Turquoise Hill May Double In A Month
Summary
- * Turquoise Hill, Rio Tinto may be close to agreement with Mongolia.
- * Rio Tinto reportedly ready to make an offer for the remaining shares of Turquoise Hill.
- * Looking for New Hires at the Mine.
- * Projected production for the years ahead.
A couple of reports point to the possibility Turquoise Hill (TRQ) may be close to coming to an agreement with the Mongolian government over terms associated with the Oyu Tolgoi copper and gold mine.
One of the reports points to Rio Tinto (RIO), which owns 50.8% of Turquoise, being close to buying up the rest of the shares it doesn't own in the company for about $8.00 a share, presumably once an agreement is reached. With the share price standing at a little over $4.00 as of this writing, that would just about double any investment made at this time if the report is accurate. Turquoise owns 66% of Oyu Tolgoi, with Mongolia owning the remaining 34%.
Having said that, I believe the $8.00 per share offer may be on the low end, as the huge resource is worth far more than that. You do have to figure in that Rio Tinto already owns over half the company and that Turquoise Hill has a 66% stake in the deposit at the mine.
Nonetheless, it's value is many billions, and could have a mine life of up to 40 years. There is also the strong possibility the resource at the mine hasn't been fully discovered and the quantity of minerals could be higher than believed.
Rio would also have to strongly consider potential legal challenges if it attempts to buy the remainder of the company on the low side. That could be a drag on the company over time; a weight that could result in downward pressure until it is all sorted out.
(click to enlarge) source: StockCharts.com
Is Rio Tinto ready to buy?
What needs to be considered now is why or if Rio Tinto is actually ready to assimilate all of Turquoise Hill into the company, and why they would do that.
First of all, the major catalyst there would be coming to an agreement with the Mongolian government, which would immediately cause the share price of the company to jump. If that happens before Rio Tinto were to acquire all of Turquoise Hill, the company would become much more costly to acquire. Rio could be thinking of making a bid before that happens.
Rio Tinto has been struggling for the last eight years, trading only a little above what it was at in January 2006. So with the probability of reaching an agreement soon with the Mongolian government, it is likely Rio will buy up the rest of Turquoise Hill in order to get all the benefits of the vast resource.
(click to enlarge) source: Yahoo Finance
Mongolian government
The key to this all working out is making an acceptable deal with the Mongolian government, which has been unpredictable even after the original deal had been put in place. Much of that has been because of the boost in costs of bringing the mine online; specifically the next phase of development.
It has become apparent the government of Mongolia is very inexperienced at deals of the size it is working on with Turquoise Hill and Rio Tinto, and that, as much as anything, has been a reason for the slow movement of the project.
Nonetheless, that is the hand investors have been dealt, and it must be included in the mix when evaluating the overall viability of the project.
One unspoken concern is whether or not Mongolia is making the new deal so difficult to accept that it may end up nationalizing Oyu Tolgoi. The problem there is it would result in businesses interested in investing in the country to back off from making deals. Mongolia has no experience in this area as well, and other nationalization efforts, such as in Venezuela and Mexico, have resulted in far less productive and valuable businesses.
While it's possible Mongolia may go this route, I see it more as a last resort than something it would want to do.
My major concern is the fact that Mongolia is an owner in the mine in the first place. It would have been far more beneficial if a company from Mongolia owned it and negotiated from a market standpoint.
As it is, getting a deal in place is the priority going forward, and once that happens and it is visible as to the details, I see Turquoise Hill really taking off. I think that's what Rio Tinto sees, and the fact that there are rumblings of a soon-to-be-announced deal in place, makes it likely the mining giant will acquire the entirety of Turquoise Hill.
New hires
Another source that has been cited by a mining website points to an advertisement from a contractor at Oyu Tolgoi for workers at the mine. This suggests the probability of an imminent deal, which again, brings into play the high possibility of the rumors of an acquisition of the remaining shares by Rio Tinto being true.
According to the source, AMEC, which is an engineering and project management company at the mine, has been seeking workers for "a major underground, copper and gold mining expansion in Mongolia."
Taking that into consideration, this is the reason a growing number of people are expecting a deal to be in place between Turquoise Hill and the Mongolian government before the end of March.
Assuming that's what happens, is would accelerate the time table for Rio to buy up the remaining shares it doesn't own of Turquoise Hill.
Risks
The major risk in taking a position in Turquoise Hill at this time is if the deal in fact never materializes. That would lock up capital in the company, as it would surely drop to below $3.50 per share if a deal isn't made.
Now I don't see any risk if the position is held in the company over the long term. But if you want to put your money to work somewhere else, it would result in a short-term loss if you want to pull it out of the miner.
Even so, if a deal is struck with the government of Mongolia, and Rio Tinto makes no move to acquire the remaining shares in Turquoise Hill it doesn't own, it won't take long for the market to realize the share price will start moving up because of the quality of Oyu Tolgoi, and what it will, over time, bring to Turquoise Hill shareholders. To me an investor will win either way. It's a matter of whether it will be a short-term or long-term win.
When you consider the amount of copper, gold, and silver in Oyu Tolgoi, there is no way to lose outside of the nationalization of the mine.
Production outlook
Once mine production is in full swing, the estimated 10-year average annual production at the mine is projected to be 332,000 metric tons of copper, 495,000 ounces of gold, and 2.3 million ounces of silver. Gold production may even reach as high as 750,000 ounces annually, according to some, which would make it a significant player in that market alone.
For 2014, Turquoise Hill is looking to produce up to 175,000 tons of copper in concentrate, and up to 750,000 ounces in gold. Once the second phase of the project has been completed, which is going to cost about $6 billion, estimates are copper production will come in at 1.2 billion pounds annually; gold production at 650,000 ounces; and about 3 million ounces of silver to be produced annually. Measured by current prices, that would bring in over $4.5 billion a year. Keep in mind Turquoise Hill gets 66% of that at this time.
This is why I see $8.00 per share as a low offer. That said, if that offer is made by Rio Tinto, it will result in a nice windfall very quickly for those that get in before it is confirmed.
The response to the offer by shareholders will play a part in how high the share price of Turquoise Hill will go, but there is not doubt it will generate some serious returns.
Conclusion
Whether or not Rio Tinto makes a bid to acquire the remaining shares in Turquoise Hill it doesn't own, if it comes up with an agreement with the government of Mongolia, I see the share price of Turquoise Hill steadily moving up going forward.
With anticipation building, if Rio doesn't make the offer, it will temporarily result in the share price of Turquoise Hill dropping closer to the $3.00 per share mark. But if a deal is made with Mongolia, and Rio doesn't acquire the rest of Turquoise Hill, that will be a temporary situation; one which will quickly reverse once the market understands the project will go forward with no significant negative catalysts.
The worst case scenario will be if no acquisition is made and a deal with Mongolia is not finalized. If that happens, the share price of Turquoise Hill will probably languish between $3.00 to $4.00 per share until that is worked out.
With a lot of the negative catalysts already built into the low share price of Turquoise Hill, there isn't a lot of downside risk when measured against the potential short-term and long-term upward movement of the share price.
It is likely the search for workers points to a deal with the Mongolian government about to be announced. If Rio is looking to capitalize on that by buying the rest of the shares of Turquoise Hill it doesn't own, shareholders and investors will make a nice profit, even if a bid of $8.00 per share is made and accepted