Oyu Tolgoi LLC

active

Scope of Project and IFC’s Proposed InvestmentThe proposed project (the “Project”) is an $12 billion investment to develop a copper and gold deposit at Oyu Tolgoi in the South Gobi desert, Mongolia. The Project owner and developer is a Mongolian company, Oyu Tolgoi LLC (the “Company” or ”OT”) which is owned 66% by Ivanhoe Mines Ltd, a Canadian public company listed on the Toronto Stock Exchange and 34% by Erdenes Oyu Tolgoi LLC, a Mongolian State owned company. As of January 24 2012, Ivanhoe is 51% owned by Rio Tinto.OT is the world’s largest undeveloped copper-gold deposit and presents significant development potential for Mongolia bringing an expected increase in GDP of 35 % by 2020. The Project is located in the sparsely populated Omnogovi aimag of Mongolia. It is situated 600 km south of Ulaanbaatar, 220 km south-east of the aimag capital Dalanzadgad and 45 km west of the soum capital Khanbogd. A customs post is located 80 km south at Gashuun Sukhait on the border with the People’s Republic of China. OT consists of a series of deposits containing copper, gold, silver and molybdenum. The main Oyu Tolgoi deposits cover an area of 84.96 square kilometres.IFC is part of a group of lenders that include EDC, EBRD, Standard Chartered, BNP Paribas, US EXIM, Australian EFIC and MIGA. The full value of IFC’s investment remains to be confirmed but A and B loans up to around $ 800 million are under discussion.The Oyu Tolgoi exploration area was initially explored in the 1980’s by Mongolian and Russian geologists. The exploration rights were then acquired by BHP Billiton who undertook an initial drilling program in 1997/1998 before selling the rights in 2000 to Ivanhoe Mines (Ivanhoe) who began a drilling program. In 2002 Ivanhoe discovered a high grade, very large copper/gold deposit (Hugo North) suitable for underground mining. In October 2006, Ivanhoe entered into a partnership with Rio Tinto International Holdings Limited (Rio Tinto). On October 6, 2009, Ivanhoe Mines and Rio Tinto signed a 30-year, comprehensive Investment Agreement with the government of Mongolia for the development of the project. Rio Tinto is the manager of the Project on behalf of Oyu Tolgoi LLC. Under the Investment Agreement, the Government of Mongolia has established the Southern Gobi Regional Development Council (SGRDC) which includes representatives of the government, local governance organisations, private sector entities, civil society organisations, potential aid donors and international financial organisations with activities directed towards the southern Gobi region. The SGRDC is mandated to co-ordinate and manage regional and community development issues and impacts associated with the OT Project and other major investments in the southern Gobi region. OT is a member of the SGRDC governing board and supports the organisation’s implementation of social and economic programmes. Under the provision of the Minerals Law of Mongolia, 20% of mine royalties is transferred to the host aimag (province) government and 10% of mine royalties to the host soum (district) government. Transfer of these royalties during mine operation would provide local governments with significant resources which could be used for regional and community development projects and programmes. OT supports the development of Mongolian suppliers of goods and services through the implementation of the Mongolia First Initiative. The Project will also support the development of local suppliers and a sustainable economic base through a Local Business and Economic Development (LBED) Programme. Support for local communities and government agencies in community planning and infrastructure development will be provided through OT’s Local and Regional Planning and Infrastructure (LRPI) Programme.The project’s operational workforce will number approximately 3,500 with a construction workforce peaking at almost 14,800 in December 2011. OT has made substantial commitments with regard to the training and employment so that the operational workforce will be largely Mongolian. The current reserve model (JORC compliant) gives a 27 year mine life based on a 100,000 tonnes/day (tpd) concentrator throughput. However, studies are underway into the expansion of the mine to 160,000 tpd. Such expansion would be subject to an update to the environmental and social assessment process, especially as regards water availability. The ore will be processed through conventional crushing, grinding and flotation circuits. The concentrate produced will initially be trucked to smelters in China but in future years, it is expected to be transported by the developing Mongolian rail network, expansions to which are under consideration.The project will be developed into two phases. Initial production will be from an open pit copper-gold mining operation at the Southern Oyu deposit, supplemented within approximately four years by production from underground mining operations at the Hugo North deposit. This initial phase is covered by a full Environmental & Social Impact Assessment (ESIA). The ESIA contains construction phase Environmental & Social Management Plans and a framework for operational phase Environmental and Social Management Plans which will be completed and disclosed prior to IFC disbursing funds. An expansion to the capacity of the concentrator is planned during the 27 year mine life, based on a throughput of 160,000 tpd of ore (from 100,000 tpd). This Project expansion is will require regulatory approval from the Mongolian authorities, including environmental approvals, and will require the identification and permitting of adequate water resources. Updated project documentation will be required by IFC and the other lenders and will be subjected to full consultation and disclosure in line with IFC Policies.The mine layout and processing methods are described in the ESIA and consist of an open pit (Southern Oyu deposits) and underground mine (Hugo Dummett deposit), a processing plant, a mine tailings storage facility on the eastern part of the Mine Licence Area (MLA) and on-site waste rock dump (WRD) to the south of the open pit. The main ephemeral water course, the Undai, flows across the western part of the MLA and will be diverted to bypass the open pit and WRD. The mine will operate 24 hours per day based on two 12-hour working shifts. Water Resource ManagementOT