Turquoise Hill Resources today announced its financial results for the year ended December 31, 2018. All figures are in
U.S. dollars unless otherwise stated.
“Oyu Tolgoi delivered strong operational results in 2018,” said Ulf Quellmann, Turquoise Hill’s Chief Executive Officer. “For
the year, Oyu Tolgoi achieved an industry-leading safety performance and benefitted from processing higher-gold grade
ore, which resulted in us exceeding copper and gold production guidance. Increased gold production, along with higher
average copper prices for the year, led to a more than 25% increase in revenue and more than 11% increase in operating
cash flow over 2017.
“Underground development continued to progress during 2018 with more than 10 equivalent kilometres completed by year end. As can occur in a project of this size and complexity, mine manager Rio Tinto has identified challenges with the
location of some ore passes on the footprint. We acknowledge Rio Tinto’s proactive approach to maintaining the highest level of infrastructure stability by reviewing the location of these ore passes. The impact of these changes will be reflected in the definitive estimate review, which is expected to be complete towards the end of the year.
“Oyu Tolgoi is a world-class asset with a best-in-class workforce. Turquoise Hill is a tremendous opportunity to invest in a copper and gold producer with a direct participation in the world’s next Tier 1 copper asset.”
Full year 2018
. Oyu Tolgoi achieved an industry-leading All Injury Frequency Rate of 0.16 per 200,000 hours worked for the year
ended December 31, 2018.
. On December 31, 2018, Oyu Tolgoi and the Government of Mongolia signed the Power Sector Framework Agreement
providing a pathway forward for a Tavan Tolgoi-based power plant.
. Copper production of 159,100 tonnes for 2018 increased 1.1% over 2017 and exceeded guidance by 2.6%.
. Gold production of 285,000 ounces in 2018 increased 150.0% over 2017 and exceeded guidance by 1.8%.
. Mill throughput for 2018 decreased 5.9% over 2017 due to increased processing of harder Phase 4 ore throughout
. Revenue of $1.2 billion in 2018 increased 25.6% over 2017 due to the significant increase in gold sales, a 5.0%
increase in copper sales volumes and the impact of higher average copper prices.
. For 2018, income of $394.3 million increased 255.4% over 2017 reflecting the significant increase in gold revenue
and reduced unit costs of production driven by higher head grades and recoveries.
. For 2018, Oyu Tolgoi’s cost of sales was $2.25 per pound of copper sold ($2.32: 2017), C1 cash costs of $1.59 per pound of copper produced ($1.92: 2017) and all-in sustaining costs of $2.20 per pound of copper produced ($2.39:
. For 2018, mining costs1 per tonne were $2.13 ($1.51: 2017), milling costs1 per tonne were $7.11 ($6.36: 2017) and G&A costs per tonne were $3.03 ($2.93: 2017).
. Total operating cash costs1 of $817.1 million for 2018 increased 14.8% over 2017 due to higher freight and royalty
costs, a reduction in costs capitalized as deferred stripping as well as higher fuel and power costs.
. During 2018, underground lateral development advanced 10.3 equivalent kilometres, a 68.9% increase over 2017.
. Underground expansion capital for 2018 was $1.2 billion, meeting the upper-end of the Company’s guidance.
. During 2018, Oyu Tolgoi completed the sinking and commissioning of Shaft 5.
Fourth quarter 2018
. Copper production of 41,500 tonnes during Q4’18 decreased 8.4% over Q4’17 due to lower throughput, which was partially offset by higher grades and recovery.
. Gold production of 117,000 ounces during Q4’18 increased 234.3% over Q4’17 due to significant increases in both grades and recovery.
. As planned, mill throughput in Q4’18 decreased 13.6% over Q4’17 due to increased processing of harder Phase 4 ore.
. Revenue of $346.2 million in Q4’18 increased 37.5% over Q4’17 due to higher gold revenue driven by a significant increase in volumes of gold in concentrate sales.
. For Q4’18, Oyu Tolgoi’s cost of sales was $2.12 per pound of copper sold ($2.32: Q4’17), C1 cash costs of $1.24 per pound of copper produced ($2.05: Q4’17) and all-in sustaining costs of $2.01 per pound of copper produced ($2.40:
. For Q4’18, mining costs1 per tonne were $2.28 ($1.72: Q4’17), milling costs1 per tonne were $6.82 ($5.92: Q4’17) and G&A costs per tonne were $4.55 ($3.56: Q4’17).
