By the bookI think RIO managed this one nicely by the book and GOM was not at par by few miles.
What we SAW.
Part 1: Ongoing IA saga
Part 2: Delays for first shipment
Part 3: Because of this, RIO provides a bridge loan to TRQ up to early august with a repayment into TRQ shares in case of default.
Part 4: Some large TRQ minority shareholders scream.
Part 5: RIO, good citizen, increases the size of the loan and extends the loan to December leaving the time for the Mongolia parliament to pass an OT Law that would protect Phase II after the unpleasant experience of Phase I with non-stop complaining from GOM.
Part 6: Rio stops committing $ to Phase II to save TRQ’s cash.
Part 7: nov. 2013, still no peace treaty on the IA and no OT Law for Phase II, then TRQ goes for a rights issue to repay RIO’s loans.
Part 8: RIO grabs most of the rights and increases its stake in TRQ.
Part 9: Creeper triggered, mandatory offered required (not sure exact % rules), then further TRQ purchases by RIO.
Now Rio has 50% of TRQ x 66% of OT = 33% of OT’s equity.
If ever (worst case scenario) RIO gives up to GOM request to have 50% of OT after RIO reaches 66% of TRQ, RIO has still the same equity in OT…
So if minority shareholders of TRQ feel upset, the warnings were on the wall and they can only blame …GOM that was given notice and time to settle this but did not act!
Those minority shareholders may have mixed feelings in the next 2-3 years if GOM tries to list any state-owned company :)
For the new CEO of RIO, after seeing GOM complaining for ever on the IA signed by the government (therefore its enforceability), can he commit $ and reputation, and HIS CAREER, starting Phase II now …while GOM is not yet done with the audit of OT, numbers Mongolian board members at OT have seen for years without obviously ever complaining?
With loans repaid, stronger balance sheet and production on, TRQ could even afford to take legal actions against GOM.
We will see how the price of the rights issue is set, BUT I would certainly NOT expect that to be below market price.
In fact, I would expect MUCH higher, may be $6 to $8 range.
Grabbing high % is more important than saving pennies. A right issue is always an extraordinary opportunity to find liquidity.
The rational is simple; with such a high price in this environment, a lot of minority shareholders will pass…leaving more rights for grab to RIO…while at the same time the communication message from TRQ will be: “we see much more value and more upside in the undervalued TRQ that is why in setting a higher price we want to send a signal”.
Also with a price much higher than market and a right valid for just 2-3 weeks, the “fair value” of the rights will be tiny and the shorts will not fear a high cost (to their lenders paying the fair value of the rights) and probably not buy back their short pushing the stock price high, not disrupting the process.
Just few thoughts
Disclaimer: I don’t work for RIO, TRQ, OT and have only a small long TRQ position.