October 24th, 2013
In a positive development for Rio Tinto (NYSE:RIO), customers of its copper output from the Oyu Tolgoi mine in Mongolia have resolved a months-long dispute with the Chinese customs authorities. This will allow Rio Tinto to finally start recording revenues for its sales from Oyu Tolgoi. Rio operates in Mongolia through its subsidiary Turquoise Hill Resources, in which the Mongolian government owns a 34% stake. 
The $6.2 billion Oyu Tolgoi project has been marred by many controversies and delays on account of a number of different factors. After overcoming various hurdles and objections from the Mongolian government and the Chinese authorities, there are signs that the project will now stabilize.
Since the production from Oyu Tolgoi has been substantial this year, Rio is expected to report record revenues from the copper business in the fourth quarter. The company said that production and shipment rates are likely to be aligned by the end of 2013.
We have a Trefis price estimate for Rio of $55, which represents 5% upside to the current market price.
Many Ups and Downs At Oyu Tolgoi
Rio’s Oyu Tolgoi project has been marred by delays and controversies throughout. The Mongolian authorities initially sought to renegotiate specific clauses of the contract, much after they had been agreed upon. With a change in the political regime, the new legislators who had made resource nationalism a key poll plank, pressured the government to seek more royalties from Rio as well as a higher equity stake for the government. However, Rio held out in face of a deadlock and was eventually able to thwart these initiatives. 
Next, putting in place a power supply agreement with China proved quite difficult. Without this agreement, Rio would have had to spend additional time and money to establish its own power generation capabilities. This would have led to cost escalation and delays, as there is an absence of any alternative power supply in the region. The Chinese were unhappy with the Mongolian government for thwarting an attempt by Chalco, a Chinese firm, to acquire a large coal mine in Mongolia. This may have made negotiations more difficult because the Mongolian government has a significant stake in Oyu Tolgoi and would have played a part in the final agreement. 
First Shipment Took Place In July
After the power supply agreement was put in place, Rio started producing copper a few months later. Its first shipment was delayed by about 20 days due to some pending issues with the Mongolian government. The first shipment from the mine was finally made in July this year, but in absence of customs clearance at the Chinese border, the metal had to be stored at a warehouse in China near the Mongolia-China border. The documentation issues at the border took a long time to resolve and all further shipments had to be stored in the warehouse, pending resolution. Rio was unable to record sales revenues on its books in this duration because it is permitted to do so only once the customer has received the shipment. 
Rio has produced approximately 160,000 tonnes of copper concentrate from Oyu Tolgoi and shipped 38,000 tonnes to the warehouse since July. At full production levels, the average annual production is expected to be 450,000 tonnes of copper and 330,000 ounces of gold. ((Rio Tinto’s Oyu Tolgoi Customers Get Chinese Customs Approval For Copper, WSJ))
For 2013, Rio expects a company-wide production figure of 590,000 tonnes for mined copper and 270,000 tonnes for refined copper. ((Third quarter 2013 operations review, Rio Tinto Media Release))