G. Batsukh, Chairman, Oyu Tolgoi: Interview

Interview: G. Batsukh

Could you update us on production and sales during phase one of the Oyu Tolgoi mining project?

G. BATSUKH: We have a strong open pit up and running, and production and sales are progressing well. We made a smooth transition from construction to operation, and we are continuing to work on safely optimising production and ramping up sales. Oyu Tolgoi produced 148,400 tonnes of copper and 589,000 oz of gold in concentrates in 2014, and is expected to produce 175,000-195,000 tonnes of copper and 600,000-700,000 oz of gold in concentrates in 2015.

We cannot control commodity prices; however, what we can do is bring down costs and improve efficiency in our operations to face future commodity price volatility from a position of strength. Improvements in technology, the workforce and the supply chain are all being undertaken. We expect 2015 to bring even more improvements in these areas.

Once an agreement is reached, how long before phase two can begin producing? How will implementation impact the local supply chain?

BATSUKH: It is difficult to make predictions for a timeline. Once our shareholders resolve all of the outstanding shareholder issues and decide to progress on the underground portion, there will be a great deal of work to be done – particularly in terms of recruitment, training and the implementation of necessary safety measures. While we have gained tremendous knowledge and experience in these areas from the first stage of the project and are ready to start making preparations as soon as the green light is given, phase two will take time to develop.

Phase two will benefit from a strengthened local supply chain built during and after phase one. We started completely from scratch with respect to the supply chain in 2012, but have made significant progress. More than 50% of Oyu Tolgoi’s procurement costs were with Mongolian companies in 2014, compared to 39% in 2013. Total procurement spending inside Mongolia reached 77% in 2014, and we expect this to grow over the coming years. There are some purchases that cannot be sourced domestically, such as the state-of-the-art equipment and machinery needed for the concentrator and portions of the underground infrastructure, but there are many areas with considerable opportunity for development. For example, we are speaking with local companies that are interested in developing the capacity to provide our concentrator with the steel balls it needs to produce concentrate from ore. Another potential area is cement, most of which had to be brought from China for phase one. Given the recent improvements in technology and production capacity, we are well positioned to start buying quality lime in the country in 2015. Increased local procurement not only reduces costs, but also helps to develop the country’s industrial capabilities, benefitting the Mongolian people.

What are your expectations for copper and gold? Where do you foresee most demand coming from?

BATSUKH: While long-term demand for copper is strong, it is difficult to speculate on what the markets will do. In the short to medium term we can expect some volatility, but Oyu Tolgoi is well placed to face this. We have agreements in place for more than 90% of the planned production for 2015 and are in discussions with potential takers for the medium-term. Given our location, it should be no surprise that China will be our mine’s largest market for the foreseeable future, and despite a relative slowdown in its economy, it is still going strong and will need a large amount of copper for all the things a growing economy needs: from railways, electronics, mobile phones, cars and buildings to the spaceship it is currently working on. We are fortunate to be located next to the Chinese border. That said, we are also exploring opportunities for other international export markets, which will be easier to reach now that more Chinese ports are expected to open to Mongolian exports.