RE:RE:RE:RE:RE:RE:Rising price on low volume With apologies if I'm being repetitive, but an ETG buyout engineered by Rio Tinto but executed by OTLLC is fundamentally different from the Rio buyout of the 49% of TRQ they didn't own.
In the TRQ situation the ownership of Rio Tinto doubled. They shut down the cost of a public listing and another level of corporate governance - but given the values in play that was a limited future savings and economy.
ETG - has no current tax stability. The government of Mongolia and opposition politicians in Mongolia have complained for years Mongolia has not achieved a 34% ownership of the JV portion of OT (as they have 34% of only the 80% JV interest surrendered by ETG). It is unfinished business and creates ongoing political uncertainty, and may be one of the primary reasons tax stability equivalent to OTLLC's and Rio Tinto's Investment Agreement with Mongolia has not been extended to ETG.
The JV Agreement has never been settled and signed.
Exploration of the JV ground has been limited. Optionality to advance timing of Lift 2 HNE and/or Heruga has not been pursued publicly, Optionality of a mill expansion to increase OT production - ditto.
TRQ's public minority shareholdings were always to some extent hostile to Rio Tinto. There was litigation with IVN concerning active magagement control of OT and ejection of IVN management before TRQ was brought under Rio Tinto's control. That was followed by Pentwater and Sailingstone being active dissident shareholders.
ETG, until commencement of the arbitration (almost two years ago) scheduled to be heard next month, has since 2004 refrained from public criticism of Rio Tinto. Recall Rio Tinto's toehold investment at OT was through ETG first, before IVN. The arbitration allegations concerning performance of the Earn In and JV Agreement have never been made public in detail, only in general terms as being necessary to answer certain questions, permit transfer of the mining licences over the JV, and better align interests (whatever that means!). TRQ made a weird blanket denial that never explained what they were denying.
What appears to have happened is some earlier representation concerning resolution of pre-existing issues (likely who should bear the cost of Mongolia taking 34% out of ETG's JV interests, and speed of exploration and confirmation of the extent of Lift 2 HNE which would be a substantial valuation change for ETG) were being delayed, for the obvious reason that Rio Tinto did not want to boost the value of OT when it was contemplating purchase of almost half of TRQ. Either the Mongolians and/or ETG decided they would press Rio with a ticking deadline of resolution of outstanding controversies through arbitration.
There is potentially substantial jeopardy to Rio Tinto and Mongolia if it is determined they have breached the Earn In Agreement or the Joint Venture Agreement (while not fully concluded the parties have proceeded as if a Joint Venture has been formed). The most radical - ETG could dissolve the joint venture and reclaim 100% of the JV mining licences and land. Which would trigger an explosion in Mongolian politics.
ETG's JV interests are thus far more valuable consolidated into OTLLC for both Rio Tinto and Mongolia than they can possibly be in ETG's hands. The solution is patently obvious - ETG needs to be revalued to represent much of the suppressed additional economic potential and value (leaving a large portion in the table as in any cash-out situation where the buyer is absorbing all future political and economic uncertainty) and be bought out.
And a fair full valuation is surely in excess of $400 million USD given both metals price rises, the probability of massive expansion of mineral reserves, the extinguishment of tax uncertainty, the gaining of production expansion and acceleration optionality, and the passage of time to production cashflow from the JV ground having been substantially reduced to be near-term.
Will Rio allow the arbitration to proceed? Or will they negotiate terms with Mongolia to cover-off their financing of an OTLLC acquisition that does not impair dividends from that entity? Others have suggested Mongolia might give some tax or royalty concessions to induce Rio to finance an OTLLC buyout of ETG. Then there needs to be some hard bargain driven with HCU and management to fix a fair price which makes some allowance for the Mongolian 34% grind, some allowance over optionality upvaluation, wind-up costs for ETG etc.,. But the gap between implied current market cap and the high end of fair valuation of ETG is likely significant. And unlike TRQ the free float is much less likely to be interested in a marginal premium to market offer as opposed to just holding on to await free cashflows which will be significant. And, if that causes Rio Tinto to delay further JV development such as Heruga or Lfit 2 earlier scheduling ... or a mill expansion ... those time to production losses are wholly unrecoverable.
There is a probable window of cyclical elevated copper prices due to global supply constraint coming up - Rio Tinto is poised to have OT production expand during that window, but they have to start moving on alterations to the OT development schedule now.
We'll see. My own view is Rio Tinto and Mongolia basically agreed on a confidential plan to deal with ETG in 2022 when the undercut agreement and debt forgiveness to Mongolia was negotiated, and now we are down to the short strokes on what price to be paid to collapse ETG. They knew the largest independent shareholders (SSL now HCU) are mining valuators, they knew the value-added elements in place, they knew the market trading for ETG was suppressed due to the uncertainties in the licence ownership, tax stability and Mongolian political pressures. And ETG started the clock ticking by arbitration so that the long delays to negotiations and finality would be brought to a head.
No 60% or so premium is going to fly off $1.50 CDN in my opinion ... the number to put a bow around all of OT for Rio and Mongolia is going to be bigger then that.
cg