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Hedge fund urges Rio Tinto to change Oyu Tolgoi funding

Oyu Tolgoi is Rio’s biggest copper growth project but has faced geological challenges. (Image courtesy of Rio Tinto.)

Rio Tinto has offered $2.7 billion for the 49% of shares it doesn’t already own in Canada’s Turquoise Hill Resources (TSX, NYSE: TRQ) in a move that seeks gaining direct controlling ownership of the vast Oyu Tolgoi copper-gold mine in Mongolia.

The world’s second largest miner is offering C$34 per each outstanding share of Turquoise Hill Resources it does not already own, a 32% premium to Friday closing price.

Rio currently controls and operates the Oyu Tolgoi mine, located is 550 km (342 miles) south of Mongolia’s capital Ulaanbaatar via Turquoise Hill’s 66% stake. The government of Mongolia owns 34%.

“Rio Tinto strongly believes in the long-term success of Oyu Tolgoi and Mongolia, and delivering for all stakeholders over the long-term,” Rio Tinto chief executive Jakob Stausholm said in the statement. “(The transaction) will simplify the ownership structure, and further strengthen Rio Tinto’s copper portfolio.”

Grant Sporre, Bloomberg Intelligence metals and metals analyst said the move was “well-timed” for all stakeholders, which improved the likelihood of success.

“Robust copper prices and the recent agreement with the Mongolian government — which greenlit the underground development — may limit pushback from Turquoise Hill shareholders,” Sporre wrote on Monday.

The offer comes only two months after Rio Tinto and the government of Mongolia reached an agreement to complete the long-delayed $6.9 billion underground development of the Oyu Tolgoi project in the Gobi Desert. That deal saw Rio agree to write off $2.4 billion of loans and interest used by Ulan Bator to fund its share of the development costs.

The non-binding buyout proposal will now be considered by the Turquoise Hill board, excluding Rio’s nominees, before going to shareholder vote. That includes persuading US hedge fund Pentwater Capital Management, which has accused Rio of concealing the real cause of the delays that have plagues the expansion and seen the budget climb to $6.9 billion, up from $5.3 billion.

Turquoise Hill said on a separate statement on Monday that will establish a special committee, comprised of independent directors, to review Rio’s offer.

Shares in the company jumped in New York premarket trading Monday morning. At 6:19 a.m. ET, Turquoise Hill was up 27% at $25.55. 

Biggest new copper mine

Rio Tinto has had a rocky relationship with the Vancouver-based miner, particularly over how to fund Oyu Tolgoi’s expansion. The top miner has also drawn criticism from some of Turquoise Hill’s minority shareholders about the control it exerts over the company.

“Rio Tinto’s strategy over its stake in Turquoise Hill has been subject to discussion for many years, but we didn’t think it would end up offering to buy out the minorities based on previous form,” BMO Metals and Mining analysts said in a note to investors.

“Given the dearth of copper opportunities elsewhere, combined with its recently lowered risk profile, perhaps increasing its Oyu Tolgoi exposure now makes sense,” BMO Alexander Pearce and David Gagliano wrote.

Once completed, the underground section of Oyu Tolgoi will lift production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, which is now expected by 2025 at the earliest. This would make it the biggest new copper mine to come on stream in several years.

Rio Tinto, which last week cut all ties with Russian businesses over the invasion of Ukraine, is working to avoid lack of supplies and fuel for Oyu Tolgoi.

Mongolia is bordered on the north by Russia and on the south and east by China, which leaves Rio with limited alternatives to bring in needed provisions.