recognises that the responsible and efficient use of water resources is a key priority for the project, as it is located in a region which has limited surface water resources, low annual rainfall and also limited potable groundwater resources. During the construction phase, limited amounts of water are being obtained from shallow aquifers as well as deeper weathered bedrock aquifers within the MLA. For mine production, water will be sourced from a significant aquifer system which has been identified and delineated in the Gunii Hooloi basin, which form a substantial groundwater resource. After extensive assessment OT determined that only the Gunii Hooloi aquifer has sufficient reserves to supply the project’s water demand without having a significant impact on the shallow water users or on groundwater-dependent vegetation. This deep aquifer water is brackish to saline and is not consumed by existing water users in the area, with the exception of one herder well in the north eastern extremity of the aquifer area where the deeper aquifers are closer to the surface. If this well is impacted, an alternative supply will be provided to the herder.OT has been permitted to draw approximately 810 L/s of water from the Gunii Hooloi aquifer. The average water demand during the initial years of operation, with a production rate of 100 000 tpd, is predicted to be 696 L/s prior to any consideration of water recovery from the underground or open pit mines. The borefield and supply pipeline have been designed with a capacity of 900L/sec to provide for seasonal peak demand.All open water associated with the supply (eg: lagoons) will be covered with a floating cover to prevent evaporation. OT’s ongoing groundwater assessment programme aims to provide a range of future water supply options. Power SupplyThe project is energy intensive with an energy build-up to start-up in excess of 100 MW with capacity for further growth to around 200 MW in the longer term. OT owns and operates a 20 MW diesel power station located within the MLA to provide construction power to the project, which has been expanded to 40 MW. After the project’s long-term power supply has become operational, this station will provide stand-by power. The initial permanent power supply will be via a dedicated 220 kV overhead powerline from China. The Investment Agreement allows for power to be provided to the project from outside Mongolia, provided that within four years from commencement of commercial it sources all its power requirements from within Mongolia from one or more of the following sources: (a) a coal-fired power plant developed or funded by OT LLC; (b) a coal-fired power plant developed or funded by a third party; or (c) the Mongolian electricity grid. Heating requirements for the Project will be met by on-site coal-fired boilers which will continue to be used throughout the Project life. In line with the above alternatives, during construction of the first phase of the project OT will undertake a study for the design and permitting of a coal-fired power plant within the MLA (three 150 MW units with provision for potential expansion) . An environmental and social impact assessment (ESIA) is being undertaken to meet the requirements of IFC Performance Standards and EBRD Environmental Policy. This will be made publically available in line with the disclosure policies of both IFC and EBRD for a minimum of 60 days prior to the start of any construction. The Power Plant ESIA is expected in Q4 2012 and will include the following additional elements: (i) An expanded alternatives analysis reviewing the feasibility and cost/benefits of different fuel sources to see whether coal in fact represents the only technical and economically viable source of fuel to meet the project’s requirements; and if coal represents the only feasible alternative, analysis to demonstrate that the technology choice meets appropriate efficiency and emission standards given design constraints (coal characteristics, location, water availability, size of plant). The analysis will also include consideration for using renewable energy as part of the supply solution as a blend for the coal power or as a stand-alone alternative for lighting and/or heating, and (ii) OT is committed to extending the independent review process which is already in place for the main ESIA (on terms of reference to be adjusted in agreement with IFC) to include an expert technical opinion on the above analysis. OT will look for opportunities to promote wider benefits of the proposed power plant, for instance by allowing for a portion of the plant capacity to meet community demand for electric power; and to consider as part of the broader initiatives in support of renewable energy at site and in the region. Power from the OT plant will be provided to local communities replacing the existing power source - most commonly diesel generators. The power from OT’s plant will represent a more efficient form of energy generation, which results in real emissions reductions compared to the alternative. Additionally, there are social benefits in bringing more electricity to the region at a price and reliability that is significantly better than what is currently being provided to local communities. A power line from MLA to Khanbogd is part of this process and its construction has been brought forward in order to supply power in time for winter 2012/2013. Transport InfrastructureMost supplies for the project arrive by road or by air. Concentrate production will be transported by road to markets in China. An existing gravel road (some 80 km in length) to the Mongolia-China at the Gashuun Sukhait border crossing is being upgraded to a heavy duty tarred highway. Although independent of the OT Project, the “coal” road (from Tavan Tolgoi coal mine to the border) also runs to the same border crossing. The border crossing is within the Small Gobi Special Protected Area B (SGSPA) (see PS 6 section below) and to reach it, the OT road must cross some 13 km of the western extremity of the protected area. The final alignment in the SGSPA remains to be decided but in the interim OT have constructed a temporary road which runs parallel to the “coal” road in this area.A temporary dirt runway airstrip has been opened to service the Project. This will be replaced in due course by a permanent regional airport which is fully described in the ESIA.