Money
Post Market Wrap | Rio Tinto launches US$2.7B cash offer for full ownership of Turquoise Hill
This Post Market Wrap is presented by KOSEC – Kodari Securities
- Offer price is a 32 percent premium to Turquoise Hill’s last closing share price
- Two-thirds of Turquoise Hill minority shareholders must approve the offer
- Acquisition will strengthen RIO’s exposure to copper
- Copper is strategically important given its application to Electric Vehicles and wind turbines.
Rio Tinto Limited (‘RIO’ or the ‘Company’) is the world’s second-largest metals and mining corporation (after BHP). The Company’s product groups are iron ore, copper & diamonds, aluminium, gold and uranium. The Company’s iron ore interests are based in the Pilbara region of Western Australia and comprise a number of large-scale integrated mines.
Cash bid for Turquoise Hill
RIO has announced its intention to acquire the remaining 49 percent equity that it doesn’t currently own in Toronto Stock Exchange listed miner Turquoise Hill, for C$34 a share. The offer price is a 32 percent premium to Turquoise Hill’s last closing share price and values the 49 percent minority stake at US$2.7 billion. The bid price appears reasonable given RIO already has a controlling 51 percent equity stake, so it is not bound to include a change-of-control premium in the offer price. Turquoise Hill shareholders must approve the ownership change, which requires two thirds of Turquoise Hill minority shareholders to vote in favour of the proposal.
Turquoise Hill is the majority owner of the Oyu Tolgoi copper mine in Mongolia. The acquisition will deliver to RIO a 66 percent stake in the copper mine alongside the Mongolian government, which owns the remaining 34 percent interest. RIO are already familiar with the Oya Tolgoi copper project, having spent more than US$6 billion in operating and capital costs since 2010. A controlling interest in Oyu Tolgoi strengthens RIO’s position in copper and clears the way for it to negotiate suitable terms with the Mongolian government, before committing to funding the cost of underground mining operations. RIO believe that these negotiations are likely to be more productive once the ownership structure of Oyu Tolgoi is simplified by having just 2 parties agree to the terms under which the project expansion can proceed.
RIO’s all-cash bid for 100 percent of Turquoise Hill appears logical before these negotiations with the Joint Venture partner in the Mongolian government proceed, given the significant amount of capital investment required to fund the underground mining extension. The offer is also well-timed because it relieves existing Turquoise Hill shareholders from having to fund a large equity raising to avoid dilution, if the RIO take-over offer is not accepted.
Image: File
The economic significance of RIO’s proposed 100 percent ownership of Turquoise Hill is illustrated by the fact that Oyu Tolgoi will deliver additional production of 52,000 tonnes per annum of copper from existing mining operations. This is equivalent to an additional 9 percent of RIO’s present copper production volume. Importantly, the proposed underground expansion of Oyu Tolgoi can deliver up to another 160,000 tonnes per annum, being a 28 percent increase to existing production volume, by 2028. This amount compares to RIO’s estimated FY2022 mined copper production of 500-575,000 tonnes. At present, underground operations are expected to deliver first production in H1 2023.
Copper is strategically significant to miners across the globe given that it is an essential commodity used in Electric Vehicles and wind turbines. The acquisition also diversifies RIO’s mining interests, which are heavily tilted to iron ore production, which represents about 76 percent of EBITDA.
RIO’s gradual diversification from iron ore to future-facing metals like lithium and now copper, which are essential commodities in a carbon-neutral world, is likely to be well supported by equity markets.
This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.
Money
Inflation rise reduces chances of Reserve Bank rate cut
Inflation spikes, drastically reducing chances of a Reserve Bank rate cut amid economic pressures and rising costs
Inflation spikes, drastically reducing chances of a Reserve Bank rate cut amid economic pressures and rising costs
– Rate cut likelihood by the Reserve Bank has decreased due to a rise in annual inflation to 3.2 per cent.
– Significant price increases in housing, recreation, and transport are raising concerns for the Reserve Bank.
The likelihood of a rate cut by the Reserve Bank has decreased significantly after a surge in annual inflation.
The Australian Bureau of Statistics reported that inflation for the year ending September rose to 3.2 per cent, reflecting a 1.1 per cent increase.
