TRQ - Turquoise Hill: Successful Coup For Rio Tinto

Summary

• Turquoise Hill recently received a $3.3B takeover offer from Rio Tinto.
• The company's vast copper-producing Mongolian asset, Oyu Tolgoi is at the heart of the Australian miner's sustainability strategy.
• This strategic corporate asset grab has been lucrative for Turquoise Hill shareholders.

What this means for Shareholders?

On 6 September, 2022 - Rio Tinto ( RIO ) entered into a definitive agreement to acquire Turquoise Hill ( TRQ ). The offer at C$43 represents a 67% premium to the Canadian miner's closing price of $25.68 on 11 March,2022. It provides for a solid capital gain for equity holders. This article explores further the strategic move for Turquoise Hill and its underlying importance in Rio Tinto's future copper portfolio.

General Overview

Boom time for copper means a pursuit for dependable long-life assets has been a detailed talking point for boardrooms from London to Melbourne. Global copper consumption has accelerated with consumer goods such as electric vehicles, mobile phones, laptops, and homes all requiring substantial quantities.

According to the United States Geological Survey, the Americas dominate the world's 21m tons produced annually with the region home to 15 of the largest copper mines globally. Included conspicuously in that list is Chile's vast copper belt - its production, with Escondida and Collahuasi mines at the forefront, equates to almost a quarter of total output.

Copper prices continue to bounce back following price moderation driven by China induced lockdowns.

BHP's ( BHP ) 66% stake in the gargantuan Escondida property, combined with copper's increasing significance as a battery mineral, assured Rio Tinto would make a strategic play to bolster its copper portfolio. That was recently achieved with the acquisition of Turquoise Hill. The Montreal, Quebec based miner had until recently a 66% stake in the plentiful Oyu Tolgoi Copper Gold mine in Southern Mongolia. In a savvy tactical gambit, the Australian mining giant made a $3.3B 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 ultimately put paid to a lengthy acrimonious board room battle while providing Rio Tinto CEO Jakob Stausholm a corporate victory lap focused on rekindling a damaged relationship with the Mongolian government. In one foul swoop, Rio Tinto's new asset has thrust it to the forefront of global sustainability. Let's find out more about Turquoise Hill and its prized Oyu Tolgoi asset.

Chile dominates global copper production.

Takeover by Rio Tinto

Rio Tinto's takeover bid for Turquoise Hill, a calculated play for its prolific Mongolian copper producing asset, was finalized in December 2022. In exchange for control of the vast copper and gold producing tenement, Rio Tinto forked out $3.3B from cash reserves allowing it control (66% direct interest) with the Government of Mongolia (34%) making up the remainder.

For the deal to be finalized, extensive due diligence had to be completed, both by the Yukon court in Canada and Turquoise Hill shareholders. The final transaction represented a 67% premium on closing price of Turquoise Hill one day prior to the Australian mining giant's public non-binding proposal to acquire the Canadian firm.

Oyu Tolgoi is an outstanding asset with incredible people that will deliver significant long-term value for Rio Tinto and Mongolia

Rio Tinto Chief Executive - Jakob Stausholm.

The acquisition was challenging as Rio Tinto had to raise its offer for the company twice to appease hawkish Turquoise Hill equity holders. The two largest minority shareholders, SailingStone Capital and Pentwater Capital, had been vocal proponents of the deal citing a low-ball valuation.

At one stage, Pentwater Capital had been the instigator of a class action lawsuit claiming the Australian miner had failed to inform investors of blow-out costs and schedule creep linked to the ongoing development of shaft 2.

With almost 40,000 bolts and approximately 95% of steel in the shaft's headframe requiring rework, cost overruns ultimately hampered underground copper production, delaying the project by 16 to 30 months, and culminating in $1.2B to $1.9B of excess cost. With the takeover now finalized, Rio Tinto can fully focus on unleashing the mine's vast copper producing asset.

Oyu Tolgoi Asset

The Oyu Tolgoi gold & copper mine is a combined open pit and underground operation showcasing some of the world's largest proven reserves. Originally discovered in 2001, the operation is located in the South Gobi region of Mongolia, where initial open pit works commenced in 2011 along with development of the copper concentrator.

Life of mine is presently in the decades and the operation's output will meaningfully impact Mongolian gross domestic product for years to come. Underground operations were developed only recently, with the Australian mining giant pouring roughly $5B in the extension project to produce an additional 500,000 tons annually.

The Oyu Tolgoi Project will be predominantly focused underground.

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

Block caving, a technology consisting of tunnelling under the ore body and letting it progressively collapse under its own weight, has been the chosen methodology for bringing ore to market. The team in Mongolia are supported by Rio Tinto Underground mining expertise in Brisbane, Australia.

The narrow vein mineral deposits lie over a 26km strike, running approximately North to South and are comprised of copper, gold, and silver. Conventional drill and blast, load and haul methods are being used for the open pit, surface mining operation.

Satellite view of the Oyu Tolgoi asset in Southern Mongolia.

Future for Rio Tinto

While the acquisition of Turquoise Hill by Rio Tinto has been a rollercoaster ride, the finalization of the deal is likely to provide positive tailwinds for the Australian giant for years to come. The agreement provides for a simplification of the operating structure, improved capital allocation and financing mechanisms, along with a rebuilding of relations with the government of Mongolia. It has undoubtedly been a victory for Rio Tinto as it now looks to get over the board room wrangling, corporate rivalries and disruption, to focus fully on bringing the asset online. It allows Rio Tinto to meet its sustainability ambitions will strategically positioning it neatly among the world's largest proponents of decarbonization.

Key Takeaways

The Turquoise Hill acquisition has been a major coup for Rio Tinto, ending a plethora of corporate and state disruption, while providing the Melbourne headquartered miner the opportunity to rebuild broken relations and strengthen its social license. Its great news for Turquoise Hill shareholders that realize intrinsic value to their investment while shoring-up the future of the asset for decades to come.

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