Why Turquoise Hill Is Ready To BounceIt's extraordinary to watch the stock performance of Turquoise Hill Resources Ltd. (
TRQ), as it continues to get hammered because of global economic concerns, as well as a slowdown in China and falling commodity prices.
There is also the Federal Reserve effect, which has of course crushed the markets because of a possibility it may taper its massive stimulus program, which many believe will have a detrimental impact economically. Most people have forgotten the repeated words of Fed Chairman Ben Bernanke that it is predicated on the U.S. economy continuing to improve, which is far from a certainty. Interest rates on the other hand, no matter what happens, are expected to remain at current levels for a couple of years.
Income Statement -
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Source: Ycharts
Cash Flow
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Source: Ycharts
Balance Sheet
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Source: Ycharts
A cursory glance at Turquoise would seem to indicate the company is a disaster, as it has a forward P/E 0f 133.00, profit margin (TTM) of -294.16 percent, operating margin of -349.33 percent, EBITDA of -408.13 million, and return on equity of -10.43 percent.
As for operating cash flow , it's -512.09 million, while levered free cash flow is -2.68 billion.
It has total cash as of the most recent quarter of $580.65 million, with total debt of $1.90 billion. It's total debt to equity is 31.68.
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Source:
StockCharts.com
Why the numbers don't tell the story
The reason why most of this is largely irrelevant is the story of Turquoise Hill is the story of Oyu Tolgoi. The company has other assets, but they are only ancillary properties being mined while Turquoise awaits the first shipments at Oyu Tolgoi in Mongolia to begin. It's also looking to
shed its non-core assets to focus primarily on its flagship property.
As goes Oyu Tolgoi, so will go Turquoise Hill. Anything added to that will simply be icing on the cake for the company.
To give an idea of the
massive resources at the project, there are about "46 billion pounds of copper and 25 million ounces of gold in measured and indicated resources and an additional 55 billion pounds of copper and 37 million ounces of gold in inferred resources." That's mind-boggling to say the least.
Turquoise owns 66 percent of the resource and Mongolia the remaining 34 percent. Rio Tinto has a majority stake in Turquoise, providing the deep pockets needed to mine the resource. The mine has an estimated life of a minimum of 50 years.
With copper alone the goal is to produce 450,000 metric tons a year by 2019. That would account for about 33 percent of all Mongolian government revenue.
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Map Resource =
Oyu Tolgoi
Why Turquoise is So Compelling
The reason I like Turquoise Hill so much is everything that could go against it has, which has resulted in the stock being oversold and the share price being pushed down far below its value as measured against the resources held by the company.
For example, it's operating in the most hated sector at this time: commodities, and also includes the most hated commodity in that sector - gold. That's not to say gold is the primary focus of Turquoise at this time, as it's ramping up its copper business in the early stage of production. Still, it's a factor in the long-term performance of the company because of the amazing amount of resource it represents. This is very good for the company, as it doesn't appear gold is ready to find a bottom yet, but when it does Turquoise should be positioned strongly to take advantage of it when prices rebound.
There is also the fickle Mongolian government that has changed its mind yet again on the starting date of the first shipments from the mine; something I've alluded to when covering
Rio Tinto and
Turquoise in the past. It was the one thing that had to be watched for in order to see if it would cause the share price of Turquoise to plunge even further. I didn't think government would do it again, although I saw it as a probability. Now that it has, it has put even more downward pressure on the stock, providing a much better entry point.
The latest delay is a demand from Mongolia for sales revenues generated from the mine to be deposited in the country. Prime minister Norov Altankhuyag said this must be resolved before the first shipments are given the go ahead.
I liked Turquoise when it was trading between $7.00 and $8.00 a share, I love it now that it's trading between $5.00 and $6.00 a share.
Let's repeat again what was mentioned earlier. This is a company trading between $5.00 and $6.00 a share which has 46 billion pounds of copper and 25 million ounces of gold in measured and indicated resources and an additional 55 billion pounds of copper and 37 million ounces of gold in inferred resources. All that with a 50-year minimum mine life.
There is no doubt in my mind entering Turquoise and holding for the long run will make investors a lot of money. I predicted a three-bagger when prices were about $7.00 a share; that's easily a four-bagger now at under $6.00 a share.
Mongolian Government
Some look askance and fearful at the Mongolian government over some of the odd things it has done throughout the Oyu Tolgoi deal, but all of its blunders, including this last one is great for Turquoise Hill Resources, as it continues to put downward pressure on the stock because the perception of uncertainty is greater than the reality. The promises made to the people of Mongolia concerning the resource will in no way be reneged upon.