. Total operating cash costs1 of $242.3 million in Q4’18 increased 11.3% over Q4’17 mainly due to higher freight and royalty costs associated with higher sales revenue.
. During Q4’18, underground lateral development progressed 2.3 equivalent kilometres.
. The Company has completed an independent review of Rio Tinto’s second annual schedule and cost re-forecast.
. Since completion of the Company’s independent review, Rio Tinto, as project manager, has advised Turquoise Hill that delays on the Shaft 2 fit out are expected to result in an overall schedule delay to sustainable first production
beyond the end of Q3’21. Additionally, Rio Tinto is studying relocating the ore passes on the footprint and this may modify the initiation sequence within Panel 0. The study will be incorporated into the definitive estimate.
Income in 2018 was $394.3 million compared with $110.9 million in 2017. The increase mainly reflects the $240.2 million increase in revenue driven primarily by the 150.0% increase in gold production. In addition, there were reduced unit costs of production driven by higher head grades and recoveries as Oyu Tolgoi benefitted from the processing of Phase 4 ore that contained higher gold content. Further, there was reduced depreciation and depletion due to certain long-lived assets reaching the end of their depreciable lives and lower finance costs due to higher amounts capitalized to property, plant
and equipment. Cash generated from operating activities in 2018 was $180.0 million compared to $118.0 million in 2017, primarily reflecting the impact of higher sales revenue. Capital expenditure on property, plant and equipment was $1.3 billion on a cash basis in 2018 compared with $917.5 million in 2017, attributed principally to underground development ($1.2 billion) with the remainder related to open-pit activities.
1 Please refer to the NON-GAAP MEASURES section of this press release for further information.
Turquoise Hill’s cash and cash equivalents at December 31, 2018 were $1.6 billion.
The Oyu Tolgoi mine is approximately 550 kilometres south of Ulaanbaatar, Mongolia’s capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Oyut deposit and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension).
The Oyu Tolgoi mine was initially developed as an open-pit operation. The copper concentrator plant, with related facilities and necessary infrastructure, was originally designed to process approximately 100,000 tonnes of ore per day from the Oyut open pit. However, since 2014, the concentrator has improved operating practices and gained experience, which has
helped achieve a consistent throughput of over 105,000 tonnes per day. Concentrator throughput for 2019 is targeted at 110,000 tonnes per day and expected to be approximately 40 million tonnes for the year.
In August 2013, development of the underground mine was suspended pending resolution of matters with the Government of Mongolia (Government). Following signing of the Oyu Tolgoi Underground Mine Development and Financing Plan
(Underground Plan) in May 2015 and the signing of a $4.4 billion project finance facility in December 2015, Oyu Tolgoi received formal notice to proceed approval by the boards of Turquoise Hill, Rio Tinto and Oyu Tolgoi LLC in May 2016, which was the final requirement for the re-start of underground development. Underground construction recommenced in May 2016. Prior to suspending underground construction in August 2013, underground lateral development at Hugo North Lift 1 had advanced approximately 16 kilometres off Shaft 1.
At the end of 2018, Oyu Tolgoi had a total workforce (employees and contractors), including underground project construction, of approximately 17,000, of which 92.6% were Mongolian. Underground development progress
Significant progress on the Oyu Tolgoi underground project continued through 2018, with the construction of critical above and below-ground infrastructure. Shaft 2-connected underground infrastructure progressed well during Q4’18 with the completion of the lining installation and handover of Ore Bin 11 as well as advancement of the new 6,000-tonne-per-day jaw crusher under construction.
During Q4’18, Turquoise Hill carried out its own review of the previously announced Rio Tinto schedule and cost re-forecast for the project (2018 Rio Tinto Review) that concluded a delay to sustainable first production was expected from Q1’21 to the end of Q3’21. The Company’s review, with the assistance of Turquoise Hill’s independent Qualified Person and mining
consultants OreWin Pty Ltd, found that project cost was expected to remain within the $5.3 billion budget but that it is likely there will be further delays to individual activities and that this will result in additional delays to sustainable first production.
The Company’s independent review found that the following key risks are developing.
. Shaft 2 equipping delays were due to lower than expected productivity in steel and electrical installation as well as increased quality assurance measures. It was likely the completion date would move beyond Q1’19 and impact
overall underground development rate increases.
