UPDATE: Rio Tinto goes after Turquoise Hill in US$2.7B bid

Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) has offered US$2.7 billion for the 49% of shares it doesn’t already own in Turquoise Hill Resources (TSX: TRQ; 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 $34 per each outstanding share of Turquoise Hill Resources it does not already own, a 32% premium to the company’s closing price on March 11.

“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 CEO Jakob Stausholm said in a press release. “[The transaction] will simplify the ownership structure, and further strengthen Rio Tinto’s copper portfolio.”

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

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 plagued the expansion and seen the budget climb from US$5.3 billion to US$6.9 billion.

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

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

Biggest new copper mine

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

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, 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.

Commenting on Rio’s move for Turquoise Hill, Alexander Pearce and David Gagliano of BMO Capital Markets, noted that the company’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.” But the analysts added that the decision could “make sense.”

“In the past Rio Tinto has been happy to share the risk of its assets with minority shareholders, however, given the dearth of copper opportunities elsewhere, perhaps increasing its exposure to Oyu Tolgoi now makes sense and could simplify the remaining funding hurdles for the underground project,” they wrote in a research note to clients. “From a Rio Tinto perspective, with a strong balance sheet (US$1.6B net debt at Dec. 2021) and expectations of US$12.6B FCF [free cash flow] this year, US$2.7B is easily affordable for the company.”