Rio Tinto, Turquoise Hill strike funding deal for Oyu Tolgoi

Cecilia Jamasmie | April 9, 2021 | 5:00 am News Asia Australia, NZ & South Pacific Canada Copper Gold 
Pentwater Capital Management LP, the second-largest investor in Turquoise Hill Resources (TSX: TQR) has increased its stake in the Canadian company while rejecting again Rio Tinto’s C$43-a-share offer for the 49% of the miner it doesn’t already own. The activist investor disclosed it had bought around 1.24% of common stock at C$41.01 per share in Turquoise Hill, for a total of C$102.5 million on September 15. It means it currently owns 13.77% of Turquoise Hill’s shares Rio Tinto agreed on earlier this month to take over Turquoise Hill after sweetening an initial offer by around 20% to “a best and final” $3.3 billion. Penwater, which joined minority shareholder SailingStone Capital Partners in publicly opposing Rio Tinto’s offer as too low, restated its discontent. “The proposed price implies an equity value of C$8.65 billion, which is a fraction of the free cash flow that Pentwater expects Turquoise Hill to generate over the next decade,” it said in the statement. Pentwater noted it expects Turquoise Hill to generate over C$10.5 billion of free cash flow through 2030 assuming a $3.50 per pound copper price and almost C$14.2 billion of free cash flow assuming copper prices of $4 per pound. It also said it was weighing options to thwart the deal, including but not limited to the possible exercise of dissent rights or other legal action. Rio’s offer equires two thirds of shareholders, including Rio Tinto’s, to vote in favour. More than 50% of minority shareholders must approve it. Rio’s final bid represents a 67% premium from Turquoise Hill’s closing price of C$25.68 a share on March 11, the trading day prior to the initial proposal. Pentwater has said the proposed premium is unacceptable for a mine that it expects to be “the third largest copper and gold mine in the world with a mine life in excess of 90 years.” Some analysts believe that Rio Tinto will need to increase its offer to win over some minority shareholders and so hold a direct majority stake in massive Oyu Tolgoi copper-gold mine in Mongolia. The global miner, which has mined copper from Oyu Tolgoi’s open pit for a decade, will have the task to conclude building the underground section of the mine. Once finished, it will lift production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes per year 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.
Oyu Tolgoi copper-gold mine. (Image courtesy of Erdenes Oyu Tolgoi LLC.)

Rio Tinto (ASX, LON, NYSE: RIO) and its majority-owned Turquoise Hill Resources (TSX, NYSE: TRQ) have reached a deal that ends a standoff between the companies over funding for an expansion of the massive Oyu Tolgoi copper-gold mine in Mongolia.

The funding plan addresses the remaining $2.3 billion needed for the underground project, building on and replacing deals set up under a memorandum of understanding inked in September last year.

The companies have agreed to restructure debt payments of up to $1.4 billion with lenders and look to raise up to $500 million in supplemental debt under existing financing arrangements, Rio Tinto said.

The underground expansion has seen costs jump to $6.75bn, about $1.4bn higher than Rio’s original estimate, and has led to friction over funding between it and Turquoise Hill.

Canada’s Turquoise Hill said the Australian miner had also committed to address any potential shortfalls from the re-profiling and additional supplemental debt of up to $750 million by providing a senior co-lending facility on the same terms as the project financing.

Turquoise Hill has, in turn, will complete a rights offering or placement of common shares up to $500 million to satisfy any remaining funding shortfall within six months of the co-lending facility becoming available.

“With a binding funding agreement now in place that sets out a process along a known timeline, we will be able to move ahead as expeditiously as possible with the development of the underground project at Oyu Tolgoi,” Steve Thibeault, interim chief executive officer of Turquoise Hill said in a statement.

Rio Tinto’s copper boss Bold Baatar said the agreement represented a major milestone in the development of Oyu Tolgoi, which is expected to become one of the world’s largest mines of the metal, used in construction and green technologies.

Public face-off

Tensions between the companies grabbed headlines in recent months as their differences over Oyu Tolgoi deepened.

Turquoise Hill’s chief executive quit over the spat, not before taking Rio to arbitration.

Steeve Thibeault’s departure came on the heels of a new deal between Rio Tinto and the government of Mongolia governing the polemic expansion.

That agreement, yet to be confirmed, would end a three-month impasse between the world’s second-largest miner and the landlocked East Asian country, as it would give better economic benefits to the state than the current deal.

IN DEPTH: How Rio Tinto and Turquoise Hill faced off before the latest deal with Mongolia

Turquoise Hill had expected the mine’s underground expansion to cost $5.3 billion when it was approved in 2015. Last year, however, the world’s second largest miner flagged stability risks associated with the original project design, adding that amendments to it could increase costs by as much as an additional $1.9 billion.

The Vancouver-based miner warned at the time of further delays of up to two and a half years, with first sustainable production from Oyu Tolgoi’s underground expansion expected between May 2022 and June 2023.

Once completed, the mine’s underground section 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 owns the mine through its majority stake in Turquoise Hill, which has a 66% interest in Oyu Tolgoi. The Mongolian state has the remaining 34% of the operation, located in the South Gobi desert near the border with China.

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