. There have been delays to development progress and productivities in key areas. Even though lateral development has experienced consistent overall progress, development of some critical areas, such as the footprint, Primary
Crusher 1 (PC1) system, Shaft 2 and Shaft 5, have been impacted by delays and, with the exception of Shaft 5, are critical path items for the project schedule. Small delays in lateral development on the footprint have had a direct
impact on the project schedule critical path, even though total lateral development or equivalent development metres have been on budget. Development in the PC1 system (which includes the PC1 chamber and transfers 3, 4 and 5)
has, since the time of the Rio Tinto Review data cut-off, fallen significantly behind target rates.
. The Company review indicated that in some areas there was a delay to the critical path from scope growth in mass excavation and additional ground support due to unexpectedly adverse geotechnical conditions. Although the
ground support quantities and installation times are less, but not materially less than planned in the 2016 Oyu Tolgoi Feasibility Study and ground support quantities are reported as lower than planned, some types of ground support
have had reduced installation times.
Since completion of the Company’s independent review, Rio Tinto, as manager of the project, has advised Turquoise Hill that further delays on the Shaft 2 fit out are expected to contribute to an overall schedule delay to sustainable first
production beyond the end of Q3’21. Additionally, Rio Tinto is studying relocating the ore passes on the footprint and this may modify the initiation sequence within Panel 0. The study will be incorporated into the definitive estimate review, as will work necessary to estimate any impact of cost and development schedule.
Oyu Tolgoi spent $347.3 million on underground expansion during Q4’18 and $1.2 billion for 2018, meeting the Company’s guidance. Total underground project spend from January 1, 2016 to December 31, 2018 was approximately $2.3 billion.
Underground project spend on a cash basis includes expansion capital, VAT and capitalized management services payment and excludes capitalized interest. In addition, Oyu Tolgoi had further capital commitments2 of $1.2 billion as of
December 31, 2018. At the end of Q4’18, the underground project had committed almost 87% of direct project contracts and procurement packages, of which 73% were to Mongolian companies. Since the restart of project development, Oyu
Tolgoi has committed nearly $2.3 billion to Mongolian vendors and contractors.
The main focus of 2018 was underground development, the fit out of Shaft 2, completion and commissioning of Shaft 5, support infrastructure and the convey-to-surface decline. Shaft 2 completed sinking in January 2018, which was followed by the completion of stripping in Q3’18 and commencement of the fit-out process in the same quarter. The completed commissioning of Shaft 5 was achieved during Q2’18.
During 2018, underground development advanced 10.3 equivalent kilometres, a 68.9% increase over 2017 due to the commissioning of the new 3,500 tonne-per-day crusher in the second half of 2017 and increased development capability
with increased ventilation following the completion of Shaft 5. Despite the strong year-over-year progress, during Q4’18 underground development achieved a lower than expected 2.3 equivalent kilometres of development against a target of
3.0 equivalent kilometres. The shortfall in Q4’18 led to 10.3 equivalent kilometres for 2018 against the expected target of approximately 11.0 kilometers of equivalent development. The underground development challenges experienced in Q4’18 included time constraints during hoist rope maintenance and the introduction of a new underground traffic management plan. Lateral development progressed 7.9 kilometres during 2018 and was impacted by the same challenges but also a shift in priorities of resources from lateral development to mass excavation.
Due to the latest Rio Tinto advice, Turquoise Hill’s previous guidance of lateral development advancement of 15.0 to 16.0 kilometres during 2019 is under review. The following table provides a breakdown of the various components of completed development since project restart:
Total Equivalent Kilometres Lateral Development (kilometres) Mass Excavation (’000 metres3)
2016 1.6 1.5 3.0
Q1’17 1.0 0.8 5.2
Q2’17 1.4 0.9 9.2
Q3’17 1.4 1.2 8.3
Q4’17 2.2 1.9 8.9
2017 6.1 4.8 31.6
Q1’18 2.6 2.1 11.6
Q2’18 2.4 2.1 8.6
Q3’18 3.0 2.1* 23.3*
Q4’18 2.3 1.6 16.0
2018 10.3 7.9 59.5
Total 18.0 14.2 94.1
*: Lateral development and mass excavation amounts for Q3’18 have been updated to reflect revised results.
Note: Mass excavation excludes development of vertical metres (shafts) and convey-to-surface.
2 Please refer to the NON-GAAP MEASURES section of this press release for further information.
During Q4’18, development of the convey-to-surface decline also continued to progress but has slipped slightly behind the latest forecast for the period. The convey-to-surface system enables production ramp up beyond the Shaft 2 30,000 tonnes per day capacity to the full 95,000 tonne per day underground production from the mine.
