No revenue yet for Rio’s Oyu Tolgoi

One last hurdle before shareholders realise the production rate they’ve been promised.

a woman

Rio Tinto’s (ASX: RIO) huge Mongolian project, Oyu Tolgoi, has suffered yet another setback as investors’ pain over the project continues – although it may only be short lived. The joint venture between Turquoise Hill Resources (a subsidiary of Rio) and the Mongolian government has proven to be difficult but it could soon get rewarding.

Oyu Tolgoi is a massive copper and gold mine 80 kilometres north of the Mongolia-China border. At full production it has the capacity to represent up to a third of Mongolia’s entire GDP.

Despite already producing 160,000 tonnes of copper concentrate and shipping some 38,000 tons of it to China since July, the company will have to wait for Chinese customs to approve the shipments before any revenue can be realised. Turquoise Hill said the mine “has begun to receive payments from customers. However, as revenue is recognized when customers withdraw concentrate from the warehouse, to date Oyu Tolgoi has not recorded any revenue”.

Oyu Toigoi has already received approval from Mongolian customs officials to ship the concentrate to China but its customers will have to wait to receive Chinese approval before they can withdraw the concentrate. Despite the revenue delay however the mine is continuing to ramp-up production, “Turquiose Hill continues to expect Oyu Tolgoi sales to be aligned with production rates by the end of this year.”

To make Oyu Tolgoi one of the biggest gold mines in the world, it will need significant investment from both Rio and the Mongolian government although the latter seems, once again, concerned with costs, management and development. As a result Rio was forced to lay off 1,700 workers until the Mongolian parliament can approve financing for the mine’s development.

According to the Wall Street Journal at full production (between 2020 and 2021) the mine will produce an average of 450,000 tonnes of copper and 330,000 ounces of gold.

Foolish takeaway

Rio’s management, along with other miners like BHP (ASX: BHP) and Fortescue (ASX: FMG), know too well the troubles that arise with JVs. However management has worked to resolve any issues methodically, and to date has developed the mine with as few delays as possible. When Oyu Tolgoi begins producing revenue it will mark a significant milestone for the company and allow Rio to have a more diversified revenue stream.

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.

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