Oyu Tolgio, Mongolia

The Oyu Tolgoi gold and copper project, also known as Turquoise Hill, is situated in the south Gobi region of Mongolia, around 80km north of the Chinese-Mongolian border and 550km due south of the capital Ulaanbaatar.

The mine is jointly owned by multinational resources company Ivanhoe Mines and Rio Tinto, which recently took a 19.9% stake in Ivanhoe, with provisions to increase its interest to 46.65%.

A recent integrated development plan (IDP) prepared for the companies suggests that the Oyu Tolgoi Mine will be capable of average annual production in excess of one billion pounds (lb) of copper and 330,000 ounces (oz) of gold for at least 35 years. Peak annual production in excess of 1.6 billion lbs of copper and 900,000 oz of gold is projected to be reached six years after initial production begins late 2008.

This would make Oyu Tolgoi one of the world's largest copper and gold producers.

Once operational, it is expected to contribute around 34% of Mongolia’s GDP.

Recent political unrest in the country is a concern, however. Accusations of vote rigging from the opposition led to riots in the Mongolian capital Ulaanbaatar in June 2008, leaving five people dead and hundreds injured. Mongolia’s electoral commission denied there was any rigging and declared the former communist Mongolian People's Revolutionary Party (MPRP) the winner in July.

GEOLOGY AND RESERVES

The South Gobi area lies near the boundary of the South Mongolian and the South Gobi tectonic units. Primarily Palaeozoic volcanic, sedimentary and intrusive rocks and Mesozoic sedimentary cover underlie the region.

The series of deposits discovered by Ivanhoe Mines at Oyu Tolgoi and on the adjoining Shivee Tolgoi joint-venture property during the past six years stretch over 6.6km and have a measured and indicated resource of 36.3 billion pounds of copper and 20.2 million ounces of gold, plus an inferred resource of 36.4 billion pounds of copper and 13.9 million ounces of gold, at a 0.6% copper equivalent cut-off grade for the underground resources and a 0.3% copper equivalent cut-off grade for the open-pit resources.

MINING

Ivanhoe is designing a stage one open pit mine on the near-surface Southern Oyu deposits and a stage two underground block-caving mine at the Hugo Dummett North and South deposits.

The first phase, the Base Case, consists of a concentrator with a single SAG (semi-autogenous grinding) circuit with an initial throughput rate of 70,000 tons-per-day (tpd).

Production at Hugo North is expected to commence after year three, with it becoming the predominant source of mill feed for the concentrator by year five. The softer, underground mill feed is expected to support a higher throughput rate of 85,000 tpd by year six in the single SAG circuit concentrator. Phase two of the IDP, the Expanded Case, will start with a decision in year three to develop a block-cave mine at the Hugo South Deposit and proceed with the stripping of stages three and four of the open-pit mine.

The Expanded Case envisions the ramping up of production from the underground block-cave mines and the doubling of the capacity of the concentrator, including the addition of a second SAG milling circuit, to increase Oyu Tolgoi's combined open-pit and underground production to at least 140,000 tpd by year seven.

PRODUCTION AND COSTS

Ivanhoe believes the project has the potential to achieve a mill throughput of 170,000tpd.

Provided that the expansion is undertaken as scheduled, the IDP indicates that Oyu Tolgoi could produce 35 billion lbs of copper and 11 million oz of gold over the projected, initial 35-year life of the mine, based on resources delineated to May, 2005.

The IDP's sensitivity analysis shows that the project's rate of return is most sensitive to changes in the copper price, followed by changes in the gold price, changes to the operating costs and, finally, changes in capital costs. It states that at $1.10 copper and $400 gold, the after-tax IRR increases to 22.08%; the after-tax NPV increases to $3.39bn at an 8% discount rate and $2.39bn at a 10% discount rate.

THE FUTURE

With elections now decided in Mongolia, Ivanhoe and Rio Tinto are in a better position to negotiate terms of the Oyu Tolgoi mine with the government. Production at the first phase is expected to start at the end of 2009, with an initial throughput rate of 70,000 tpd, increasing to 85,000 tpd.

Three years later the block-cave expansion will commence, with the expectation of 140,000 tpd from underground operations alone. Assuming that the expansion is undertaken as scheduled, the IDP indicates that Oyu Tolgoi could produce approximately 35 billion pounds of copper and 11 million oz of gold over the projected, initial 35-year life of the mine.