Full-year 2018 and Q4’18 open-pit operations performance
Safety performance Underground development by its nature increases specific levels of safety risk and reinforces why safety is Oyu Tolgoi’s
main priority. The mine’s management is committed to reducing risk and injury.
Oyu Tolgoi achieved an industry-leading
All Injury Frequency Rate of 0.16 per 200,000 hours worked for the year ended December 31, 2018. In addition, there are additional safety metrics, that are common in the mining industry, utilized by Oyu Tolgoi to continuously monitor safety performance.
Key financial metrics for 2018 and Q4’18 are as follows:
Oyu Tolgoi Key Financial Metrics(1)
($ in millions, unless otherwise noted)
4Q 2017 1Q 2018 2Q 2018 3Q 2018 4Q 2018 Q4’18 vs. Q4’17 Full Year 2018 Full Year
2017 2018 vs. 2017
Revenue 251.7 245.6 341.7 246.5 346.2 37.5% 1,180.0 939.8 25.6%
Revenue by metals in concentrates
Copper 216.1 202.1 273.7 180.4 210.3 -2.7% 866.5 795.6 8.9%
Gold 32.5 40.3 64.1 63.3 132.7 308.3% 300.4 130.8 129.7%
Silver 3.2 3.2 4.0 2.9 3.0 -6.3% 13.1 13.4 -2.2%
Cost of sales 182.7 168.9 239.6 181.0 187.7 2.7% 777.2 763.8 1.8%
Production and delivery costs 106.6 114.6 174.2 135.9 143.3 34.4% 568.0 468.4 21.3%
Depreciation and depletion 73.4 55.6 64.1 45.2 44.6 -39.2% 209.5 304.1 -31.1%
Capital expenditure on cash basis 330.4 285.7 318.0 328.8 371.8 12.5% 1,304.3 917.5 42.2%
Underground 309.0 270.5 291.2 304.8 347.3 12.4% 1,213.8 835.7 45.2%
Open pit(2) 21.4 15.2 26.8 24.0 24.5 14.5% 90.5 81.8 10.6%
Royalties 15.8 14.9 20.3 15.5 20.1 27.2% 70.8 57.1 24.0%
Operating cash costs(3) 217.7 176.6 201.7 196.4 242.3 11.3% 817.1 711.6 14.8%
Unit costs ($)
Cost of sales (per pound of copper sold) 2.32 2.23 2.36 2.28 2.12 -8.6% 2.25 2.32 -3.0%
C1 (per pound of copper produced)(3) 2.05 1.76 1.72 1.65 1.24 -39.5% 1.59 1.92 -17.2%
All-in sustaining (per pound of copper produced)(3) 2.40 2.07 2.42 2.29 2.01 -16.3% 2.20 2.39 -7.9%
Mining costs (per tonne of material mined)(3) 1.72 1.94 2.12 2.18 2.28 32.6% 2.13 1.51 41.1%
Milling costs (per tonne of ore treated)(3) 5.92 7.42 6.70 7.38 6.82 15.2% 7.11 6.36 11.8%
G&A costs (per tonne of ore treated) 3.56 1.90 2.25 3.43 4.55 27.8% 3.03 2.93 3.4%
(1) Any financial information in this press release should be reviewed in conjunction with the Company‘s consolidated financial statements or condensed
interim consolidated financial statements for the reporting periods indicated.
(2) Open-pit capital expenditure includes both sustaining and non-underground development activities.
(3) Please refer to the NON-GAAP MEASURES section of this press release for further information.
Full year 2018
Revenue of $1,180.0 million in 2018 increased 25.6% compared to $939.8 million in 2017, partly due to the significant increase in gold revenue from $130.8 million in 2017 to $300.4 million in 2018, driven by the 150.0% increase in gold
production as Oyu Tolgoi benefitted from the processing of Phase 4 ore that contained higher gold content. The remaining increase in revenue was driven by an increase in copper revenue due to a 5.0% increase in volumes of copper in
concentrate sales and a 5.9% increase in average copper price from 2017 to 2018.
Cost of sales in 2018 was $777.2 million compared to $763.8 million in 2017, reflecting a 3.1% increase in the volumes of concentrates sold supported by reduced unit cost of production due to higher head grades and recoveries.
