Turquoise Hill, Rio Tinto expect a delay in Oyu Tolgoi’s financing

Turquoise Hill Resources’ (TSX: TRQ; NYSE: TRQ) CEO Kay Priestly says “good progress continues to be made” with the Mongolian government to resolve outstanding shareholder issues at the company’s 66%-held Oyu Tolgoi copper–gold mine in Mongolia, but a delay in funding is expected. 

Turquoise Hill and parent Rio Tinto (NYSE: RIO; LSE: RIO) — which owns 50.8% of the junior and operates the Oyu Tolgoi mine — have been working with government officials to sort out remaining issues, including sharing the mine’s economic value so that they can close up to a US$4-billion financing to restart underground development. 

But it seems the Mongolian government, which owns 34% of Oyu Tolgoi, is set to wait for the results of the ongoing underground feasibility study before it reaches an agreement. This will likely delay the companies from securing enough funds to resume developing the 95,000-tonne-per-day underground mine, where construction was halted last August. 

“It’s important that we resolve all outstanding issues and receive all necessary permits before we restart the underground development. I am optimistic that we can resolve these matters,” Priestly said on a recent conference call. 

She added this might not happen until the feasibility study is completed and approved.  

As a result, the project funding may not have closed before a March 31 bank syndicate deadline. Firms could in turn request an extension of the lenders’ commitments, and the sizable financing could wrap up in the second half. 

In March Cowen and Co. analyst Adam Graf wrote that he does not see the missed deadline as “worrisome” and expects the banks will extend it, noting that Turquoise Hill has enough capital to carry on open-pit operations. “Interim financing should be adequate to fund working capital now that production is nearing full capacity, and sales have ramped up,” he adds. Graf has an $8.38 target price and an “outperform” rating on Turquoise Hill.

The company secured a US$200-million revolving credit facility and a US$126-million copper concentrate prepayment agreement to boost its liquidity earlier this year.

While the 100,000-tonne-per-day open-pit mine has been ramping up, Turquoise Hill has reduced its 2014 production guidance by nearly 10% to 135,000–160,000 tonnes copper and 600,000– 700,000 oz. gold, down from 150,000–175,000 tonnes copper and 700,000–750,000 oz. gold.

“The downgrade appears to be due to inventory management and liquidity issues, and possibly due to minor plant technical issues,” notes BMO analyst Tony Robson, who trimmed his target price to $4.25 from $4.50, but maintains an “outperform” rating.

Sales in January and February were lower than expected, as Oyu Tolgoi experienced a failure of the rake blades in the tailings thickeners and other plant failures, which were resolved in March, with sales accelerating that month. As of March 24, Oyu Tolgoi had sold 43,000 tonnes of concentrate since the start of 2014.

“Sales are expected to increase during the second quarter and match production,” Priestly noted, adding that when this happens, Oyu Tolgoi should generate positive operating cash flow. 

Turquoise Hill has signed sales contracts for 74% of this year’s copper-concentrate production and for 84% of next year’s output. It is also working with potential customers to secure more contracts.