The June 8 award to Jacobs Engineering of an engineer-procure-construct contract for the $5.3-billion next phase of the giant Oyo Togoi underground copper-and-gold mine in Mongolia gave industry-sector investors and analysts some hope that the sluggish mining sector might be rallying.
But the investment case for the project has fueled scrutiny from the financial sector because of still volatile commodities prices in metal markets and uncertainty about an unstable political environment at the project site.
The California firm disclosed the contract to build materials-handling facilities and surface and below ground infrastructure for the project, awarded by the partnership of mining giants Rio Tinto and Turquoise Hill Resources and the Mongolian government. According to an online Seeking Alpha report, the award and mine development had been delayed since 2013 by a dispute between the firms and the government over project ownership and royalties.
Turquoise Hill and Rio Tinto own 66% of Oyu Tolgoi, which Deutsche analyst Paul Young has described as, "the best undeveloped copper project globally and probably the best undeveloped asset in the industry.”
“Following the final notice to proceed for the underground development last month, this contract is a critical piece as we ramp up toward full construction,” Oyu Tolgoi CEO Andrew Woodley said in a statement. Oyu Tolgoi is located in the South Gobi region of Mongolia, about 550 kilometers south of the capital Ulaanbaatar. The project is being delivered over a five- to seven-year period and is seen as a key economic booster to the country.
The expansion project would increase the mine’s annual capacity to more than 500,000 metric tonnes of copper by 2027, says an on line mining industry report.
Jacobs did not disclose the value or structure of its contract, but Jamie Cook, managing director of investment firm Credit Suisse and lead construction-sector analyst, estimated in a June 10 report that it could be as high as $100 million, based on the scope of work. “The award is significant as the project is one of the few mining projects moving forward,” she said.
“There are commercial, political and performance risks for engineers ” says Tim Alch, analyst with the Society of Mining, Metallurgy and Exploration. “Working with a bankable organization like Rio Tinto, however, does help the engineering case. Rio Tinto has experience structuring these types of transactions.” The firm is one of the world's biggest mining and mineral companies with 55,000 employees in 40 countries and earnings of $4.5 billion in 2015. It also carries a high debt load near $13.5 billion, according to public data.
Jacobs performed a feasibility study for Minera Chinalco Peru SA as it looked to expand its Toromocho copper mining facilities in Peru, and provided engineering services for the expansion of Aura Minerals copper and gold processing facility in Mexico.
At a Credit Suisse investor conference on June 2, Fluor Corp. Chief Operating Officer Peter Oosterveer predicted “a light at the end of the tunnel” in the sector and said it was tracking $8 billion in mining projects set to move forward by 2018.