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.