Turquoise Hill: Successful Coup For Rio Tinto (NYSE:TRQ)

What does this mean for shareholders?

September 6, 2022 – Rio Tinto (Rio) has entered into a definitive agreement to acquire Turquoise Hill (New York stock market :CT). C$43 offer represents a 67% premium to the Canadian miner’s closing price of $25.68 on March 11, 2022. It forecasts solid capital appreciation for shareholders. This article further explores Turquoise Hill’s strategic decision and its underlying importance to Rio Tinto’s future copper portfolio.

Overview

The copper boom means the search for reliable, long-lived assets has been a topic of detailed discussion for boardrooms from London to Melbourne. Global copper consumption has accelerated, with consumer goods such as electric vehicles, cell phones, laptops and homes all requiring significant amounts.

According to the United States Geological Survey, the Americas dominates the 21 million tons produced each year in the world, the region being home to 15 of the largest copper mines in the world. Included prominently in this list is Chile’s vast copperbelt – its production, with Hidden And Collahuasi mines in the first place, is equivalent to nearly a quarter of total production.

Copper prices continue to rebound from price moderation driven by China-induced lockdowns.

BHP (BHP) A 66% stake in the gargantuan Escondida property, combined with the growing importance of copper as a battery mineral, ensured that Rio Tinto would play a strategic role in bolstering its copper portfolio. This was recently achieved with the acquisition of Turquoise Hill. The Montreal, Quebec-based miner until recently held a 66% stake in the rich Oyu Tolgoi copper gold mine in southern Mongolia. In a savvy tactical ploy, the Australian mining giant made a $3.3 billion bid to buy all outstanding shares and place it firmly among the who-is-who of copper mining behemoths.

It was a risky coup that finally ended a long, acrimonious battle in the boardroom while handing Rio Tinto CEO Jakob Stausholm a recovery-focused corporate victory lap of a damaged relationship with the Mongolian government. In one fell swoop, Rio Tinto’s new asset propelled it to the forefront of global sustainability. Let’s find out more about Turquoise Hill and its precious asset Oyu Tolgoi.

Chile dominates world copper production.

Acquisition by Rio Tinto

Rio Tinto’s takeover bid for Turquoise Hill, a calculated play for its prolific Mongolian copper producing asset, was completed in December 2022. In return for control of the sprawling copper and gold production building, Rio Tinto drew $3.3 billion from cash reserves enabling it to control (66% working interest) with the government of Mongolia (34%) making up the rest.

In order for the deal to be finalized, extensive due diligence had to be carried out, both by the Yukon court in Canada and by the Turquoise Hill shareholders. The final transaction represented a 67% premium to Turquoise Hill’s closing price a day before the Australian mining giant’s non-binding public proposal to acquire the Canadian company.

Oyu Tolgoi is an exceptional asset with incredible people who will bring significant long-term value to Rio Tinto and Mongolia

CEO of Rio Tinto – Jakob Stausholm.

The acquisition was difficult as Rio Tinto had to raise its bid for the company twice to appease hawkish Turquoise Hill shareholders. The two largest minority shareholders, SailingStone Capital and Pentwater Capital, had been strong supporters of the deal, citing a low valuation.

At one point, Pentwater Capital had been the instigator of a class action alleging that the Australian miner failed to inform investors of the costs of the explosion and the delays associated with the ongoing development of Shaft 2.

With nearly 40,000 bolts and approximately 95% of the steel in the shaft headframe requiring rework, cost overruns ultimately hampered underground copper production, delaying the project by 16 to 30 months and resulting in an additional cost of $1.2 billion to $1.9 billion. Now that the takeover is complete, Rio Tinto can fully focus on freeing up the mine’s vast copper producing assets.

Active Oyu Tolgoi

The Oyu Tolgoi gold and copper mine is a combined open pit and underground operation developing some of the largest proven reserves in the world. Originally discovered in 2001, the operation is located in the South Gobi region of Mongolia, where the first surface works began in 2011, alongside the development of the copper concentrator.

The life of the mine is currently several decades and production from the operation will have a significant impact on Mongolia’s gross domestic product for years to come. Underground operations have only recently been expanded, with the Australian mining giant pouring around $5 billion into the expansion project to produce an additional 500,000 tonnes a year.

The Oyu Tolgoi project will be mostly underground.

Most of the value lies deep underground, with the Australian natural resources giant commissioning a 200km maze of underground tunnels, consisting of 5 shafts with the deepest reaching 1.3km.

Block caving, a technology of digging a tunnel under the orebody and letting it gradually collapse under its own weight, was the methodology chosen to bring the ore to market. The team in Mongolia is supported by the underground mining expertise of Rio Tinto in Brisbane, Australia.

The narrow vein mineral deposits extend over a 26 km stretch, running approximately north to south and are composed of copper, gold and silver. Conventional methods of drilling and blasting, loading and hauling are used for surface mining.

Satellite view of the active Oyu Tolgoi in southern Mongolia.

The future of Rio Tinto

While Rio Tinto’s acquisition of Turquoise Hill has been a roller coaster ride, finalizing the deal is likely to provide tailwinds for the Australian giant for years to come. The agreement provides for a simplification of the operating structure, better allocation of capital and financing mechanisms, as well as a reconstruction of relations with the government of Mongolia. This has undoubtedly been a win for Rio Tinto as it now seeks to overcome board wrangling, rivalries and corporate disruptions, to focus fully on bringing the asset online. This allows Rio Tinto to achieve its sustainability ambitions and strategically position it among the world’s biggest proponents of decarbonization.

Key points to remember

The acquisition of Turquoise Hill was a major coup for Rio Tinto, ending a plethora of corporate and state disruptions, while offering the Melbourne-headquartered miner the opportunity to rebuild broken relationships and strengthen his social license. This is great news for Turquoise Hill shareholders who are realizing intrinsic value in their investment while securing the asset’s future for decades to come.