Shares of Canada's Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) sunk to historic lows this month on news that production from the vast Oyu Tolgoi copper-gold-silver mine in Mongolia could be delayed 16 to 30 months from the original estimate, while the capital cost of the underground expansion (pegged at US$5.3 billion) could cost an additional US$1.9 billion.
The expanded underground operation was scheduled to begin production in 2020, but it's now expected to happen sometime between May 2022 and June 2023, although a final estimate on the timeline and cost will be announced later next year.
Oyu Tolgoi, operated by the world's No.2 miner, Rio Tinto (LON: RIO; NYSE: RIO), is 66% owned by Toronto-listed Turquoise Hill, in which Rio has a 50.8% controlling stake, and 34% by the Mongolian government.
Some of Rio's main lenders, including the European Bank for Reconstruction and Development, have already signalled their willingness to provide further funding for the project.
Turquoise Hill, however, hasn't had the same luck. Its shares have fallen almost 80% over the past year, and since the cost blowout and the schedule of Oyu Tolgoi's expansion was revealed on July 16, they have dropped even more.
At press time in Toronto, the company's shares were trading at 75 ?, slightly above the company's 52-week low on July 26 of 73 ?. The company hit a 52-week high of $3.82 in August 2018.
At its peak in 2011, Turquoise Hill's market capitalization stood at nearly C$20 billion. Today it sits at roughly C$1.5 billion.
On July 31, the company reported a loss of US$736.7 million, or 22 ? a share, in the three months ended June 30, compared with a profit of US$204 million, or 9 ?, a year earlier. It attributed the profit estimates miss to an almost US$597 million impairment charge at the cash-generating unit of the Mongolian mine.
The bulk of the write down (US$364.7 million) was recorded against "capital works in progress". A further US$180 million was related to the carrying value of plant and equipment, while Turquoise Hill also wiped US$52 million off the value of its "mineral property interests".
Some minority investors fear the cost increases will force Turquoise Hill to tap its shareholders for extra cash to complete the project, which could provide Rio with a low-cost way to bump up its ownership in the company, and by extension, the Mongolian mine.
While Turquoise Hill has not ruled out an equity raising, it has said that the debt cap of US$6 billion on the project finance facility - which in theory provides an extra US$1.6 billion of lending capacity - is an "arbitrary" figure that could be "reviewed and looked at with the potential to increase that amount."
The company has also noted the mine design rethink could result in a reduced estimate of the amount of copper and gold retrievable from Oyu Tolgoi.
"Current information indicates that Oyu Tolgoi mineral reserves will not be materially impacted by the Hugo North mine design options being considered," Turquoise Hill said. "However, ongoing reviews will be considered as the work progresses."
Issues with the underground project first emerged in October 2018, when a nine-month delay to sustainable production was announced due to technical problems.
The companies have been using block-cave mining at the asset. Although technically challenging, it is deemed one of the most cost-effective mining methods for extracting ore buried deep below the surface.
For block-caving to effectively work, however, weak and fractured rock needs to collapse under pressure from gravity. Rio Tinto CEO Jean-S?(C)bastien Jacques had previously said that rock collapses too easily at Oyu Tolgoi.
"Starting a block cave correctly is critical to its long-term safety and viability. Analysis suggests that the current mine design carries stability risks leading to a number of alternative mine designs being considered with work currently at the conceptual study phase," Edward Sterck, analyst at BMO Capital Markets, said in a note to investors. "The alternative plans may require relocation of critical underground infrastructure and a change in mining sequence."
Oyu Tolgoi will become the world's third-biggest copper mine when it is fully operational in the second half of the next decade.