Even the reports of concern over the upcoming election are overstated, as the numbers show the existing government will handily win, and they're very much supportive of the deal, even though it has attempted to extract more out of the deal than originally agreed to with Turquoise and Rio Tinto (
RIO).
It looks like the delay in the first copper shipments were put in place just to quiet down the population so there is no appearance of malfeasance on the part of the current government in place. There is also the strategy of weakening the possibility of unrest if those supporting the opposition believe the election was stolen or rigged.
The issue that has
driven the campaigns during the election has been the Oyu Tolgoi mine and the deal surrounding it.
Allegations of corruption towards existing President Tsakhia Elbegdorj has been considered not much more than a smear tactic by the people, so with nothing taking hold of voters in that regard to change their minds, there appears that nothing but voter apathy could keep Elbegdorj from winning the election. If no candidate gets 50 percent of the vote (three people are running), there would be a run-off election afterwards for the two vote leaders.
Now if by some unforeseen chance an opposition candidate were to win, it could have a devastating impact on Turquoise Hill and Rio Tinto, as they are largely focusing on nationalism and the resources of the country, and would surely change the existing terms agreed upon if any of the two were to come into power. It's a small risk, but a possible one if something were to happen to change the tide in the next couple of days.
So with the share price of Turquoise getting bludgeoned, the downside risk is very little where it stands now. Once the copper shipments are released, there is no doubt a powerful positive sentiment will emerge which will propel the share price of the miner upwards.
The final approval should happen not too long after the elections.
Long or Short Term Play?
The time for Turquoise Hill being a short play is close to being over, if not totally over. That doesn't mean the share price won't drop further, just that there is little to gain if it does, and it's unlikely to plummet barring some unique and unforeseen circumstance.
Now is the time to get into Turquoise Hill, as it's doubtful this company is going to be held back much longer. After the first shipment leaves the station, it won't be long before the share price leaves the range it has been trading in.
Once a couple of quarters are under its belt and earnings reports include the results, there is no doubt this company will reward shareholders handsomely. And even if it takes longer to reach a double-digit share price, it will get there. Patient investors will be glad they made the decision to enter Turquoise at the level it's trading at now, as it may not get this low again for many years, if ever.
Risks
Other than the perceived risks from the Mongolian government, are there any other significant risks to consider? In my view it would be if the global economy were to go into recession again. China has been struggling some, and the early warnings of the beginning of a credit crisis in the country may have just been sounded.
That has the potential to negatively impact various projects, which could drive down demand for copper. Depending on how you view Europe, it's either in a recession or continuing to flirt with being on the edge of one. While that probably wouldn't have as big as an impact on Turquoise as a China economic crisis would, together it would be a challenge. Falling copper demand would pressure margins and earnings.
Since Turquoise is starting from ground zero with the mine though, anything produced and sold will bring revenue and earnings to the company. Again, it would take unusual and immediate events to chance the trajectory of this stock, which is going to be up very soon.
Over the years an economic crisis would result in a detrimental impact, but I don't see anything that would bring disappointment to shareholders if they don't panic and hold on while the copper shipments ramp up.
Conclusion
I look at Turquoise Hill Resources as a play that is wound up and ready to be released. It's only a matter of when and not if this happens. Those entering in at a good price - which is now - will make a lot of money with this play.
Look above again at the resources under the control of this miner to see how ludicrous the current price it is valued at is.
All the headwinds holding the company back have been baked into the price, and the one thing that hasn't baked in is the long-term resources under its control and the approaching launch of shipments of copper.
After the election, everything else will calm down. At that time the usual metrics investors use to value a company will come into play. It's the future revenue and earnings that will finally be included in the picture for Turquoise Hill in that regard, and once they start to be included in the valuation of the company, there is no doubt the share price will take off.
Even in the worst case scenario the fact that the company is starting from zero with Oyu Tolgoi and working its way up makes for a compelling story. That alone will be enough to make this a success story.
Not only is this company going to be driven by overwhelming resources, but has also being driven to such low levels that investors can now get in at an extraordinary entry point.
Even if you want to wait for the reversal of the downtrend to happen it wouldn't be a bad strategy at this price, but I don't see how you could lose by entering now. Other than buyers' remorse for getting in now and the price dropping, there is little to suggest this stock won't at least triple your money over the next few years.