Capital expenditure on a cash basis for 2018 was $1,304.3 million compared to $917.5 million in 2017, comprising amounts attributed to the underground project and open-pit activities of $1,213.8 million and $90.5 million, respectively. Open-pit capital expenditure includes deferred stripping of $17.3 million and tailings storage facility spending of $20.3 million.
Total operating cash costs3 at Oyu Tolgoi were $817.1 million in 2018 compared to $711.6 million in 2017. The increase was primarily due to higher freight and royalty costs associated with increased sales revenue and a reduction in the amount of costs capitalized as deferred stripping, resulting from a decrease in the proportion of waste removed, as mining resources prioritized movement of ore during the year. Other contributors include higher input prices for key items such as fuel and power.
Cost of sales were $2.25 per pound of copper sold in 2018, compared with $2.32 per pound of copper sold in 2017 reflecting higher volumes of metals in concentrate sold and reduced unit cost of production due to higher head grades and recoveries.
Oyu Tolgoi’s C1 cash costs3 in 2018 were $1.59 per pound of copper produced, a decrease from $1.92 per pound of copper produced in 2017, and are presented net of revenues from gold and silver sales. The decrease was mainly due to
higher gold sales and reduced unit costs of production driven by higher head grades and recoveries as Oyu Tolgoi benefitted from the processing of Phase 4 ore that contained higher gold content.
All-in sustaining costs3 in 2018 were $2.20 per pound of copper produced, compared with $2.39 per pound of copper produced in 2017. The decrease was mainly due to the impact of higher gold sales and higher head grades and recoveries.
Mining costs3 in 2018 were $2.13 per tonne of material mined compared with $1.51 per tonne of material mined in 2017.
The increase was mainly due to higher maintenance costs, increased fuel costs and increased cycle time as the open pit deepens.
Milling costs3 in 2018 were $7.11 per tonne of ore treated compared with $6.36 per tonne of ore treated in 2017. The increase was mainly due to higher raw material costs such as steel and increased energy costs required to process the
harder Phase 4 ore.
G&A costs in 2018 were $3.03 per tonne of ore treated compared with $2.93 per tonne of ore treated in 2017. The increase was due to higher power study costs during 2018.
Fourth quarter 2018
Revenue of $346.2 million in Q4’18 increased 37.5% compared to $251.7 million in Q4’17, primarily due to the significant increase in gold revenue from $32.5 million in Q4’17 to $132.7 million in Q4’18, driven by the 234.3% increase in gold production due to significant increases in both grades and recovery. This was partly offset by a decrease in copper revenu driven by lower average copper prices in Q4’18 compared to Q4’17.
Cost of sales for Q4’18 was marginally higher at $187.7 million compared to $182.7 million in Q4’17. The increase was due to the 9.1% increase in the volumes of concentrates sold, partly offset by a reduced unit cost of production due to higher head grades and recoveries.
Capital expenditure on a cash basis for Q4’18 was $371.8 million compared to $330.4 million in Q4’17, comprising amounts attributed to the underground project and open-pit activities of $347.3 million and $24.5 million respectively.
Total operating cash costs3 at Oyu Tolgoi were $242.4 million in Q4’18 compared to $217.7 million in Q4’17. This was principally due to higher freight and royalty costs associated with higher sales revenue. Operating cash costs include the 5% royalty payable to the Government of Mongolia and exclude deferred stripping costs.
Cost of sales was $2.12 per pound of copper sold in Q4’18 compared with $2.32 per pound of copper sold in Q4’17,
reflecting higher volumes of metals in concentrate sold and reduced unit cost of production due to higher head grades and recoveries.
3 Please refer to the NON-GAAP MEASURES section of this press release for further information.
Oyu Tolgoi’s C1 cash costs4 in Q4’18 were $1.24 per pound of copper produced, a decrease from $2.05 per pound of copper produced in Q4’17, due primarily to higher gold sales and reduced unit costs of production driven by higher head
grades and recoveries.
All-in sustaining costs4 in Q4’18 were $2.01 per pound of copper produced, compared with $2.40 per pound of copper produced in Q4’17, mainly due to the impact of higher gold sales and higher head grades and recoveries.
Mining costs4 in Q4’18 were $2.28 per tonne of material mined compared with $1.72 per tonne of material mined in Q4’17.
The increase was mainly due to higher maintenance costs and increased fuel costs.
Milling costs4 in 2018 were $6.82 per tonne of ore treated compared with $5.92 per tonne of ore treated in Q4’17. The increase was mainly due to higher raw material costs such as steel and increased energy costs required to process the
harder Phase 4 ore.