Trimmed mean inflation, a crucial measure for the Reserve Bank, was recorded at 1 per cent for the quarter and 3 per cent for the year. The bank anticipates inflation to reach 3 per cent by year-end, while trimmed mean inflation is expected to slightly decrease.
The quarterly rise of 1.3 per cent in September exceeded expectations. Governor Bullock noted that a deviation from the Reserve Bank’s projections could have material implications.
Financial markets reacted promptly, with the Australian dollar rising against the US dollar, while the ASX200 index fell.
The most significant price increases were observed in housing, recreation, and transport, indicating widespread price pressures that concern the Reserve Bank.
Despite the unexpected inflation rise, some economists believe the Reserve Bank may still consider rate cuts in December, viewing current price spikes as temporary due to the winding back of subsidies.
Economic Pressures
Broad-based economic pressures suggest that the Reserve Bank may not reduce interest rates at its upcoming meeting. Analysts highlight the need for ongoing support for households facing cost-of-living challenges.
Money
Wall Street hits record highs on low inflation
Wall Street hits record highs on cool inflation and strong earnings ahead of key Federal Reserve interest rate decision
Wall Street hits record highs on cool inflation and strong earnings ahead of key Federal Reserve interest rate decision
– U.S. stocks rose to record highs on Friday due to lower inflation and strong corporate earnings.
– Key earnings reports from major companies are expected next week, influencing market trends.
The Labor Department reported that the Consumer Price Index was slightly cooler than analysts’ predictions, easing concerns about inflation impacts from tariffs. This development suggests a likely interest rate cut by the Federal Reserve at its upcoming meeting.
Ryan Detrick from Carson Group noted the positive inflation news may facilitate forthcoming Fed rate cuts. Despite the ongoing government shutdown affecting data releases, this CPI report provided much-needed clarity.
Earnings reports are continuing, with 143 S&P 500 companies having reported results. Growth expectations for third-quarter earnings have risen to 10.4%. Detrick indicated a strong opening to the earnings season with a significant percentage of companies exceeding expectations.
This coming week, key earnings will be reported from Meta Platforms, Microsoft, Alphabet, Amazon, and Apple, alongside industrial companies like Caterpillar and Boeing.
The Dow rose 472.51 points to 47,207.12. The S&P 500 increased by 53.25 points to 6,791.69, while the Nasdaq gained 263.07 points, reaching 23,204.87.
Alphabet gained 2.7% following a deal expansion with Anthropic. Coinbase saw a 9.8% increase from a JPMorgan upgrade. In contrast, Deckers Outdoor’s shares fell 15.2% after lowering sales forecasts.
Market Trends
Advancing stocks on the NYSE outnumbered decliners by 2.18 to 1. The S&P 500 had 34 new highs, with the Nasdaq recording 124.
Trading volume was 19.04 billion shares, lower than the average of the past 20 days.
Money
US stocks face tests from Tesla, Netflix earnings
US markets brace for Tesla and Netflix earnings amid rising volatility and delayed inflation data
US markets brace for Tesla and Netflix earnings amid rising volatility and delayed inflation data
– Earnings reports from Tesla and Netflix might affect U.S. stock performance next week amid high inflation concerns.
– Increased market volatility arises from U.S.-China trade tensions and fewer S&P 500 stocks in an uptrend.
The S&P 500 entered its fourth year of growth amidst these fluctuations, having previously experienced a period of calm. Experts suggest market risks are intensifying as valuations reach peak levels.
Market Volatility
Concerns regarding U.S.-China trade relations escalated last week when the U.S. threatened to raise tariffs by November 1 over China’s rare-earth export policies. President Donald Trump is scheduled to meet with President Xi Jinping in two weeks to discuss these issues.
Despite these challenges, major stock indexes gained ground over the week, with the S&P 500 up 13.3% year-to-date. However, a noticeable decline in the number of S&P 500 stocks in an uptrend raises caution among investors about underlying market weaknesses.
The upcoming third-quarter earnings will be closely monitored, especially as the government shutdown halts economic data releases. Companies like Procter & Gamble, Coca-Cola, RTX, and IBM are due to report. The delayed U.S. consumer price index is also expected to provide crucial insights ahead of the Federal Reserve’s monetary policy meeting on October 28-29.
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