From nowhere to somewhere

From nowhere to somewhere: Rio Tinto builds a megaproject in the Gobi Desert 

Deep in the Gobi Desert in Mongolia, one of the world’s most remarkable natural resources plays is nearing completion. The Oyu Tolgoi mine, a combined open pit and underground mining project, is the largest project to be developed in Mongolia and – once completed – will account for an estimated 30 percent of Mongolia’s total annual gross domestic product (GDP).

The feat is made even more remarkable by the timelines that have been achieved. The deposit was only discovered in 2001 and work on the mine site commenced in 2010. Today, the open pit mine is essentially up and running, replete with much of the economic and social infrastructure necessary to run a sustainable and profitable mining venture in an inhospitable environment.

To learn more about the mine’s success, Julian Vella – KPMG’s Asia-Pacific Head of Global Infrastructure – spoke with Cameron McRae, President and CEO of Oyu Tolgoi LLC and the Mongolia Country Director for Rio Tinto, one of the three parties involved in the joint venture.

Julian Vella (JV): Rio Tinto is no stranger to developing megaprojects in hard-to-reach places, and this project in Mongolia seems par for the course. Can you tell me a bit about the Oyu
Tolgoi project?

Cameron McRae (CM): The project is located in the southern Gobi region of Mongolia, 600 kilometers south of the capital, Ulaanbaatar, and 80 kilometers north of the Mongolian- Chinese border in the arid south Gobi region which is essentially devoid of any infrastructure. It will be one of the world’s most technically advanced mines in one of the world’s most challenging environments, using sophisticated technologies and processes which have been tested in complex operations and geographies.

The Oyu Tolgoi ore body reserve holds 25 million tons of copper, 5.1 thousand tons of silver and 1.02 thousand tons of gold, making it Mongolia’s largest, and Asia’s second largest, mine.

I am proud to report that Phase One of the project is a couple of months ahead of schedule, its commissioning is imminent and we are due to move to commercial production in the first half of 2013. In July, our ‘First Ore’ went through the primary crusher and into the stockpile, so – for all intents and purposes – Oyu Tolgoi’s open pit mine is up and running.

The next stage of development will realize one of the biggest and deepest underground mining facilities in the world. This is a hugely complex and technically challenging undertaking that will deliver significantly higher grade copper and higher production rates. While it will take another decade to complete, it’s this phase that will really set Oyu Tolgoi apart. Early returns may be substantial, but a massive 80 percent of the project’s value lies underground.

JV: What are some of the unique challenges that you are facing with this development?

CM: The first challenge was to develop an Investment Agreement (IA) with the government to give investors the stability they required. This involved about 5 years of debate and was passed in April 2010. But once passed, the progress of the partnership has been rapid.

What very few people realize is that full-scale construction on the mine site was built in just over 2 years after the IA became effective. Of course, building one of the largest mines in the middle of the Gobi desert should be considered a big challenge. Generally speaking, mines of this scale often take up to 5 years to build, but we built it in about 2 years and did it on budget and ahead of schedule, which perhaps was the most profound challenge.

Water would have been the biggest challenge, had we not found enough sources in the deep aquifer near the mine site. The aquifer is between 40 to 70 meters underground and Oyu Tolgoi has permission from the government to use 20 percent of the aquifer which, we believe, is more than enough for the life of the project. Moreover, Oyu Tolgoi recycles over 80 percent of the water it uses.

JV: Mines require supporting infrastructure such as water, power, and worker accommodation,
as well as transport infrastructure in order to get products to market. How are you ensuring this
type of infrastructure is available for this mine?

CM: Mongolia has some good infrastructure but it varies from one location to another. Where we are building Oyu Tolgoi, the infrastructure is void – there are no railways, paved roads, and there isn’t even electrical power for the town of Khanbogd neighboring the mine.

We have had to develop a significant amount of infrastructure ourselves. For example, during construction, we used diesel power stations, but that is no longer supportive of the planned production. Our plan for the interim is to import power from China. A 100 kilometer (km) long high-power transmission line has been built from the Mongolian-Chinese border to the Oyu Tolgoi site. In the long-term, we plan to have a 450 megawatt (MW) power station built at the site.

JV: Rio Tinto is known for developing social infrastructure projects alongside mining
investments. What are some of the key projects you developed or are planning to develop to support the community?

CM: Oyu Tolgoi has spent USD22 million on regional development in South Gobi. It is building an international-standard airport, a 70 kilometer water pipeline, a 100 kilometer paved road and a 200 kilometer long 220 kilowatt (kW) power line connecting the Mongolian-Chinese borders.

We have been particularly active in the health sector, and have initiated a number of programs, including helping to fund the renovation of the hospital and health clinics in Khanbogd, funding doctors’ training programs and launching programs to limit and prevent diseases such as TB and HIV. We have also built the town’s first dental clinic which has served more than 80 percent of the population of Khanbogd.

For the local town of Khanbogd, we have constructed a 35 kW power line from the mine to the town and invested USD1.3 million in finding more water sources so that the town would have a continued reliable source of drinking water.

Rio Tinto and Oyu Tolgoi have also launched a world-class Cultural Heritage Program to preserve both tangible and intangible heritage around Khanbogd and, to date, we have spent more than USD1 million to catalogue and protect natural and man-made cultural heritage sites, including recording and preserving ancient songs with 100 elders.

JV: What have you learned from your experience leading these types of megaprojects?

CM: What’s most important is the partnership with the host nation. Without a strong partnership that guarantees stability, neither the investors nor the government can have the kind of confidence that is required to sustain a project of this magnitude. In our case, stability and assurance were offered to Oyu Tolgoi’s investors by the IA that we signed with the government, without which nothing could have begun.

I look forward to working together with the people of Mongolia to ensure the growth of the mine which will help make Mongolia the fastest growing economy in the world, and I would like to wish the Mongolian people ever more prosperity.

By Julian Vella, KPMG in Australia

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