G&A costs in 2018 were $4.55 per tonne of ore treated compared with $3.56 per tonne of ore treated in Q4’17. The increase was due to higher power study costs that arose in Q4’18 associated with the signing of the Power Source Framework
Key operational metrics for 2018 and Q4’18 are as follows:
Oyu Tolgoi Production Data
All data represents full production and sales on a 100% basis
4Q 2017 1Q 2018 2Q 2018 3Q 2018 4Q 2018 Q4’18 vs. Q4’17 Full Year 2018 Full Year
2017 2018 vs. 2017
Open pit material mined (‘000 tonnes) 28,929 23,131 22,792 22,523 22,863 -21.0% 91,310 105,921 -13.8%
Ore treated (‘000 tonnes) 10,838 9,561 10,164 9,652 9,361 -13.6% 38,738 41,177 -5.9%
Average mill head grades:
Copper (%) 0.53 0.51 0.48 0.51 0.55 3.8% 0.51 0.51 0.0%
Gold (g/t) 0.20 0.25 0.26 0.38 0.56 180.0% 0.36 0.17 111.8%
Silver (g/t) 1.54 1.32 1.17 1.19 1.22 -20.8% 1.22 1.39 -12.2%
Concentrates produced (‘000 tonnes) 205.4 177.3 178.8 179.8 189.0 -8.0% 724.9 722.5 0.3%
Average concentrate grade (% Cu) 22.0 21.9 22.0 21.9 21.9 -0.5% 21.9 21.8 0.5%
Production of metals in concentrates:
Copper (‘000 tonnes) 45.3 38.8 39.4 39.4 41.5 -8.4% 159.1 157.4 1.1%
Gold (‘000 ounces) 35 42 50 77 117 234.3% 285 114 150.0%
Silver (‘000 ounces) 285 221 225 230 238 -16.5% 914 974 -6.2%
Concentrates sold (‘000 tonnes) 175.5 163.1 220.0 171.9 191.4 9.1% 746.4 724.3 3.1%
Sales of metals in concentrates:
Copper (‘000 tonnes) 35.7 34.3 46.1 36.0 40.2 12.6% 156.7 149.3 5.0%
Gold (‘000 ounces) 27 31 51 55 111 311.1% 248 111 123.4%
Silver (‘000 ounces) 205 206 250 201 216 5.4% 873 860 1.5%
Metal recovery (%)
Copper 78.0 79.5 79.7 80.9 84.8 8.7% 81.4 75.4 8.0%
Gold 50.5 55.0 59.8 64.7 71.7 42.0% 65.2 49.7 31.2%
Silver 53.0 54.6 58.4 62.8 67.1 26.6% 60.9 52.9 15.1%
Full year 2018
Oyu Tolgoi delivered a strong operational performance in 2018 exceeding both copper and gold production guidance. Fullyear copper production of 159,100 tonnes and gold production of 285,000 ounces increased 1.1% and 150.0% respectively over 2017. During 2018, Oyu Tolgoi benefitted from the processing of Phase 4 ore that contained higher gold grades.
4 Please refer to the NON-GAAP MEASURES section of this press release for further information.
Fourth quarter 2018
Gold production in Q4’18 increased 234.3% over Q4’17 due to significant increases in both grades and recovery. Copper production in Q4’18 declined 8.4% over Q4’17 due to lower throughput, which was partially offset by higher grades and recovery. As planned, mill throughput in Q4’18 decreased 13.6% over Q4’17 due to the concentrator processing harder Phase 4 ore compared to the processing of predominately softer Phase 6 ore in Q4’17.
Oyu Tolgoi is expected to produce 125,000 to 155,000 tonnes of copper and 180,000 to 220,000 ounces of gold in concentrates for 2019. Open-pit operations are expected to mine ore primarily from Phase 4 throughout the year, with
contributions from Phase 6. Mill throughput for 2019 is expected to be approximately 40 million tonnes and it includes the processing of some material from mine stockpiles.
Operating cash costs for 2019 are expected to be $800 million to $850 million.
Capital expenditures for 2019 on a cash-basis are expected to be $150 million to $180 million for open-pit operations and $1.3 billion to $1.4 billion for underground development. Open-pit capital is mainly comprised of deferred stripping, equipment purchases, maintenance componentization and tailings storage facility construction. Underground development capital includes both expansion capital and VAT.
