From Financial Post Turquoise Hill shares soar as takeover rumour back in spotlight
Peter Koven | June 13, 2016 | Last Updated: Jun 14 10:28 AM ET
FP Watchlist: June 14, 2016
One of the Canadian mining sector’s most popular takeover rumours is back in the limelight.
Shares of Turquoise Hill Resources Ltd. jumped 13 per cent on Monday, closing at $4.16, after Britain’s Sunday Times reported that Rio Tinto Ltd. hired bankers at Goldman Sachs to study a potential privatization of the Vancouver-based company. Turquoise Hill is currently worth $8.3 billion.
It has been nearly 10 years since Rio Tinto first invested in Ivanhoe Mines Ltd., the predecessor company to Turquoise Hill. And in 2012, it became the firm’s controlling shareholder. It is no secret that Rio covets Turquoise Hill’s Oyu Tolgoi mine in Mongolia, and experts were not surprised by the talk that the company is back in play.
“It’s a recurring headline,” said Sasha Bukacheva, an analyst at BMO Capital Markets.
Some industry watchers think it is inevitable that Rio will eventually boost its stake in Turquoise Hill. But given the recent positive developments around Oyu Tolgoi, there is some logic for the mining giant to make a move soon.
Rio Tinto and Turquoise Hill have a very complex and intertwined relationship. Rio owns 51 per cent of Turquoise Hill, which owns 66 per cent of Oyu Tolgoi, a massive copper-gold mine. (The Mongolian government owns the rest.) Rio operates the mine, meaning it generates the cash that goes directly to Turquoise Hill’s shareholders.
This was never viewed as an optimal long-term solution for Rio Tinto. But for much of the last several years, Mongolian political risk was a deterrent to investing more money in the country. Rio struggled to negotiate with the government, which accused Turquoise Hill of unpaid taxes and wanted to rewrite agreements covering Oyu Tolgoi. The dispute raised serious questions about the mine’s future, and an underground expansion was delayed. (Currently, all production comes from an open pit.)
Last year, the two sides finally resolved their differences. Rio and Turquoise Hill then secured a US$4.4 billion financing package to develop the underground mine, and the US$5.3-billion project was greenlighted last month.
Once the mine reaches full capacity, Oyu Tolgoi is expected to produce more than 500,000 tonnes of copper a year and make up roughly 30 per cent of Mongolia’s gross domestic product.
Those are monster numbers, even for a huge company like Rio Tinto. And now that political and financing hurdles have been overcome, a Turquoise Hill acquisition may look more appealing to Rio’s board and management team. Copper prices are also depressed, experts noted, which could create a buying opportunity.
The Times report suggested Rio is looking to increase its stake in Turquoise Hill, while the rest of the stock would be acquired by a single buyer or a consortium. The report said that Goldman has “sounded out” potential buyers, including Chinese state-owned companies, about taking a minority stake in the company. That may not sit well in Mongolia, where the Chinese are broadly disliked.
Turquoise Hill’s share price outperformed most rivals over the past couple of years, because the company was one of the few copper miners that reported strong earnings and maintained a healthy balance sheet. Turquoise Hill generated US$650.5 million of operating cash flow before interest and taxes in 2015.