development of Oyu Tolgoi has brought, and will continue to bring great benefits to Mongolia.
The Investment Agreement has been a key enabler of recent growth, and will play a key role in Mongolia’s economic future.
Together with our partners in Government, Rio Tinto is committed to making Oyu Tolgoi world-class in all regards, and contributing to Mongolia becoming a centre of excellence in mining.
If we all work together Oyu Tolgoi will be successful for the Mongolian economy, successful for the Mongolian people and successful for its investors.
About Oyu Tolgoi LLC (www.ot.mn)
Oyu Tolgoi LLC, Mongolia's largest copper and gold mining company, is a strategic partnership between the Government of Mongolia, Turquoise Hill Resources and Rio Tinto. Located in the South Gobi, Oyu Tolgoi commenced shipment of product to customers in July 2013. Oyu Tolgoi is managed by Rio Tinto, which is investing global expertise and cutting-edge technology to help develop Mongolia’s mining industry and ensure Oyu Tolgoi is one of the world’s most advanced mines. For Oyu Tolgoi, nothing matters more than safety. The business operates under the principle that if a job cannot be done safely, it will not be done at all.