C1 cash costs are expected to be $1.75 to $1.95 per pound of copper produced. Unit cost guidance assumes the midpoint of expected 2019 copper and gold production ranges and a gold price of $1,281 per ounce.
Funding of Oyu Tolgoi by Turquoise Hill
In accordance with the Amended and Restated Shareholders’ Agreement (ARSHA) dated June 8, 2011, Turquoise Hill has funded Oyu Tolgoi’s cash requirements beyond internally generated cash flows by a combination of equity investment
and shareholder debt.
For amounts funded by debt, Oyu Tolgoi must repay such amounts, including accrued interest, before it can pay common share dividends. As of December 31, 2018, the aggregate outstanding balance of shareholder loans extended by
subsidiaries of the Company to Oyu Tolgoi was $5.0 billion, including accrued interest of $0.7 billion. These loans bear interest at an effective annual rate of LIBOR plus 6.5%.
In accordance with the ARSHA, a subsidiary of the Company has funded the common share investments in Oyu Tolgoi on behalf of Erdenes. These funded amounts earn interest at an effective annual rate of LIBOR plus 6.5% and are repayable,
by Erdenes to a subsidiary of the Company, via a pledge over Erdenes’ share of Oyu Tolgoi common share dividends.
Erdenes also has the right to reduce the outstanding balance by making cash payments at any time. As of December 31, 2018, the cumulative amount of such funding was $1.0 billion, representing 34% of invested common share equity;
unrecognized interest on the funding amounted to $0.5 billion.
As part of its independent review of the 2018 Rio Tinto Review, Turquoise Hill assessed the impact of the delay on, amongst other things, the Company’s cash flows and liquidity. Further to the outcomes of its review of the 2018 Rio Tinto
Review, Turquoise Hill continues to have access to substantial funding options, including cash forecast to be generated from operating activities, cash and cash equivalents of $1.6 billion as at December 31 2018, and the remaining net
proceeds from project finance of $1.9 billion, which are drawn and currently held by agreement on deposit with Rio Tinto.
Further, under the existing project financing arrangements, Oyu Tolgoi has the ability (subject to factors such as market appetite, general execution risk and the approval of the Oyu Tolgoi Board) to raise additional supplemental debt of up to $1.6 billion at the same attractive terms. It is intended the raising of this supplemental debt will be progressed over the course of 2019 and 2020 to assist in funding underground development going forward including commissioning and ramp up.
The Company is working with Rio Tinto to understand the issues and in parallel with the definitive estimate review, Turquoise Hill will assess the impact of any further delay to sustainable first production beyond the end of Q3’21 on the
Company’s cash flows, liquidity and funding requirements, as well as investigate potential mitigation options.
Additionally, Oyu Tolgoi is currently undertaking a feasibility study and is in discussions with the Government to progress the construction of a coal-fired power plant and related infrastructure at Tavan Tolgoi. While it is necessary to await the completion of this study to reliably estimate the associated cost, and further to await the outcome of related negotiations to determine the quantum of Oyu Tolgoi’s funding requirement, there is a provision under the existing project finance documentation to increase Oyu Tolgoi’s current total debt capacity of $6.0 billion to assist in funding an expansion facility,
such as a Tavan Tolgoi-based power plant and related infrastructure.
Oyu Tolgoi signs Power Source Framework Agreement
On February 15, 2018, Oyu Tolgoi received notification that the Government had cancelled the Power Sector Cooperation Agreement (PSCA), which was signed in August 2014. The Government’s action, under Section 1.3 of the PSCA, indicated
the Tavan Tolgoi power project was no longer a viable option. As a result of the Government’s action, effective February 15, 2018, long-term power for Oyu Tolgoi must be domestically sourced within four years, in accordance with the 2009 Oyu Tolgoi Investment Agreement (Investment Agreement).
On December 31, 2018, Oyu Tolgoi and the Government signed the PSFA, which provides a binding framework and pathway forward for the construction of a Tavan Tolgoi-based power project, as well as established the basis for a longterm domestic power solution for the mine. The PSFA formalized the role of each party and sets out an amended timetable for Oyu Tolgoi to source power domestically. Construction is expected to start in 2020 following further studies and commissioning of the power plant is scheduled for mid-2023. Oyu Tolgoi will now move forward to confirm the technical design of the project and finalize the commercial arrangements, including financing, underpinning the PSFA. The 300 megawatt plant will be majority owned by Oyu Tolgoi LLC and will be situated close to the Tavan Tolgoi coalfields.
Oyu Tolgoi tax assessment
On January 16, 2018, Turquoise Hill announced that Oyu Tolgoi had received and was evaluating a tax assessment for approximately $155 million from the Mongolian Tax Authority (MTA) relating to an audit on taxes imposed and paid by Oyu Tolgoi LLC between 2013 and 2015. In January 2018, Oyu Tolgoi paid an amount of approximately $5.0 million to settle unpaid taxes, fines and penalties for accepted items.
Following engagement with the MTA, Oyu Tolgoi was advised that the MTA could not resolve Oyu Tolgoi’s objections to the tax assessment. Accordingly, on March 15, 2018, Oyu Tolgoi issued a notice of dispute to the Government under the Investment Agreement and on April 13, 2018, Oyu Tolgoi submitted a claim to the Mongolian Administrative Court. The Administrative Court has currently suspended the processing of the case for an indefinite period based on current
procedural uncertainty in relation to the tax assessment disputes.
Chapter 14 of the Investment Agreement sets out a dispute resolution process. The issuance of a notice of dispute is the first step in the dispute resolution process and includes a 60-working-day negotiation period. The parties were unable to reach a resolution during the 60-working-day period; however, the parties have continued discussions in an attempt to resolve the dispute in good faith. If unsuccessful, the next step would be dispute resolution through international arbitration.
Turquoise Hill is of the opinion that Oyu Tolgoi has paid all taxes and charges required under the Investment Agreement, the ARSHA, the Underground Plan and Mongolian law.
Mongolian parliamentary working group
In March 2018, the Speaker of the Mongolian Parliament appointed a Parliamentary Working Group (Working Group) that consisted of 13 Members of Parliament to review the implementation of the Investment Agreement. The Working Group established five sub-working groups consisting of representatives from government ministries, agencies, political parties, non-governmental organizations and professors, to help and support the Working Group. The Working Group’s fieldwork has been completed and they were due to report to Parliament before the end of spring session in late June 2018; however,
this has been continually delayed.
On December 13, 2018, Oyu Tolgoi received a letter from the head of the Working Group confirming that the consolidated report, conclusions and recommendations of the Working Group have been finalized and was ready to be presented to
parliament. However, a final report and conclusions of the Working Group have not been submitted to the Economic Standing Committee, which is expected to review and discuss the report before it goes to a parliamentary plenary session.
The Working Group has not communicated any of their findings, issues or concerns with Oyu Tolgoi.
Anti-Corruption Authority information requests
Oyu Tolgoi LLC has received information requests from the Mongolian Anti-Corruption Authority (ACA) for information relating to Oyu Tolgoi. The ACA has also conducted interviews in connection with its investigation. Turquoise Hill has inquired as to the status of the investigation and Oyu Tolgoi has informed the Company that the investigation appears to relate primarily to possible abuses of power by certain former Government officials in relation to the Investment Agreement, and that Oyu Tolgoi is complying with the ACA’s requests in accordance with relevant laws. To date, neither Turquoise Hill
nor Oyu Tolgoi have received notice from the ACA, or indeed from any regulator, that either company or their employees are subjects of any investigation involving the Oyu Tolgoi project.
The Investment Agreement framework was authorized by the Mongolian Parliament, concluded after 16 months of negotiations and reviewed by numerous constituencies within the Government. Turquoise Hill has been operating in good
faith under the terms of the Investment Agreement since 2009, and we believe not only that it is a valid and binding agreement, but that it has proven to be beneficial for all parties.
Adherence to the principles of the Investment Agreement, ARSHA and Underground Plan has allowed for the development of Oyu Tolgoi in a manner that has given rise to significant long-term benefits to Mongolia. Benefits from Oyu Tolgoi’s
open-pit operations and underground development include, but are not limited to, employment, royalties and taxes, local procurement, economic development and sustainability investments.
Letter to shareholders
On March 14, 2018, the Board of Directors of Turquoise Hill issued a letter to shareholders regarding a meeting between members of Turquoise Hill’s board of directors and representatives of SailingStone Capital Partners (SailingStone). The meeting followed a publicly-filed letter by SailingStone on February 1, 2018 in which it raised corporate governance concerns.
On May 3, 2018, the Board of Directors of Turquoise Hill issued a letter to shareholders discussing a review undertaken by the board about matters raised by SailingStone and provided specific actions to be taken.
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